2022 (4) TMI 220 - AT - Income Tax

Appeal Dismissed: No Section 54 Benefit for Combining Residential Units

The Tribunal dismissed the appeal, ruling that the appellant is not entitled to the benefit of Section 54 for investing in two residential units, even if ... Exemption under section 54 - one residential house - literal construction - prospective effect of amendment - date of investment as triggering event - requirement of municipal sanction for amalgamationExemption under section 54 - one residential house - literal construction - date of investment as triggering event - requirement of municipal sanction for amalgamation - Whether the assessee is entitled to exemption under section 54 for investment in two adjacent flats which were later converted into a single residential unit - HELD THAT: - The Tribunal held that for AY 2015-16 the amended wording of section 54 requiring investment in 'one residential house' is plain and must be given a literal construction. The relevant event is the date of investment; it is for the revenue to determine whether the LTCG was invested in one house or more at that time. On the material on record the assessee received allotment letters for two separate flats with separate entrances and two kitchens before the relevant date and the builder's communication expressly described them as two different sanctioned units and stated amalgamation would be subject to obtaining requisite approvals. The assessee failed to produce any municipal approval or sanctioned plan showing that at the time of purchase the two units were already amalgamated into one residential house. In those circumstances a subsequent conversion without prior sanction/approval could not be treated as investment in one residential house for the purposes of section 54. The Tribunal accordingly applied the literal meaning of the amended provision (which took effect from 01.04.2015 and is applicable to AY 2015-16) and upheld the rejection of the exemption. [Paras 16, 17, 19, 20, 21]Claim for exemption under section 54 disallowed as investment was in two separate residential units at the time of investment and no municipal sanction for amalgamation was provedFinal Conclusion: Appeal dismissed; exemption under section 54 denied because the assessee invested in two distinct residential units at the relevant time and failed to prove sanctioned amalgamation into one residential house, and the literal amended requirement of 'one residential house' (effective AY 2015-16) was applied. Issues Involved:1. Whether the benefit of exemption under Section 54 of the Income Tax Act, 1961, can be given to the appellant for purchasing two adjacent residential units.2. Whether the amendments made by the Finance Act, 2014, to Section 54, restricting the benefit to 'one residential house,' apply to the appellant's case.3. Whether the appellant's conversion of two adjacent flats into a single residential unit qualifies for the exemption under Section 54.Issue-Wise Detailed Analysis:1. Exemption Under Section 54 for Two Adjacent Residential Units:The appellant sold a residential flat for Rs. 8.5 crores and claimed exemption under Section 54 by investing in two adjacent residential properties. The Assessing Officer (AO) denied the exemption, stating that post-amendment, the benefit under Section 54 is restricted to investment in 'one residential house.' The appellant argued that the two flats were intended to be used as a single residential unit for their joint family of 10 members, and the builder confirmed that the two adjacent flats could be combined into one unit. However, the AO and subsequently the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this claim, emphasizing that the flats were purchased under two separate agreements and had two separate kitchens and entrances, thus constituting two distinct residential units.2. Applicability of Amendments by Finance Act, 2014:The CIT(A) upheld the AO's decision, citing the amendment to Section 54 by the Finance Act, 2014, which substituted 'a residential house' with 'one residential house in India.' The CIT(A) referred to the Explanatory Memorandum of the amendment, which clarified that the benefit was intended for investment in one residential house within India. The CIT(A) emphasized the rule of literal construction, stating that the clear legislative intent was to restrict the exemption to one residential house. The appellant's reliance on judicial precedents was dismissed, as the CIT(A) noted that the amendment explicitly aimed to limit the benefit to a single residential unit.3. Conversion of Two Flats into a Single Residential Unit:The appellant argued that the two flats were converted into one unit to accommodate their large family, and thus should be considered as one residential house for the purpose of Section 54 exemption. However, the Tribunal noted that the relevant date for determining the applicability of Section 54 is the date of investment in the residential house. At the time of purchase, the flats were two distinct units with separate kitchens and entrances. The Tribunal also highlighted that no approval or permission from the municipal authorities for the amalgamation of the two flats was provided by the appellant, despite being directed to do so. The Tribunal concluded that the subsequent conversion of two flats into one unit is immaterial for the purpose of Section 54, which requires the investment to be made in one residential house at the time of purchase.Conclusion:The Tribunal dismissed the appeal, holding that the appellant is not entitled to the benefit of Section 54 for the investment made in two residential units, even if they were later converted into a single unit. The Tribunal emphasized the clear legislative intent of the amendment to restrict the exemption to one residential house and the requirement for literal interpretation of the statute. The Tribunal also noted the absence of necessary approvals for the amalgamation of the two flats, further supporting the denial of the exemption.