Applicability of Section 54F When Assessee Holds a Jointly-Owned Residential Property: Legal Analysis, Case Law, and ITAT Delhi Ruling in Kusum Sahgal v. ACIT
Section 54F of the Income-tax Act, 1961 continues to be one of the most litigated provisions in capital gains taxation-especially when a taxpayer owns a fractional share or jointly-owned residential property. A recurring question appears in assessments, appeals, and professional discussions: Does joint ownership of a house amount to “owning” a residential house for the purpose of the restrictive proviso to Section 54F?
This controversy was recently examined in depth by the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) in Kusum Sahgal v. ACIT (AY 2015–16, Order dated 08.11.2023), where the Tribunal harmonised various judicial precedents and clarified the law. This article explains the statutory background, judicial conflict, analysis of the ITAT ruling, and the broader implications for taxpayers and professionals.
1. Statutory Background of Section 54F: What Triggers Disqualification?
Section 54F grants exemption on long-term capital gains arising from sale of any capital asset other than a residential house, provided the assessee invests the net consideration in a new residential house within prescribed time.
However, the proviso to Section 54F(1) imposes a key restriction. Exemption is denied if on the date of transfer the assessee:
1. Owns more than one residential house(other than the new one purchased), or
2. Purchases or constructs another residential houseother than the new asset within the specified period.
The term “owns” is not defined in the Act, giving rise to interpretational disputes. Does owning a 1/4th or 1/10th share in a residential property amount to “owning a house”? Do co-owners stand on the same footing as sole owners? Courts have expressed divergent views, leading to inconsistent assessments nationwide.
2. The Core Issue Considered by ITAT Delhi
Can exemption under Section 54F be denied merely because the assessee holds a fractional joint ownership in another residential house on the date of transfer?
This question has direct consequences for lakhs of taxpayers who inherit, receive gifts, or purchase family homes jointly with siblings or parents.
3. Brief Facts of Kusum Sahgal v. ACIT
1. The assessee sold a plot of land (a long-term capital asset).
2. She invested the net consideration in a new residential house and claimed exemption u/s 54F.
3. The Assessing Officer (AO) observed that she owned a 1/4th undivided sharein another residential house jointly with family members.
4. AO concluded that this fractional share meant she “owned” another residential house on the date of transfer.
5. Exemption u/s 54F was accordingly denied.
6. CIT(A) upheld the AO’s decision.
7. The assessee appealed to ITAT Delhi.
4. What the Lower Authorities Held
4.1 Assessing Officer
• Any share-partial, fractional, joint-amounts to “ownership”.
• Proviso to Section 54F applied.
• Exemption must be denied.
4.2 CIT(A)
• Followed Karnataka High Court judgment in M.J. Siwani(strict interpretation).
• Even 1/10th or 1/100th share amounts to ownership.
• Joint ownership = absolute bar to exemption.
5. ITAT Delhi’s Landmark Observations
The ITAT disagreed with the strict approach and examined a series of judicial precedents supporting a more liberal interpretation.
5.1 Joint Ownership Is Not Equivalent to Owning a Full Residential House
ITAT relied on multiple High Court rulings including:
• Madras High Court – CIT v. Jennifer Bhide
• Rajasthan High Court – CIT v. Sh. Gyan Chand
• Delhi High Court – principles in CIT v. Ravinder Kumar Arora
These judgments emphasise that:
• A fractional share does not constitute full ownership.
• Section 54F(1) is a beneficial provision and must be interpreted liberally.
•• Ambiguities in exemption provisions must be resolved in favour of the assessee.
5.2 Beneficial Construction Is the Correct Legal Approach
The Tribunal reiterated that when two reasonable interpretations exist, the one favourable to the taxpayer must prevail (Supreme Court principle in Vegetable Products Ltd., 88 ITR 192).
5.3 The Word “Owns” Must Be Interpreted in Context
The ITAT held that:
• The proviso intends to deny exemption only to those who already possess more than one self-contained, independent residential house.
• A fractional undivided share-where the assessee cannot exclusively reside, sell, or control the property-cannot be treated as “ownership” of a house for Section 54F.
Thus, joint ownership ≠ ownership of a residential house for disqualification purposes.
5.4 Final Ruling
Exemption under Section 54F cannot be denied merely because the assessee held 1/4th share in another residential property.
The ITAT allowed the appeal and restored full exemption.
6. Why This Judgment Matters: Practical Takeaways
• Taxpayers who hold jointly-owned family properties(ancestral homes, inherited shares, co-owned flats) remain eligiblefor Section 54F exemption.
• Only independent, fully-owned residential houses count for the purpose of the proviso.
• Fractional ownership does not disqualify the exemption.
• This significantly reduces litigation and improves consistency in assessment.
7. Is There Any Supreme Court Judgment on This Issue?
Short Answer: NO – The Supreme Court has not yet delivered a judgment specifically deciding:
“Whether joint ownership or fractional ownership constitutes ‘owning a residential house’ for Section 54F disqualification.”
8. Conclusion
The ITAT Delhi ruling in Kusum Sahgal v. ACIT reinforces the principle that Section 54F is a beneficial provision and disqualification should apply only in clear cases of full ownership of multiple residential houses.
A fractional, undivided, joint ownership interest does not amount to “owning” a residential house for the purposes of the restrictive proviso.
Taxpayers owning ancestral or jointly-held homes can confidently claim exemption under Section 54F when they invest capital gains in a new residential property.
