Introduction

The recent Delhi ITAT decision in the case of Kaushal Kishore Maheshwari vs ACIT [TS-6590-ITAT-2017(DELHI)-O], has raised a few eye-brows.One cannot underestimate the magnitude of bearing the decision will have on Capital Gain cases across the country; and also for the purposes of tax planning u/s 54F. The 14 page order of Delhi ITAT has distinguished the landmark decision ofits jurisdictional High Court in CIT vs Ravindra Kumar Arora [TS-675-HC-2011(Delhi)-O] while making its judgement.

Key Facts:

1. The assessee sold a land and purchased a house property exclusively in the wife’s name. He claimed exemption u/s 54F for the same.

2. To purchase the house (for reinvestment purposes), a loan was taken in the name of the wife. The assessee (husband) was only a secondary to the loan, as it was sanctioned to the wife.

3. Husband used consideration received on sale of land to repay the loan taken by wife for purchase of house in the name of the wife.

4. The wife is an independent assessee being assessed to income tax already, on her income separately.

Observation and decision:

1. Wife is an independent tax payer on her sources of income. The new property is owned exclusively by the wife and the Assesse is not even a co-owner.

2. The loan has been sanctioned to the wife and the husband is merely a joint name/secondary to the loan.

3. The repayment of loan by the assessee is a transaction different from the transaction of investment in the property. No evidence given to prove the same, either.

4. Hon’ble ITAT held that investment in the new property not made in the name of Assessee. Denies exemption u/s 54F

Analysis:

The Delhi ITAT observed as follows:

“….Neither the investment has been made in the name of the appellant or alongwith his wife, nor the investment can be traced to the sale proceeds received on account of sale of the property. The sale proceeds of the property have gone to different accounts in the name of the appellant and his father. The property has been purchased out of loan taken from the bank in joint name. The wife is art independent assessee and the loan has been disbursed directly to Mrs. Salochna Goyal, the vendor and to the wife. The source from which loan has been paid has not been produced.

Thus it is apparent that the appellant is not entitled to deduction under section 54F”

There are 2 parts of this decision that needs to be critically understood and analysed.

The Assessee ought to be a co-owner or spouse/children should not be independent tax payers

The most critical part of the decision is the decision to deny extension of exemption u/s 54F to the assessee as the property was purchased in his wife’s name and he is not even a co-owner to the same. The Hon’ble Delhi ITAT found it pertinent to note“…the investment has been made in the name of the appellant or alongwith his wife…”.

Proviso to Section 54F of the Act states as follows:

“Provided that nothing contained in this sub-section shall apply where—

(a)  the assessee,—

 (i)  owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or

 (ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or

(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and

(b)  the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head "Income from house property"

Hence, as it can be seen there are 4 requirements to be satisfied to enjoy the benefits of Section 54F. While the Act mandates that the house should be purchased by the assessee,nowhere in the Act does it stipulate that the house should be purchased in the name of the assessee only.Despite this, it has proved to be a contentious issue across various High Courts and Tribunals.

In CIT vs V Natarajan [TS-5128-HC-2006(MADRAS)-O], the Madras High Court held that where an Assessee purchased a property in the name of his wife, he will still be eligible for exemption u/s 54 (or 54F). 

In CIT vs Gurnam Singh [TS-119-HC-2008(P & H)-O], the Punjab &Harayana High Court held that “Undisputedly, the purchased land is being used by the assessee only for agricultural purpose and merely because in the sale deed his only son was also shown as co-owner, the Tribunal has rightly come to the conclusion that it does not make any difference because the purchased land is being used by the assessee for agricultural purposes. It is not the case of the Revenue that the said land is being used exclusively by his son. In our view, a pure finding of fact has been recorded by the Tribunal which does not require any interference in this appeal.”

The Andhra Pradesh High Court in the case of Late Mir Gulam Ali Khan vs. CIT [TS-8-HC-1984(AP)-O] has held that the object of granting exemption under s. 54 of the Act is that an assessee who sells a residential house for purchasing another house must be given exemption so far as capital gains are concerned. The word "assessee" must be given wide and liberal interpretation so as to include his legal heirs also. There is no warrant for giving too strict an interpretation to the word "assessee" as that would frustrate the object of granting exemption

In CIT vs. Podar Cements (P) Ltd. & Etc. [TS-17-SC-1997-O], the Supreme Court has also accepted the theory of constructive ownership.

However, in D Devdass vs ITO [TS-5244-ITAT-2016(CHENNAI)-O], the Hon’ble Chennai ITAT held that the Assessee must reinvest the property in his own name and, even though it has been reinvested in the name of his unmarried daughter, a blood relation, he will not be eligible to claim the exemption under the above section. Therefore, it was held in favour of the revenue. A similar rationale was applied in Jai Narayan vs ITO [TS-5713-HC-2007(PUNJAB & HARYANA)-O].

The Assessee, in the course of proceedings had placed reliance onCIT vs Ravindra Kumar Arora [TS-675-HC-2011(DELHI)-O], and the Delhi ITAT has distinguished the case from the Assessee’s case. In CIT vs Ravindra Arora, the Delhi High Court held that:

‘whole of the purchase consideration has been paid by the assessee and not even a single penny has been contributed by the wife in the purchase of the house. The Tribunal also noted the argument that the property was purchased by the assessee in the joint name with his wife for 'shagun’ purpose and because of the fact that the assessee was physically handicapped. The Tribunal further concludes that as a matter of fact, the assessee was the real owner of the residential house in question.’

In the Assessee’s case, the Delhi ITAT stated that since the property was purchased exclusively in the name of the wife and she is an independent tax payer,the Assessee will not be eligible to exemption u/s 54F. It appears that the Assessee’s case has been solely distinguished based on the fact that the Assessee’s wife is an independent tax-payer and the assessee is not dependent on the spouse for managing the property (as in the case referred above, the tax payer was physicallyhandicapped). While the reasoning maybe sound, such a provision does not exist in the Act itself, and may be considered as one which is specific to that tax payers case.

Same funds to be used - Repayment of loan separate from investment in property

In the Assessee’s case, the Delhi ITAT noted that as the wife *is an independent tax payer it cannot be said that the assessee has made investment for purchase of the property. This is due to the reason that loan has been primarily sanctioned to the wife of the assessee, who is having title over the property and the assessee has been joined in the loan for the purpose of repayment of the loan. The repayment of loan by the assessee is a transaction different from the transaction of investment in the property.

Therefore, as can be seen above, the Delhi ITAT attempts to establish a direct nexus between the net consideration received and the reinvestment made.

The very purpose of introduction of these sections was to encourage the assessee to make more investments in residential houses, on the sale of a long term capital asset. It is not necessary that the same funds must be used in purchasing of the new residential house, but, the fund should be available with the assessee for its investment in residential house. Since the law permits utilization of capital gain within the specified time, the assessee may use such funds for other purpose and may find resource from other source for investment in time. The assessee may use the money for his business and draw the amount for investment from his past savings. Conversely, he may place sale proceeds in long-term investment other than what is permitted under s. 54, but, all the same find money from the business or other source for approved investment within the time.

In Milan Sharad Ruparel vs ACIT [TS-5735-ITAT-2008(MUMBAI)-O], the Mumbai ITAT noted that:

“The law does not expect that the sale amount should be kept in the locker and the same should be utilized in purchase of residential house. Neither the law nor does any circular require the identity of the amount received on sale and utilization for purpose of s. 54F and other relevant provisions. Since money has no colour, all that is required is compliance with the condition of investment within the specified time”

This view was fortified in the Kerala High Court in the case of ITO vs K.C. Gopalan [TS-5453-HC-1999(Kerala)-O] and Prem P Shah vs ITO [TS-5901-ITAT-2005(MUMBAI)-O].

Therefore, there exist multiple decisions in the favour of the assessee that do not require a nexus to be established between the consideration and the reinvestment.

While this is so, in a recent decision of T Ramesh vs ITO [TS-7189-ITAT-2017(CHENNAI)-O], the Hon’ble single member bench of the Chennai ITAT held that where the assessee had borrowed funds to reinvest in a new asset, the Assessee should have repaid the same with the sale consideration he has received; i.e. the same funds should have been used for the purpose of reinvestment.

Conclusion:

The Supreme Court of India, in Bajaj Tempo Ltd., [TS-3-SC-1992-O] held that‘The Statute should be construed liberally; and since the provision for promoting economic growth has to be interpreted liberally, restrictions on it too has to be construed so as to advance the objective of the provisions and not to frustrate it’.

While the Delhi ITAT distinguished the case of the Assessee from CIT vs Ravindra Arora, it is also important to note the Hon’ble Delhi High Court had, in the same case, observed that the objective of s. 54F and the like provision such as s. 54 is to provide impetus to the house construction and so long as the purpose of house construction is achieved, such hyper technicality should not impede the way of deduction which the legislature has allowed. Purposive construction is to be preferred as against the literal construction, more so when even literal construction also does not say that the house should be purchased in the name of the assessee only. Sec. 54F of the Act is the beneficial provision which should be interpreted liberally in favour of the exemption/deduction to the taxpayer and deduction should not be denied on hyper technical ground.

Therefore, the provisions of Sec 54 and 54F should not be frustrated by hyper technical interpretation of the same.