Exemption under ss. 54/54F denied for multiple houses; unexplained cash deposits accepted, s.69A/115BBE issue infructuous

ITAT Delhi-AT held that the assessee was not entitled to exemption under ss. 54/54F. The Tribunal found that the Karol Bagh property comprised three independent residential units with separate kitchens, from which the assessee was earning rental income, thereby constituting more than one residential house on the relevant date. Consequently, the assessee failed the basic eligibility condition for ss. 54/54F at the entry level and the claim was rightly disallowed. On the issue of unexplained cash deposits, ITAT accepted the assessee's explanation that deposits were sourced from prior cash withdrawals, refundable security deposits from rental properties, and part of the joint development consideration, and therefore deleted the addition. In light of this, the ground on tax rate u/s 69A/115BBE was rendered infructuous. The appeal was partly allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether exemption/deduction under sections 54/54F was allowable on capital gains arising from a joint development of a residential property where the assessee already owned and was earning rental income from multiple independent residential units.

1.2 Whether the cash deposits of Rs. 17,28,000 made during the demonetisation period were unexplained money liable to addition under section 69A.

1.3 Whether, assuming an addition under section 69A, the higher tax rate under section 115BBE as amended (60%) was applicable for the assessment year in question, or only the earlier, lower rate.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of exemption/deduction under sections 54/54F where multiple residential units are owned

Legal framework (as discussed by the Court)

2.1 The Court examined sections 54 and 54F, focusing on the requirement that the assessee must not own more than one residential house, other than the new asset, on the date of transfer of the original asset, and on the expression "a residential house". The Court noted judicial precedents holding that multiple units in a single building can still constitute "a residential house" and that the relevant tests include existence of a common kitchen versus independent self-contained units.

Interpretation and reasoning

2.2 The assessee had entered into a joint development agreement in respect of property at Pitampura, where three floors were constructed; the builder retained the second floor with 25% parking and the assessee retained the first and third floors, claiming deduction under section 54F in respect of capital gains.

2.3 The Court recorded that the assessee was already declaring rental income from the following units at Karol Bagh and Pitampura: (i) Karol Bagh upper ground floor, (ii) Karol Bagh first floor, (iii) Karol Bagh fourth floor, (iv) Pitampura first floor, and (v) Pitampura third floor.

2.4 The real controversy was identified as: whether the assessee, who was earning rental income from multiple independent residential units, could still be regarded as owning only "one residential house" for the purpose of eligibility under sections 54/54F, by treating multiple floors/units in the same building as a single house.

2.5 The assessee relied on judicial precedents (including the decision holding that multiple units in one building could still be treated as "a residential house") to contend that vertically or laterally structured separate floors constitute one house if the building is organically one, and that the floors constructed under the joint development agreement formed one residential house.

2.6 The Court distinguished those precedents on facts, noting that they dealt with cases where the question was whether a newly acquired/constructed property comprising several units within the same building could still qualify as "a residential house" for deduction, and not with the threshold condition that the assessee should not own more than one residential house (other than the new asset) on the date of transfer.

2.7 The Court held that, under the statutory condition, the assessee can claim the benefit under sections 54/54F only where he has not more than one residential house apart from the new asset; this effectively contemplates at most one existing residential house plus the new residential house for which deduction is claimed.

2.8 Applying the functional test of an "independent residential house", the Court emphasized that a residential house must typically comprise rooms, a hall and a kitchen; the presence of separate kitchens in multiple units indicates separate independent residential houses, irrespective of being in the same building.

2.9 On facts, it was found that from the Karol Bagh property alone the assessee was earning rent from three independent residential units, each having separate kitchens, demonstrating that the assessee already owned three independent residential houses even before considering the new construction at Pitampura.

2.10 Therefore, when the assessee sold the second floor at Pitampura to the developer and claimed deduction under section 54/54F, he already held more than one independent residential property. The statutory condition of not owning more than one residential house (other than the new asset) thus failed "at the entry level" itself.

Conclusions

2.11 The Court held that the assessee was not eligible to claim deduction/exemption under sections 54/54F in respect of the Pitampura transaction as he already owned more than one independent residential house. The precedents relied on by the assessee regarding multiple units within a single building being treated as "a residential house" were held to be distinguishable and inapplicable to the ownership-condition aspect. The ground relating to denial of exemption under sections 54/54F was dismissed.

Issue 2: Addition under section 69A on account of cash deposits during demonetisation

Legal framework (as applied by the Court)

2.12 The addition was made under section 69A treating cash deposits of Rs. 17,28,000 during demonetisation as unexplained money, and tax was levied by invoking section 115BBE. The Court considered whether the assessee had satisfactorily demonstrated the source and traceability of the deposits.

Interpretation and reasoning

2.13 The Court examined the bank statements and cash-flow details produced in the paper book. It found that Rs. 8,00,000 of the cash deposits were sourced from cash withdrawn from one bank account and re-deposited into another bank account of the assessee, and that there was full traceability of these withdrawals and deposits.

2.14 The Court further noted that part of the cash deposits was explained as refundable security deposits and rent received in cash from rental properties in accordance with a rent agreement; these receipts were duly reflected in the computation of income under the head "Income from house property".

2.15 Additionally, it was observed that an amount of Rs. 6,83,000 from the joint development arrangement formed part of the sale consideration and was deposited in cash, which was also evidenced in the records.

2.16 On an overall appreciation of the material, the Court concluded that the assessee had demonstrated adequate and identifiable sources for the cash deposits made during the demonetisation period, and that the earlier observation of "no prior history of having cash in hand" could not stand in the face of the documentary evidence of withdrawals, rents, deposits and sale consideration.

Conclusions

2.17 The Court held that the cash deposits of Rs. 17,28,000 were duly explained and traceable to recorded sources, and therefore could not be treated as unexplained money under section 69A. The addition was deleted and the corresponding ground of appeal on this issue was allowed.

Issue 3: Applicability and rate of tax under section 115BBE to additions under section 69A for the relevant assessment year

Legal framework (as discussed by the Court)

2.18 The additional ground challenged the application of the enhanced rate of tax (60%) under the amended section 115BBE to the addition made under section 69A for the assessment year in question, contending that only the pre-amendment lower rate (30%) could apply since the amendment was operative prospectively from assessment year 2018-19.

2.19 The Court referred to a High Court decision holding that the amendment to section 115BBE prescribing higher rates was prospective and applied from assessment year 2018-19.

Interpretation and reasoning

2.20 Since the Court had already deleted the substantive addition under section 69A while allowing the assessee's ground on cash deposits, it held that the question of the applicable rate under section 115BBE became infructuous in the present appeal.

2.21 Nonetheless, the Court observed that, in line with the cited High Court decision, the enhanced rate under section 115BBE is to be applied prospectively from assessment year 2018-19, implying that for the assessment year under consideration the earlier, lower rate would have been applicable had the addition survived.

Conclusions

2.22 The additional legal ground was treated as infructuous due to deletion of the underlying addition. However, the Court endorsed the position that the higher tax rate under the amended section 115BBE is applicable only prospectively from assessment year 2018-19.

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