Tribunal confirms capital gains exemption under Section 54, allows deduction for new residential house.

The Tribunal directed the AO to allow the capital gains exemption under Section 54 after verifying the construction of the new residential house within the prescribed time limit. The appeal of the Revenue was partly allowed, confirming the eligibility of the assessee's claim for deduction under Section 54 for the capital gains from both flats.

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Issues Involved:
1. Claim of deduction under Section 54 of the Income Tax Act, 1961.
2. Determination of whether two separate flats constitute one residential house.
3. Eligibility of exemption under Section 54 for capital gains from multiple residential houses.
4. Use of one of the flats for business purposes and its impact on exemption eligibility.

Issue-wise Detailed Analysis:

1. Claim of Deduction under Section 54:
The primary dispute revolves around the assessee's claim for deduction under Section 54 of the Income Tax Act, 1961, concerning the investment of capital gains from the sale of two flats into a new residential property. The assessee had sold two flats, one in Ramkrishna Sadan and another in Vishnu Villa, and invested the capital gains in constructing a new house in Bangalore. The assessee claimed the capital gains from both flats as exempt under Section 54.

2. Determination of Whether Two Separate Flats Constitute One Residential House:
The assessee argued that the two flats, although located in different buildings and on different roads, were used as a single residential unit by the four brothers and their families. The CIT(A) accepted this claim, considering the assessee's previous treatment of the flats as a single unit in wealth tax returns and income tax computations. However, the Tribunal disagreed, noting that the flats were in separate buildings with no common approach and were acquired in different years. The Tribunal held that the two flats could not be considered one residential house under Section 54, citing the Allahabad High Court judgment in Shiv Narain Chaudhari v. CWT, which distinguished between contiguous units and separate buildings.

3. Eligibility of Exemption under Section 54 for Capital Gains from Multiple Residential Houses:
The Tribunal examined whether Section 54 allows exemption for capital gains from the sale of multiple residential houses if the gains are invested in a single new residential house. The Tribunal found no restriction in Section 54 against such an arrangement. It referenced the Mumbai Tribunal's decision in Rajesh Keshav Pillai v. ITO, which held that exemption under Section 54 is available for the transfer of any number of residential houses, provided the capital gains are invested in a new residential house within the prescribed time limit. The Tribunal concluded that the assessee could claim exemption for capital gains from both flats, subject to fulfilling other Section 54 conditions.

4. Use of One of the Flats for Business Purposes and Its Impact on Exemption Eligibility:
The AO had denied the exemption for the Vishnu Villa flat, asserting it was used for business purposes since no income from house property was declared for it. The CIT(A) and the Tribunal rejected this view, noting that the assessee had treated both flats as a single residential unit and had not shown income from the Vishnu Villa flat due to this treatment. The Tribunal emphasized that the absence of declared income from house property does not imply business use without supporting evidence. Consequently, the Tribunal held that the Vishnu Villa flat qualified as a residential house eligible for Section 54 exemption.

Conclusion:
The Tribunal directed the AO to allow the capital gains exemption under Section 54 after verifying that the new residential house was constructed within the prescribed time limit. The appeal of the Revenue was partly allowed, affirming the eligibility of the assessee's claim for deduction under Section 54 for the capital gains from both flats.

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