2025 (7) TMI 1598 - HC - Income Tax

Section 54(1) allows capital gains exemption on buying multiple residential houses, not just one unit

The HC held that under the unamended Section 54(1), the term 'a residential house' does not restrict exemption to the purchase of a single residential ... Exemption on capital gains u/s 54 - sale proceeds of a flat in Mumbai used towards purchase of seven row houses in Pune - set off the purchase cost of more than one residential units against the capital gains earned from sale of a single residential house. Whether the Assessee is entitled to claim exemption under provisions of Section 54(1) of the Act against the entire capital gains arising out of sale of his flat in Mumbai, on account of utilization thereof towards purchase of seven row houses in Pune ? Whether sale proceeds of one residential house, used for purchase of multiple residential houses, would qualify for exemption under Section 54(1) of the Act ? HELD THAT:- The position appears to be fairly well settled that use of the words ‘a residential house’ in unamended Section 54 (1) of the Act would not mean a single residential house and the contemplated even multiple residential houses. The emphasis in the unamended Section 54 (1) of the Act is on residential nature of the property and the objective was never to restrict the number of residential houses purchased against capital gains. The words ‘a residential house’ were merely descriptive nature of the assets sold/purchased and not restrictive of the number of assets sold or purchased. The position got modified by the Legislature only w.e.f. 01 April 2015. We are of the view that the issue involved in the present case is squarely covered by the judgments of Arun K. Thiagarajan [2020 (6) TMI 513 - KARNATAKA HIGH COURT] and Tilokchand & Sons[2019 (4) TMI 713 - MADRAS HIGH COURT]. We are in respectful agreement with the view expressed therein that the expression ‘a residential house’ in unamended Section 54(1) of the Act includes more than one residential house. even though two interpretations of the provisions of unamended Section 54(1) of the Act may be possible, the one in favour of the Assessee will have to be accepted. Reliance in this regard on Apex Court judgment in Mavilayi Service Coop Bank Ltd. [2021 (1) TMI 488 - SUPREME COURT] is apposite. Assessee is held entitled to the benefit of exemption under provisions of Section 54(1) of the Act against the entire capital gains arising out of sale of his flat in Mumbai, on account of utilization thereof towards purchase of seven row houses in Pune. Assessee appeal allowed. ISSUES: Whether Section 54(1) of the Income Tax Act, 1961 allows exemption of capital gains arising from sale of a single residential house against purchase or construction of multiple residential houses.Whether the expression 'a residential house' in unamended Section 54(1) includes plural residential houses or restricts exemption to only one residential house.Whether the amendment by Finance (No. 2) Act, 2014 substituting 'a residential house' with 'one residential house' clarifies the scope of exemption prospectively.Whether multiple residential units connected by common entrance or sharing facilities can be treated as a single residential house for exemption under Section 54(1).Whether the interpretation of Section 54(1) should be liberal and beneficial to the assessee. RULINGS / HOLDINGS: The Court held that prior to the 2014 amendment, the phrase 'a residential house' in Section 54(1) of the Act was not restrictive to a single residential house but included plural residential houses; hence, exemption against capital gains from sale of one residential house can be claimed for investment in multiple residential houses.The amendment by Finance (No. 2) Act, 2014, which replaced 'a residential house' with 'one residential house,' was a prospective clarification effective from 1st April 2015, explicitly restricting exemption to investment in only one residential house for assessment years thereafter.The judgment in K.C. Kaushik was distinguished as it did not address the issue of multiple residential houses but focused on letting out the second house, and therefore does not support the proposition that exemption is limited to one residential house.The Court agreed with the Karnataka High Court in Arun K. Thiagarajan and Madras High Court in Tilokchand & Sons that the singular 'a residential house' includes plural residential houses, and that multiple houses purchased at different addresses out of sale proceeds qualify for exemption under unamended Section 54(1).The Court held that the beneficial provisions of Section 54(1) must be interpreted liberally in favor of the assessee, adopting the view that allows exemption for multiple residential houses purchased from capital gains arising from sale of a single residential house.The Special Bench ITAT decision in ITO Vs. Ms. Sushila M. Jhaveri, which limits exemption to one residential house, is not binding on the Court and was not followed in view of contrary High Court decisions.The Court quashed and set aside the orders denying exemption for the entire capital gains invested in seven row houses and allowed exemption under Section 54(1) of the Act for the full amount invested. RATIONALE: The Court applied the unamended provisions of Section 54(1) of the Income Tax Act, 1961, relevant for assessment year 1995-96, which used the phrase 'a residential house' without the explicit numerical restriction introduced by the 2014 amendment.The Court relied on the principle under Section 13 of the General Clauses Act, 1897, that singular words include plural unless context otherwise requires, supporting a plural interpretation of 'a residential house.'Precedents from Karnataka High Court (Arun K. Thiagarajan), Madras High Court (Tilokchand & Sons), and Delhi High Court (Gita Duggal) were followed, which held that 'a residential house' includes multiple houses and that the 2014 amendment was a clarificatory and prospective legislative change.The Court noted the legislative intent behind the 2014 amendment was to restrict exemption to one residential house prospectively, indicating no such restriction existed before the amendment.The Court distinguished the K.C. Kaushik judgment on its facts and scope, and declined to follow the Special Bench ITAT decision, emphasizing binding High Court precedents and the beneficial nature of the exemption.The Court emphasized that the exemption provisions are benevolent and must be interpreted liberally to encourage residential house purchase activities.