Individual or HUF assessee’s are exempted from payment of income tax on capital gains arising from the transfer of any long-term capital asset, (not being a residential house), u/s. 54F of the IT Act on the purchase or construction of a residential house within the specified period.

The exemption is subject to fulfilment of the other conditions specified in section 54F. One of the important condition required to be satisfied to claim exemption u/s. 54F is about the ownership of another residential house, as on the date of transfer of the asset.  This limitation is provided in the Proviso to section 54F(1).  

Upto AY 2000-01, the condition was that the assessee should not own any other residential house on the date of transfer other than the new house in respect of which the assessee intends to claim the exemption.

Finance Act, 2000 w.e.f. 1st April, 2001 amended the Proviso to section 54F(1) so as to provide that the assessee owning one residential house as on the date of transfer of the original asset, other than the new house, is also eligible to claim the exemption u/s. 54F. Therefore, ownership of more than one residential house, on the date of transfer, is fatal to the claim of exemption u/s. 54F.

In respect of this condition, the controversy has arisen in cases where the assessee is a co-owner of a house besides owning one house on the date of the transfer. The question that has arisen before Courts is whether the residential house which is not owned by the assessee exclusively but is co-owned jointly with some other person should also be considered while ascertaining the number of houses owned by the assessee as on the date of transfer of the original asset.  

Cases in Favour of Assessee

Dr. P.K. Vasanthi Rangarajan vs. CIT [2012] 209 Taxman 628 (Madras) – In this case, the LTCG arising from the execution of a joint development agreement was offered to tax in the return of income for the AY 2001-02 and the corresponding exemption was claimed u/s. 54F on reinvestment of such gains in purchasing the residential premises.

So far as the exemption u/s. 54F was concerned, the AO observed that the assessee owned 50% share in the property which consisted of a clinic on the ground floor and a residential portion on the first floor. The balance 50% share was owned by the husband of the assessee. The AO denied the exemption u/s. 54F as the conditions prescribed therein in his opinion were not satisfied. The CIT (A) confirmed the additions.

Given the fact that the assessee had not exclusively owned the house, but owned it jointly with her husband, the High Court held that unless and until the assessee was the exclusive owner of the residential property, the harshness of the proviso to section 54F could not be applied to deny the exemption.  The High Court observed that a reading of section 54F, clearly pointed out that the holding of the residential house as on the date of transfer had relevance to the status of the assessee as an individual or HUF and when the assessee, as an individual, did not own any property in the status of an individual as on the date of transfer, joint ownership of the house would not stand in the way of claiming an exemption u/s. 54F. Accordingly, the High Court allowed the exemption to the assessee.

Ashok G. Chauhan vs. ACIT [2019] 105 204 (Mum) – The ITAT held that condition of not owning more than a residential house on the date of transfer of the original asset would mean absolute ownership.  It does not cover within its sweep a case where the assessee jointly owns residential house together with someone else

Cases in Favour of Revenue

CIT vs. M.J. Siwani [2014] 366 ITR 356 (Karnataka)In this case, the assessee and his brother, jointly owned a property at Bangalore. During the AY 1997-98, they transferred this property by executing an agreement to sell. The resultant LTCG arising on the transfer of the said property was claimed to be exempt u/s. 54 or, in the alternative, u/s. 54F.

The claim of exemption u/s. 54F was denied since as on the date of transfer, both the assessees owned two residential houses having one-half share each therein. The CIT(A) confirmed the addition. The Tribunal allowed the appeal.

On appeal by the Revenue, the High Court, allowing the appeal held that even where the residential house was shared by the assessee, his right and ownership in the house, to whatever extent, was exclusive and nobody could take away his right in the house without due process of law. The HC observed that a co-owner was the owner of a house in which he had a share and that his right, title and interest was exclusive to the extent of his share and that he was the owner of the entire undivided house till it was partitioned.

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