The assessee entered into a
development agreement pursuant to which the developer demolished the property
and constructed a new building comprising of three floors. In consideration of
granting the development rights, the assessee received Rs. 4 crores and two
floors of the new building. The AO held that in computing capital gains, the
cost of construction of Rs. 3.43 crores incurred by the developer on the
development of the property had to be added to the sum of Rs. 4 crores received
by the assessee. The assessee claimed that as the said capital gains was
invested in the said two floors, she was eligible for exemption u/s 54. The AO
rejected the claim on the basis that the units on the said floors were
independent & self-contained and not “a residential house” and granted
exemption for only one unit. The CIT(A) and Tribunal upheld the assessee’s
claim by relying on B. Ananda Basappa 309 ITR 329 (Kar) and K.G. Rukminiamma
331 ITR 211 (Kar). On appeal by the department to the High Court HELD
dismissing the appeal:
As
held in B. Ananda Bassappa (SLP dismissed) & K G Rukminiamma, the Revenue’s
contention that the phrase “a” residential house would mean “one” residential
house is not correct. The expression “a” residential house should be understood
in a sense that building should be of residential in nature and “a” should not
be understood to indicate a singular number. Also, s. 54/54F uses the
expression “a residential house” and not “a residential unit”. S. 54/54F requires
the assessee to acquire a “residential house” and so long as the assessee
acquires a building, which may be constructed, for the sake of convenience, in
such a manner as to consist of several units which can, if the need arises, be
conveniently and independently used as an independent residence, the
requirement of the Section should be taken to have been satisfied. There is
nothing in these sections which require the residential house to be constructed
in a particular manner. The only requirement is that it should be for the
residential use and not for commercial use. If there is nothing in the section
which requires that the residential house should be built in a particular
manner, it seems to us that the income tax authorities cannot insist upon that requirement.
A person may construct a house according to his plans, requirements and
compulsions. A person may construct a residential house in such a manner that
he may use the ground floor for his own residence and let out the first floor
having an independent entry so that his income is augmented. It is quite common
to find such arrangements, particularly post-retirement. One may build a house
consisting of four bedrooms (all in the same or different floors) in such a
manner that an independent residential unit consisting of two or three bedrooms
may be carved out with an independent entrance so that it can be let out. He
may even arrange for his children and family to stay there, so that they are
nearby, an arrangement which can be mutually supportive. He may construct his
residence in such a manner that in case of a future need he may be able to
dispose of a part thereof as an independent house. There may be several such
considerations for a person while constructing a residential house. The
physical structuring of the new residential house, whether it is lateral or
vertical, cannot come in the way of considering the building as a residential
house. The fact that the residential house consists of several independent
units cannot be permitted to act as an impediment to the allowance of the
deduction u/s 54/54F. It is neither expressly nor by necessary implication
prohibited.
Contrast with ITO vs. Sushila
Jhaveri 292 ITR (AT) 1 (Mum)(SB). On the question whether a non-jurisdictional
High Court will prevail over the Special Bench see the line of cases where
Virgin Creations (Cal HC) was followed in preference to Bharati Shipyard 132
ITD 53 (Mum)(SB).
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