High Court allows Section 54F exemption for commercial properties deemed residential. Units in same building considered one.

The High Court ruled in favor of the assessee, allowing the exemption under Section 54F of the Income Tax Act. It held that the two properties used commercially could not be considered residential. Additionally, even if deemed residential, the two units in the same building should be treated as one residential unit. The court overturned the decisions of the assessing officer, Commissioner of Income Tax (Appeals), and Income Tax Appellate Tribunal, granting the appeal in favor of the assessee.

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Issues Involved:
1. Denial of exemption under Section 54F of the Income Tax Act, 1961.
2. Interpretation of the term "residential house" in Section 54F(1) proviso (a)(i) of the Income Tax Act.
3. Classification of properties used for commercial purposes as residential houses under Section 54F(1) proviso (a)(i).

Detailed Analysis:

Issue 1: Denial of Exemption under Section 54F of the Income Tax Act, 1961
The assessee, a director of a private company, filed a return for the assessment year 2006-07, declaring a long-term capital gain and claiming exemption under Section 54F of the Income Tax Act, 1961. The assessing officer denied this exemption, stating that the assessee owned nine residential flats and derived income from these properties, thus disqualifying him under proviso (a)(i) and (b) of Section 54F(1). The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld this decision, leading to the present appeal.

Issue 2: Interpretation of the Term "Residential House" in Section 54F(1) Proviso (a)(i)
The assessee argued that two of the properties, though sanctioned as residential, were used for commercial purposes as serviced apartments. The tribunal held that the nature of use (commercial or residential) was immaterial as long as the units were recognized as residential. The High Court, however, emphasized that the term "residential house" should be interpreted liberally to advance the objective of the provision, which is to promote the construction of residential houses. The court noted that the usage of the property should determine its classification as residential or commercial.

Issue 3: Classification of Properties Used for Commercial Purposes as Residential Houses
The court noted that seven out of nine properties were sanctioned for commercial purposes, leaving only two properties in question. These two properties were used commercially as serviced apartments. The court held that the usage of the property should be considered, and since these properties were used commercially, they could not be classified as residential. The court also cited various High Court decisions supporting this view, emphasizing that the beneficial provisions of the Act should be construed to promote their purpose.

Conclusion:
The High Court concluded that the assessee was entitled to the exemption under Section 54F(1) of the Act. It held that the two apartments used commercially could not be treated as residential properties. Additionally, even if considered residential, the two units in the same building should be treated as one residential unit. The court quashed the orders of the assessing officer, the Commissioner of Income Tax (Appeals), and the Income Tax Appellate Tribunal, allowing the appeal in favor of the assessee.

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