Landmark judgment on admissibility if Capital gains upon Construction of residential house over leasehold Land

short overview : Requirement of section 54 in the second limb is that capital gain should be used in construction of residential house and nothing more. Assessee in the instant case was owner of super-structure constructed by utilizing capital gain and it was clear from the lease deed by which land over which construction had been put up was given on lease to assessee, therefore, deduction under sections 54 could not be disallowed.

Assessee sold certain property and claimed exemption under section 54 as regards capital gain utilized towards construction of a residential on leasehold land. AO denied deduction on the ground that assessee was not the owner of land over which construction had been put up.

it is held that Requirement of section 54 in the second limb is that capital gain should be used in construction of residential house and nothing more. Assessee in the instant case was the owner of super-structure constructed by utilizing capital gain and it was clear from the lease deed by which land over which construction had been put up was given on lease to assessee, therefore, deduction under sections 54 could not be disallowed.

Decision: In assessee’s favour.

Distinguished: Yogesh Sunderlal Shah v. Asstt. CIT 24(1) (2013) 21 ITR 97 (Mum) : 2013 TaxPub(DT) 168 (Mum-Trib).

IN THE ITAT, BANGALORE BENCH

N.V. VASUDEVAN, V.P. & JASON P. BOAZ, A.M.

Shivakumar Kheny (HUF) v. ITO

ITA No. 792/Bang/2019

31 July, 2019

Appellant by: R.B. Krishna, Advocate

Respondent by: Vikas Suryavamshi, Addl. Commissioner (Departmental Representative) (ITAT), Bengaluru

N.V. Vasudevan, V.P.

This appeal by the assessee is against the Order, dated 8-3-2019 of the Commissioner (Appeals), Bengaluru-6, Bengaluru relating to assessment year 2015-16.

2. The only issue that arises for consideration in this appeal is as to, whether the revenue authorities were justified in denying the benefit of deduction under sections 54 of the Income-Tax Act, 1961 (“the Act”) to the assessee.

The above issue arises for consideration under the following facts and circumstances. The Assessee owned property bearing No. 25/A (Old site No. 25) PID No. 98-50-25/A, situated at 1st Main, Hebbal Ganganagar Layout, Bangalore. The Assessee sold the aforesaid property on 4-4-2014. On such sale, there was a Long Term Capital Gain. While computing income under the head long term capital gain, the Assessee will be entitled to a deduction under sections 54 of the Act, if the Assessee invests the capital gain in any one of the following modes viz.,

(i) purchase of a new asset i.e., a residential house or

(ii) construction of new asset i.e., one residential house in India.

In the event of purchase of new asset the time limit laid down in the section is within a period of one year before or two years after the date on which the transfer took place. In the event of construction of new asset i.e., one residential house in India, such construction has to be within a period of three years after the date of transfer. and the computation thereof has already been furnished in the paper book filed. The provisions of section 54 of the Act, reads thus :–

“Profit on sale of property used for residence.–54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,–

(i) if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.

(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return (such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139) in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:–

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,–

(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.”

3. The Assessee took land on lease for a period of 20 years under a lease deed, dated 14-3-2013 and constructed a residential house on such land. The amount of capital gain to the extent it was so utilized was claimed as deduction under sections 54 of the Act. As per the lease, dated 14-3-2013, the Assessee entitled to construct a building after reimbursing a sum of Rs. 4.9 Lakhs already spent by the lessor. The Lease period was for 20 Years. As per clause 10, the ownership and title to the residential building (except the land) would vest in the Assessee for the period of lease and thereafter the title in the building will vest with the lessor.

4. The assessing officer denied exemption under section 54 of the Act on the ground that since the Assessee was not owner of the land, the condition laid down in section 54 of the Act for claiming deduction was not satisfied. taking the stand that such dichotomy in ownership is not acceptable. According to the assessing officer, the Assessee had only a leasehold interest over the land on which building was constructed. He was of the view that the Assessee did not have any right to alienate the superstructure.

5. It was the plea of the Assessee based on a decision of the Hon’ble Madras High Court in the case of Park View Enterprises (1991) 189 ITR 192 (Mad) : 1991 TaxPub(DT) 142 (Mad-HC) that in law there can be two different owners of the land and the building constructed on a land and that had occasion to consider whether two different persons could own the land and building separately. Reference was also made to sections 63A, 108(h) and 8 of the Transfer of Property Act, 1882 to further the proposition that the owner of land need not necessarily be the owner of anything constructed-thereon. Reliance was placed on the decision of the Hon’ble Karnataka High Court in the case of Dr. Puttanna and Sons v. CIT (1986) 162 ITR 468 (Karn) : 1986 TaxPub(DT) 1637 (Karn-HC) in which it was held that when a lessee constructs a building on leased land, the lessee becomes owner of the building and income therefrom will have to be assessed as income from house property. It was also argued that as per the provisions of section 269 UA(f)(i) read with section 27 (iiib) of the Act, a person acquiring any rights through a lease for a period exceeding 12 years would be treated as the owner.

6. The above arguments did not find favour either with the assessing officer or the Commissioner (Appeals). The Commissioner (Appeals) in upholding the order of the assessing officer, relied on the decision of the Mumbai ITAT in the case of Yogesh Sundarlal Shah v. ACIT in ITA No. 1876/M/2012, 25 taxmann.com 300 (Mum) : 2013 TaxPub(DT) 168 (Mum-Trib) wherein it was held if capital gain is utilized for acquisition of leasehold rights in property then deduction under sections 54 of the Act is available. The Commissioner (Appeals) came to the conclusion that the assessee was not the owner of the land or building and therefore assessee was not entitled to deduction under sections 54B of the Act.

7. Aggrieved by the order of Commissioner (Appeals), the assessee is in appeal before the Tribunal. We have heard the rival submissions. The learned counsel for Assessee drew our attention to the provisions of section 54 of the Act which we have extracted in the earlier part of this order and submitted that to claim deduction under sections 54 of the Act, there are two modes of investment of the capital gain viz., (i) purchase of a new asset i.e., a residential house or (ii) construction of new asset i.e., one residential house in India. In the event of purchase of new asset the time limit laid down in the section is within a period of one year before or two years after the date on which the transfer took place. In the event of construction of new asset i.e., one residential house in India, such construction has to be within a period of three years after the date of transfer. He submitted that in so far as construction of one residential house in India is concerned, all that the Assessee has to do is to invest the capital gain in construction of a residential house. It is immaterial whether the Assessee has ownership of the land over which the new asset i.e., one residential house in India, is constructed.

8. He drew our attention to the lease deed between Mrs. Sarojini Kheny, who is the wife of the Kartha of the Assessee HUF and the Assessee HUF, dated 14-3-2013. This lease deed is in respect of the land owned by Mrs. Sarojini Kheny, over which the Assessee HUF put up construction. The lease was for a period of 20 years. The yearly rent was a sum of Rs. 60,000 to be paid in equal monthly installments commencing from the date of the lease deed. The Lessor had already obtained planning permission as early as 17-9-2012 and has put up construction thereon of the value of Rs. 4,90,000. The Assessee HUF undertook to return this sum. The Assessee HUF was permitted to the enjoy the building for a period of 20 years and thereafter the building will vest with the lessor.

During the lease period of 20 years, the lessee was to be regarded as owner of the building (Clause10 of the lease deed). He brought to our notice none of the above facts were disputed by the revenue. The revenue seeks to rely on the only circumstance that the Assessee was only lessee of the land for 20 years and did not have absolute ownership. It was submitted by the learned counsel for the Assessee that the revenue authorities have wrongly proceeded on the basis that deduction under sections 54 of the Act cannot be allowed in a case of construction of a new asset over land of which the Assessee is not absolute owner. The learned counsel for the Assessee submitted that in law there can be duality of ownership i.e., ownership of land and ownership of superstructure built on such land can be with two different persons. Our attention was drawn to a decision of the Hon’ble Madras High Court in the case of Park View Enterprises v. State Government of Tamil Nadu (1991) 189 ITR 192 (Mad) : 1991 TaxPub(DT) 142 (Mad-HC) wherein the Hon’ble Madras High Court, was dealing with the following proposition :–

“The fourth point which is of considerable importance is, whether anything fixed to the soil earth becomes automatically the property of the owner of the land or the superstructure could be owned by a different person? This point has taken the Counsel appearing for both the parties decisions of antiquity (Sic). It is strenuously pleaded by the learned Advocate-General that, if any superstructure is erected over the land belonging to a person, then in the eye of law, the owner of land becomes the owner of the superstructure. Petitioners’ counsel contend that the maxim relied upon by the learned Advocate-General is one of antiquity and obsolete in law and has no application in India and that ownership in land could be with one person and that the superstructure could be owned by another, provided there is a legal relationship between them. It may originate by granting him a permission, which in law means licence, or may be the resultant effect of a long lease granted by the owner for putting up the superstructure etc.”

After an exhaustive analysis of the case laws on the issue, the Court finally concluded as follows :–

“Rather, the Transfer of Property Act proceeds on the basis that in law ownership of a building is different from ownership in the land, and that land and building could be owned by different persons in the eye of law. Therefore, reliance placed on sections 8, 63-A and 108(h) does not in any manner advance the propositions put forth by the learned Advocate General.

63. Rather, Advocates appearing for the petitioners have relied on the decisions under mentioned to show that this obsolete maxim has no application in India. Mr, Mohan Parasaran, learned counsel would straightway refer to a Division Bench decision of this Court in Venkatasubbiah v. Thirupurasundari, wherein after referring to section 63 of the Transfer of Property Act, it was held categorically, “There is no substance in this contention. This maxim–whatever is affixed to the soil belongs to the soil is a rule of considerable antiquity and has been held to be inapplicable in this Country.”

In India the view has been uniformly taken that the English doctrine of fixtures as to buildings would not apply and that the party who builds on another’s land should be allowed to remove the materials”.

As already referred to in Bishan Das v. State of Punjab, it was held that it is well settled that the maxim, what is annexed to the soil goes with the soil has not been accepted as an absolute rule of law in this Country, another Division Bench of this Court in M. A. Kadar v. Dt. Collector Kanyakumari Expresses the same view. Being bound by these decisions, this Division Bench does not see any valid ground made out for accepting the plea of the learned Advocate General, that basic for (Sic) such a maxim Article 5(i) will have to be understood and implemented.”

9. The learned counsel for the Assessee submitted that the Commissioner (Appeals) in upholding the order of the assessing officer refusing to allow deduction under sections 54 of the Act to the Assessee has placed reliance on the decision of the ITAT Mumbai Bench in the case of Yogesh Sunderlal Shah v. ACIT ITA No. 1876/Mum/2012 for assessment year 2008-09 Order, dated 21-9-2012. He pointed out that the deduction in that case was claimed by the Assessee under sections 54 of the Act on the first limb i.e., purchase of a new asset i.e., a residential house or (ii) construction of new asset i.e., one residential house in India. He submitted that since the words used in section 54 of the Act are “purchase” of a new asset, there was scope for examining regarding ownership of the new asset purchased, but such conditions can by no stretch of imagination be extended to a case of deduction under sections 54 claimed on the basis of the second limb viz., construction of new asset i.e., one residential house in India. The requirement of section 54 of the Act in the second limb is that capital gain should be used in construction of residential house and nothing more. He submitted that the Assessee in the present case is the owner of the superstructure constructed by utilizing the capital gain and this is clear from clause-10 of the lease deed by which the land over which the construction has been put up was given on lease to the Assessee.

10. Reliance was also placed on the decision of the Hon’ble Karnataka High Court in the case of Dr. Puttanna and Sons v. CIT (1986) 162 ITR 468 (Karn) : 1986 TaxPub(DT) 1637 (Karn-HC) wherein the Hon’ble Karnataka High Court took the view that when building is constructed on a land taken on lease, the income derived from letting out of such building will have to be assessed as income from house property because under sections 22 of the Act, the charge of income under the head income from house property is on the owner of the building and the ownership of the land is immaterial. He submitted on the same analogy the Assessee in the present case should be construed as owner of the building and the deduction under sections 54 of the Act ought to have been allowed.

11. Arguments were advanced on the applicability of section 269 UA(d) (i) & (f)(i) of the Act and section 27(iii) of the Act, which provide that in the case of lease over a period beyond 12 years, such leases have to be regarded as transfer for the purpose of the Act. We are not discussing those arguments at this stage.

12. The learned Departmental Representative relied on the order of the Commissioner (Appeals). Without prejudice to the above submission, he submitted that the Assessee should not be given deduction under sections 54 of the Act to the extent of Rs. 490000 which was the sum spent by the owner of the land for putting up construction and which was reimbursed by the Assessee to the owner of the land. He also submitted that the deduction cannot be in excess of what is actually invested in constructed of a new asset and to the extent spent by the Assessee during the relevant previous year.

13. We have given a very careful consideration to the rival submissions.

The provisions of section 54 of the Act, allows deduction while computing capital gain, if the capital gain is reinvested in two modes viz., (i) purchase of a new asset i.e., a residential house or (ii) construction of new asset i.e., one residential house in India. In the event of purchase of new asset the time limit laid down in the section is within a period of one year before or two years after the date on which the transfer took place. In the event of construction of new asset i.e., one residential house in India, such construction has to be within a period of three years after the date of transfer. In the present case, the Assessee has claimed deduction on the second limb of section 54 of the Act viz., construction of new asset. It is not in disputed that the Assessee is not owner of the land but the Assessee holds leasehold interest on the land for a period of 20 years with a right to put up construction over the land and also enjoy ownership of the superstructure during the tenure of the lease viz., 20 years. This is very clear from clause-10 of the lease deed. Thus the ownership of the building vests with the Assessee. There is no dispute that the Assessee utilized the capital gain in putting up construction i.e., construction of the new house and that it is one residential house of the Assessee contemplated under sections 54 of the Act. As rightly contended by the learned counsel for the Assessee, when exemption is claimed under the second limb of section 54 of the Act, i.e., utilization of the capital gain in construction of one residential house in India, all that the Assessee has to do is to invest the capital gain in construction of a residential house. It is immaterial whether the Assessee has ownership of the land over which the new asset i.e., one residential house in India, is constructed. Such a condition does not emanate from a plain reading of section 54 of the Act. In our view the assessing officer fell into an error in reading such a condition and refusing the claim of deduction under sections 54 of the Act.

14. As far as the decision of the Mumbai ITAT in the case of Yogesh Sunderlal Shah (supra) is concerned, as rightly pointed out by the learned counsel for the Assessee, the claim for deduction under sections 54 in that case was made under the first limb of section 54 of the Act. This would be clear from the facts of that case which was that the assessee had sold a Bungalow No. 32 at Dariyalal C.H. Society, Mumbai 49, for a consideration of Rs. 3.50 crores on 8-8-2007 and on 16-8-2007, the assessee purchased tenancy rights in two flats in the third floor of ‘Symphony’ situated at junction of 8th and 12th Road, Khar (West), Mumbai, for a consideration of Rs. 1.85 crores. The assessee computed the long term capital gain from sale of residential Bungalow at Rs. 2,13,02,427 which was claimed exempt to the extent of Rs. 2,04,11,610 because of the investments made in acquisition of the tenancy rights in the new two flats. The revenue however denied exemption under sections 54 of the Act on the ground that exemption from tax on capital gain from sale of residential house property was available only when the assessee purchased or constructed a new residential flat. The assessee purchased only tenancy rights and therefore was not entitled to deduction under sections 54 of the Act. The tribunal upheld the stand of the revenue. The following were the relevant observations of the Tribunal :–

“5.1 We have carefully considered the various aspects of the matter. We find that under the provisions of section 54, exemption of capital gain is available in respect of transfer of residential house owned by the assessee. The purpose of the section is to grant exemption in case the assessee acquires a new residential house by investing the capital gain as an owner.

It is because of this reason, the words used in section 54 are “purchase” or “construction” of a new residential house. The requirement of section is not that assessee may acquire a new residential house by any other mode. The word “purchase” appearing in section 54 had come for consideration before Hon’ble Supreme Court in case of CIT v. T.N. Arvinda Reddy (1979) 120 ITR 46 (SC) : 1979 TaxPub(DT) 1091 (SC) in which Hon’ble Supreme Court held that the word “purchase” appearing in section 54(1) has to be given its common meaning i.e. buy for a price or equivalent of price by payment in kind or adjustment towards a debt or for other monetary consideration. Thus, for application of provisions of section 54, the assessee has to buy a property as an owner.

In this context, it may be appropriate to refer to the judgment assessment year 2008-09 of Hon’ble High Court of Bombay in case of Hameed Jaffery v. CIT (1997) 227 ITR 724 (Bom) : 1997 TaxPub(DT) 1115 (Bom-HC) which was in the context of old provision of section 54 which required that the property which had been transferred should be in the occupation of the assessee for his own residence or for the residence of his parents. The Hon’ble High Court held that occupation should be as an owner and not as tenant. The exemption under section 54 from capital gain is available to an assessee, who invests the capital gain in similar asset being a residential house which would obviously mean that acquisition of the house should be as an owner as the capital gain covered under section 54 is the capital gain arising from transfer of a residential house owned by the assessee.

5.2 Further, as rightly pointed out by the learned Commissioner–Departmental Representative, provisions of section 54 are exemption provisions and, therefore, in case two interpretations are possible i.e. whether assessee should acquire the new residential house as owner or even the perpetual tenancy right would suffice, the interpretation favorable to the revenue shall be followed as held by Hon’ble Supreme Court in case of Novopan India Ltd. (3 SCR 549). In the said case, the Hon’ble Supreme Court held that the principle that in case of ambiguity, a taxing statute should be construed in favour of the assessee would not apply to the construction of an exception or an exempting provision; these have to be construed strictly. The Hon’ble Supreme Court also held that the assessment year 2008-09 person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision. In case of doubt or ambiguity, benefit of it must go to the State. Following the said judgment, therefore, even if there is some ambiguity in the provision, the same has to be interpreted in favour of the revenue because it is an exemption provision. In the present case, there is no ambiguity. The provision refers to purchase or construction of a new residential house and it is quite obvious that the same should be as an owner and not as perpetual tenant.”

15. As rightly submitted by the learned counsel for the Assessee, deduction in the case of Yogesh Sunderlal Shah (supra) was claimed by the Assessee under sections 54 of the Act on the first limb i.e., purchase of a new asset i.e., a residential house and not on the basis of the second limb of section 54 of the Act viz., construction of new asset i.e., one residential house in India. Since the words used in section 54 of the Act in so far as it relates to the first limb are “purchase” of a new asset, there was scope for examining regarding ownership of the new asset purchased, but such conditions cannot be extended to a case of deduction under sections 54 claimed on the basis of the second limb viz., construction of new asset i.e., one residential house in India. The requirement of section 54 of the Act in the second limb is that capital gain should be used in construction of residential house and nothing more. The Assessee in the present case is the owner of the superstructure constructed by utilizing the capital gain and this is clear from clause-10 of the lease deed by which the land over which the construction has been put up was given on lease to the Assessee. Therefore, the deduction under sections 54 of the Act ought to be allowed to the Assessee as claimed by the Assessee.

We hold and direct accordingly. The other arguments raised by the Assessee and the learned Departmental Representative do not require any discussion, in the light of our conclusions as above.

16. In the result, appeal by the Assessee is allowed