Capital gains exemption u/s 54F: Property acquired by means of perpetual lease for unlimited period would amount to purchase
Short overview Acquisition of property by means of perpetual lease exceeding twelve years, would be construed as acquisition of property/purchase of property within the meaning of section 54F. Hence, the assessee would be entitled for exemption under section 54F.
AO allowed assessee’s claim of exemption under section 54F. However, CIT invoking revision power under section 263, denied the said exemption on the ground that the assessee acquired property by way of perpetual lease deed agreement and therefore, it could not be construed as outright/absolute purchase of the property. Assessee submitted that as the lease was for unlimited period and he had enduring right to possess and enjoy the property as residential house for unlimited period, thus, by virtue of section 2(47)(vi) read with section 269UA(2)(iii)(f), it had to be construed as acquisition of the property, and hence, he would be eligible for exemption under section 54F.
It is held that As per section 2(47)(vi), the transaction of perpetual lease agreement by which the assessee took possession of property for unlimited period has to be construed as purchase of property within the meaning of section 54F. Furthermore, section 269UA(2)(iii)(f) provides that the acquisition of property by perpetual lease exceeding the period of twelve years has to be construed as purchase within the meaning of section 54F. In instant case, as there was a perpetual lease agreement exceeding twelve years and assessee was in possession of property, thus, in view of sections 2(47)(vi) and 269UA(2)(iii)(f), the assessee would be entitled to deduction under section 54F. Hence, the order of CIT passed under section 263, would not be sustainable.
Decision: In assessee’s favour.
IN THE ITAT, CHENNAI BENCH
N.R.S. GANESAN, J.M. & S. JAYARAMAN, A.M.
N. Ramaswamy v. ITO
ITA No. 925/Chny./2019
6 December, 2019
Appellant by: M. Narayanan, Retd., Addl.CIT
Respondent by: S. Bharath, CIT
ORDER
N.R.S. Ganesan, J.M.
This appeal of the assessee is directed against the order of the Principal Commissioner of Income Tax-1, Chennai, dated 12-2-2019 for the assessment year 2014-15, passed under section 263 of the Income-tax Act, 1961 (in short “the Act”).
2. M. Narayanan, the learned representative for the assessee, submitted that the assessing officer allowed the claim of exemption under section 54F of the Act. However, the Principal Commissioner found that the assessee acquired the property from M/s Mahindra Recidential Developers Limited by way of perpetual lease deed agreement. Therefore, it cannot be construed as outright/absolute purchase of the property by claiming exemption under section 54F of the Act. The learned representative clarified that the lease was for unlimited period. The perpetual lease holder/assessee has enduring right to possess and enjoy the property as residential house for unlimited period. According to the learned representative, the assessee also has the right to transfer the lease/possession to other person in the open market. Therefore, according to the learned representative, by virtue of section 2(47)(vi) read with section 269UA(2)(iii)(f) of the Act, it has to be construed as acquisition of the property, hence, the assessee is eligible for exemption under section 54F of the Act.
3. On the contrary, Shri S. Bharath, the learned Departmental Representative, submitted that admittedly the assessee entered into an agreement for perpetual lease for unlimited period with M/s Mahindra Recidential Developers Limited and the property was not purchased outright by the assessee. According to the learned D.R., section 54F, being a beneficial provision, only for purchase of property by means of outright sale, the exemption therein can be claimed. Therefore, according to the learned D.R., the Principal Commissioner has rightly found that there was an error in the order of assessment, which is prejudicial to the interests of Revenue.
4. We have considered the rival submissions on either side and perused the relevant material available on record. As rightly submitted by the learned representative for the assessee and the learned D.R., the assessing officer allowed the exemption as claimed by the assessee under section 54F of the Act. It is not in dispute that the assessee entered into an agreement for perpetual lease for an unlimited period with M/s Mahindra Residential Developers Limited. The issue arises for consideration is whether the assessee has to purchase the property absolutely for claiming exemption under section 54F of the Act or perpetual lease for unlimited period would amount to purchase of the property for claiming exemption under section 54F of the Act. We have gone through the provisions of section 54F of the Act which reads as follows :–
54F. CAPITAL GAIN ON TRANSFER OF CERTAIN CAPITAL ASSETS NOT TO BE CHARGED IN CASE OF INVESTMENT IN RESIDENTIAL HOUSE
(1) Subject to the provisions of sub-section (4), where in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or wo 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 (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say :–
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45 ;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45 :–
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”.
Explanation For the purposes of this section – “net consideration”, in relation to the transfer of a capital asset means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.
(2) Where the assessee purchases, within the period of two years after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head “Income from house property”, other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head “Capital gains” relating to longterm capital assets of the previous year in which such residential house is purchased or constructed.
(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head “Capital gains” relating to long-term capital assets of the previous year in which such new asset is transferred.
(4) The amount of the net consideration 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 by which- (a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds(b) the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset, shall be charged under section 45 as 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 the unutilised amount in accordance with the scheme aforesaid.
5. The language employed by the Parliament is very clear that the assessee has to purchase within a period of one year before or after the date on which the transfer took place or the assessee has to construct a residential house within a period of three years after the sale of the property, capital asset. In this case, after the sale of the property, the assessee entered into a perpetual lease for an unlimited period. The assessee has every right to transfer the perpetual lease to third party in the open market and also has every right to continue in possession of residential house. Therefore, the question arises for consideration is whether the property acquired by the assessee by means of perpetual lease for unlimited period would amount to purchase within the meaning of section 54F of the Act? We have carefully gone through the provisions of section 2(47) of the Act and also 269UA(2)(iii)(f) of the Act. For the purpose of convenience, we are reproducing sections 2(47)(vi) and 269UA(2)(iii)(f) of the Act which read as follows :–
2(47) “transfer”, in relation to a capital asset, includes :–
(i) the sale, exchange or relinquishment of the asset ; or
(ii) the extinguishment of any rights therein ; or
(iii) the compulsory acquisition thereof under any law ; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or
(iva) the maturity or redemption of a zero coupon bond ; or
(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property :–
Explanation 1 – For the purposes of sub-clauses (v) and (vi), “immovable property” shall have the same meaning as in clause (d) of section 269UA.
Explanation 2 – For the removal of doubts, it is hereby clarified that “transfer” includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India ; 269UA(2)(iii)(f) “transfer,” :–
(i) in relation to any immovable property referred to in sub-clause (i) of clause (d), means transfer of such property by way of sale or exchange or lease for a term of not less than twelve years, and includes allowing the possession of such property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882).
Explanation For the purposes of this sub-clause, a lease which provides for the extension of the term thereof by a further term or terms shall be deemed to be a lease for a term of not less than twelve years, if the aggregate of the term for which such lease is to be granted and the further term or terms for which it can be so extended is not less than twelve years; (ii) in relation to any immovable property of the nature referred to in sub-clause (ii) of clause (d), means the doing of anything (whether by way of admitting as a member of or by way of transfer of shares in a co-operative society or company or other association of persons or by way of any agreement or arrangement or in any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of, such property.
6. A bare reading of section 2(47)(vi) of the Act shows that the agreement or arrangement which has the effect of transferring or enabling the enjoyment of immovable property, has to be considered as transfer in relation to capital asset. In this case, there was a perpetual lease agreement for unlimited period. The assessee was in possession of residential house. Therefore, this Tribunal is of the considered opinion that in view of the definition found in section 2(47)(vi) of the Act, the transaction of perpetual lease agreement by which the assessee took possession of property for unlimited period, has to be construed as purchase of property within the meaning of section 54F of the Act.
7. Furthermore, section 269UA(2)(iii)(f) of the Act clearly says that any lease for a term of not less than twelve years and includes holding possession of such property thereby taken, has to be construed as transfer. Of course, this is in the context of purchase of property by Central Government in the case of transfer. In other words, section 269UA(2)(iii)(f) also defines transfer which includes lease for a term not less than twelve years. In this case, admittedly, the lease was not for less than twelve years. Hence, for all practical purposes, the acquisition of property by perpetual lease exceeding the period of twelve years, has to be construed as purchase within the meaning of section 54F of the Act. In view of the scheme under the provisions of the Income-tax Act, as enunciated under section 2(47)(vi) and section 269UA(2)(iii)(f), this Tribunal is of the considered opinion that when the assessee acquired the residential house by means of perpetual lease exceeding twelve years, it has to be construed as acquisition of property/purchase of property within the meaning of section 54F of the Act. Therefore, the assessee is entitled for exemption under section 54F of the Act. Hence, this Tribunal is unable to uphold the order of the Principal Commissioner passed under section 263 of the Act. Accordingly, the impugned order of the Principal Commissioner is quashed.
8. In the result, the appeal filed by the assessee is allowed.
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