Query 1]

A small query related with the words “One House”, “One Flat “. Is there any restriction regarding the size of house or flat to be purchased or constructed? Suppose, someone have sold a plot & instead of buying 2 flats of 2 BHK each, these are converted before possession in to 1 flats of 4 BHK each, will it breach the requirements of exemption clause? What if the conversion in to one flat is not done & purchaser purchases it by two separate sale deeds executing it on the same day? [Dr Subhash Tiwari-drsrtiwari@rediffmail.com]

Opinion:

“This is too difficult for a mathematician. It takes a philosopher.” —Albert Einstein on filing taxes

1. An Individual/HUF can save tax on Long Term Capital Gain (LTCG) arising from sale of house property by claiming an exemption u/s 54. For exemption (u/s 54), taxpayer have to invests the amount of LTCG in purchase or construction of “one” residential house property within a prescribed time period. The prescribed time periods are as under:
   a] For purchase:
   One year before or two years after the date of transfer.
   b] For Constructions:
   Three years after the date of transfer.
2. Earlier, instead of “one residential house property”, the word used in the Income Tax Act-1961 was “a residential house property”. To put an end to lot many confusion, litigation & ambiguities as to the meaning of word “a”, it was replaced by “one” by the Finance Act-2014. Now the exemption would be available only if the taxpayer invest the amount of LTCG in purchase/ construction of “one” residential house property. In short, taxpayer must purchase or constructs “one” house property for claiming an exemption u/s 54. If taxpayer purchases more than “one” house property, exemption would be restricted to only one house property as per the choice of the taxpayer.
3. There is no restriction on the area or size of the house property to be purchased by the taxpayer for claiming an exemption u/s 54. As far as the property purchased could be construed as one single house property, exemption u/s 54 could not be denied.
4. Though the interpretation of the word “a” has been clarified by said amendment so as to mean “one”, another controversy has emerged as to the meaning of word “one”. The same relates to your query as well.
5. In the query raised by you, following two view are possible:
   a] Exemption could be restricted to just one unit as section 54 strictly talks about “one” house property. Tax authorities may not consider investment in two adjacent units (converted in to one flat either before or after purchase) for the reason that it still remains two independent units in all other records like Deed of Apartment/ Declaration, municipal records, sanction map etc. In such case, exemption could be restricted to just one unit as per the choice of the taxpayer.
   b] Exemption could be claimed in respect of both the flat taken together as it is being to put to use as one single unit by the purchasing taxpayer. Though the units are different in all the records, its use would be like single unit only. In short, though may not be in accordance with the strict wording of section 54, but would be in true spirit of law which contemplates investment in one house property as against multiples house properties at different location. In the present case, both the house properties are adjacent and are usable as one house property so as to fall within the four corner of section 54. [Such interpretation may not be possible if the flats are located in different buildings/locations].  In short, if taxpayer buys just “one” house property by executing just one sale deed of both the adjacent flats converted in to one, it would be in accordance with the true spirit of law.
6. Though tax authorities would prefer the first view for the obvious reason, support in favor of the second view from the judiciary is very much possible.
7. Observation by Mumbai bench “D” of ITAT in the case of Ratanchand Murarka Vs. Jt. CIT is very relevant & worth reproducing here. It held that
   “Section 54(1) is a beneficial provision which grants exemption and it is therefore necessary to read the provision in the context of the subject matter and its setting in the scheme of capital gains and the subject of the exemption and to ascertain the true import of the relevant part which is controversy. It is also well settled that the words of a statue when there is a doubt as to their meaning, are to be understood in the sense they best harmonized with the object of the enactment and the object which the legislature had to view. Strict grammatical construction or constructions aided by dictionary meanings may not solve the problem if the approach is divorced from the object behind which the section was introduced.”
   While delivering above judgment, the tribunal has relied on CIT Vs. Aravinda Reddy, 120 ITR 46(SC) & B.B. Sarkar Vs. CIT 132(ITR 150(Cal). It was also opined in favor of the taxpayer in the case of ACIT Vs. Leela P. Nanda, 102 ITD 281 (Mumb), CIT Vs Sunita Agrawal (2006) 284 ITR 20 (Del). The same view was opined by the Karnataka High court in the case of D. Anand Basappa Vs. ITO (2009) 309 ITR 329 & Bombay High court in the case of CIT Vs. Devdas Naik (2014) 227 Taxman 157. Same view can be inferred from CIT Vs. Gita Duggal (2015) 228 Taxman 62 (SC).

The issue is controversial. Subject to above detailed elaboration, in my considered opinion, if the two adjacent or attached flats which are capable of being used as “one” unit are purchased by the taxpayer, exemption u/s 54 would be available. Reading above, taxpayer would recall Albert Einstein universally applicable quote – “Hardest thing to understand is income tax”.

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