Deduction under s.54F allowed where assessee only co-owner; appeal on indexed cost of shares rejected

ITAT Delhi dismissed the Revenue's appeal, upholding the CIT(A)'s order granting the assessee deduction under s.54F and allowing indexed cost of acquisition of shares. It was held that "own" in s.54F contemplates absolute and exclusive ownership of a residential house; joint or fractional ownership by family members does not constitute ownership for the purpose of denying exemption. As the assessee was only a co-owner of the Goa flat, the assessee could not be treated as its absolute owner, and exemption under s.54F was correctly allowed. On the issue of indexed cost of acquisition of shares, the Tribunal endorsed CIT(A)'s factual verification of ledger accounts and investment confirmations, finding no basis to disturb the relief granted.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether deduction under section 54F of the Income-tax Act, 1961 was allowable where the assessee, on the date of transfer of the original asset, held only fractional/joint interests in residential properties and not more than one residential house in his absolute ownership.

1.2 Whether a memorandum of family settlement and consequential transfers, though formally registered after the date of transfer of the original asset, could be disregarded for purposes of determining "ownership" of residential houses under the proviso to section 54F.

1.3 Whether disallowance of the indexed cost of acquisition of shares, resulting in taxation of the entire sale consideration as capital gains, was justified when the assessee had produced ledger accounts and confirmations from the issuing company evidencing acquisition and cost of such shares.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2 - Eligibility for deduction under section 54F where assessee holds joint interests in residential properties and effect of family settlement

Interpretation and reasoning

2.1 The Assessing Officer denied deduction under section 54F on the basis that the assessee had disclosed income from three house properties and, therefore, allegedly owned more than one residential house on the date of transfer of shares, and further held that ownership was not transferred until execution and registration of sale/gift deeds in 2020 and 2021, rendering the family settlement dated 05.04.2019 ineffective for the relevant date.

2.2 The appellate authority examined the factual matrix and found that: (i) House No. 3114, Sector 21-D, Chandigarh was jointly owned by the assessee and his brother; (ii) House No. C-01, SRS Lotus Garden, Sector 9, Thanesar, Kurukshetra was jointly owned by the assessee and his wife; and (iii) only House No. 75, Sector 4, Urban Estate, Kurukshetra was in the sole name of the assessee prior to the family settlement. Post-settlement, the Chandigarh property was to go to the brother, the Kurukshetra Urban Estate property to the assessee's son, and the SRS Lotus Garden property remained in joint ownership.

2.3 The appellate authority held that even if, for argument's sake, the memorandum of family settlement was ignored or its registration treated as subsequent, the assessee, at best, had absolute ownership of only one property and fractional/joint ownership in the other properties. The proviso to section 54F contemplates ownership of more than one residential house in the sense of absolute, full ownership and not mere co-ownership.

2.4 Relying on judicial precedents discussed in the appellate order, particularly the reasoning adopted in decisions such as ITO v. Rasiklal N. Satra and Ashok G. Chauhan v. ACIT, it was emphasized that:

- The expression "a residential house" and the word "own" in section 54F refer to a complete residential house fully and wholly owned by the assessee.

- Joint or fractional ownership does not amount to "ownership" of a residential house for the purpose of the exclusion in the proviso to section 54F.

- Where property is jointly owned, none of the co-owners can be regarded as the absolute owner to the exclusion of all others; ownership in such context is distinct from co-ownership.

- The legislature, having amended section 32 to include the expression "owned wholly or partly" after the decision in Seth Banarsi Dass Gupta, but not having similarly amended section 54F, indicates that part/joint ownership is not intended to fall within the mischief of the proviso to section 54F.

2.5 The Tribunal noted that the appellate authority had appropriately applied the above principles, and further relied on the coordinate bench decision in Ashok G. Chauhan, where it was held that shared interest in a residential house does not preclude deduction under section 54F, since such shared interest does not amount to full ownership.

Conclusions

2.6 For purposes of the proviso to section 54F, only a residential house wholly and exclusively owned by the assessee is to be counted; fractional/joint interests do not constitute "ownership" of that residential house.

2.7 As the assessee did not hold more than one residential house in his absolute ownership on the date of transfer of shares, his claim for deduction under section 54F in respect of investment in the Pune residential property was rightly allowed by the appellate authority.

2.8 The Tribunal upheld the appellate authority's decision and refused to interfere with the allowance of deduction under section 54F.

Issue 3 - Disallowance of indexed cost of acquisition of shares and evidentiary sufficiency

Interpretation and reasoning

3.1 The Assessing Officer disallowed the indexed cost of acquisition of Rs. 1,54,28,619/- on sale of 74,024 shares of Tirupati Medicare Ltd., on the ground that the assessee allegedly failed to furnish evidence of acquisition and cost, thereby effectively taxing the entire sale consideration as capital gains.

3.2 The appellate authority found, on examination of the record, that the assessee had filed detailed ledger accounts from the books of Tirupati Medicare Ltd. for the relevant financial years, which contained:

- Date-wise and year-wise entries of share investments;

- Details of cheque payments, including cheque numbers and dates;

- Bank details through which payments were made; and

- Confirmations from the company in respect of the transfer and holding of shares in the assessee's name.

3.3 It was further found that the assessee was a regular assessee since 2007 and an initial shareholder and director of the company, and that the jurisdiction over the company lay with the same Assessing Officer. In these circumstances, there was no justification to ignore the documentary evidence of cost and acquisition placed on record, nor to refuse the indexed cost of acquisition while simultaneously accepting that the assessee was the owner of the very shares sold.

3.4 The Tribunal noted that the matter was essentially factual; the appellate authority had verified the ledgers and confirmations in detail and concluded that the cost of acquisition was adequately established and that disallowance of such cost was contrary to law and facts.

Conclusions

3.5 Documentary evidence in the form of detailed company ledger accounts, cheque/payment details, and confirmations from the issuing company constituted sufficient proof of acquisition and cost of shares for computation of long-term capital gains.

3.6 The disallowance of Rs. 1,54,28,619/- as indexed cost of acquisition was unsustainable and was rightly deleted by the appellate authority.

3.7 The Tribunal upheld the deletion of the disallowance of indexed cost of acquisition and dismissed the Revenue's grounds on this issue.

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