Interpretation of "Residential House" in Tax Law: Multiple Units Qualify. Finance Act 2014 Amendment Not Retroactive.

The High Court held that the term "a residential house" in Section 54(1) of the Income Tax Act includes multiple residential units based on judicial precedents. The court also determined that the amendment by the Finance Act, 2014, was prospective and did not apply to the relevant assessment year. Consequently, the assessee was entitled to claim exemption under Section 54(1) for investments in two residential properties. The orders of the lower authorities were set aside, and the appeal was allowed in favor of the assessee.

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Issues Involved:
1. Entitlement to exemption under Section 54 of the Income Tax Act for purchasing more than one house.
2. Interpretation of the term "a residential house" in Section 54(1) of the Act.
3. Applicability of the amendment to Section 54(1) by Finance Act, 2014.

Detailed Analysis:

Issue 1: Entitlement to Exemption under Section 54 for Purchasing More Than One House
The primary issue was whether the assessee was entitled to claim exemption under Section 54 of the Income Tax Act for investments made in two residential properties. The assessee sold a residential property and invested the proceeds in two properties in Bangalore. The assessing officer restricted the exemption to one property based on a prior decision, leading to the disallowance of the exemption for the second property. The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld this decision, prompting the assessee to appeal to the High Court.

Issue 2: Interpretation of "a residential house" in Section 54(1)
The court examined whether the term "a residential house" in Section 54(1) should be interpreted as singular or plural. The assessee argued that the term should be interpreted to include multiple residential units, citing various judicial precedents where courts had interpreted "a residential house" to mean any number of residential units. The court referred to multiple decisions, including those of the Karnataka High Court and other High Courts, which held that the term "a residential house" includes plural, thereby allowing exemption for investments in more than one residential property.

Issue 3: Applicability of the Amendment by Finance Act, 2014
The court also considered the amendment to Section 54(1) by the Finance Act, 2014, which substituted the words "constructed a residential house" with "constructed one residential house in India," effective from 01.04.2015. The court noted that the amendment was prospective and not applicable to the assessment year in question (2003-04). The explanatory note to the Finance Act clarified that the amendment was intended to restrict the benefit to one residential house, effective from the assessment year 2015-16 onwards.

Conclusion:
The court concluded that the term "a residential house" in Section 54(1) includes multiple residential units based on judicial precedents and the context of the provision. The amendment by the Finance Act, 2014, was prospective and did not apply to the assessment year in question. Therefore, the assessee was entitled to the benefit of exemption under Section 54(1) for investments made in two residential properties. The orders of the assessing officer, Commissioner of Income Tax (Appeals), and the Income Tax Appellate Tribunal were quashed to the extent they deprived the assessee of this benefit, and the appeal was allowed.

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