Income Tax | Sale Proceeds Of One House Used For Purchasing Multiple Residential Houses Qualifies For Exemption U/S 54(1): Bombay High Court

The issue before the bench was whether Section 54(1) of the Income Tax Act allows the Assessee to set off the purchase cost of more than one residential units against the capital gains earned from sale of a single residential house.

Chief Justice Alok Aradhe and Justice Sandeep V. Marne stated that use of the words 'a residential house' in unamended Section 54 (1) of the Income Tax Act would not mean a single residential house and the contemplated even multiple residential houses.

The bench further opined that “The emphasis in the unamended Section 54 (1) of the Act is on residential nature of the property and the objective was never to restrict the number of residential houses purchased against capital gains. The words 'a residential house' were merely descriptive nature of the assets sold/purchased and not restrictive of the number of assets sold or purchased. The position got modified by the Legislature only w.e.f. 01 April 2015.”

The assessee submitted that the Assessee is entitled to exemption against the entire capital gain which amount was invested for purchase of seven row houses by him.

As per the assessee the phrase 'a residential house' is only meant to qualify the nature of asset purchased/sold, viz. what is sold or purchased cannot be a commercial asset/premises. The amendment made by Finance (No. 2) Act, 2014 makes it explicitly clear that the restriction of exemption of capital gain against 'one residential house' is made applicable prospectively, i.e. with effect from 01st April 2015.

The revenue contended that the Legislature has intended to give different meanings to the words 'any' and 'a' in different Sections of the Act and has consciously used the words 'a residential house' instead of using the words 'any residential house'. The word 'a' is intended to mean only one residential house unlike use of the word 'any' to convey investments in one or more assets.

The bench opined that the amendment brought in by Finance (No.2) Act 2014 makes the position clear that after the amendment, the capital gains can be adjusted against purchase of only 'one' residential house.

“The word 'a' is consciously replaced by the legislature by the word 'one' by way of amendment making the intention clear that after the amendment, it is impermissible to adjust the capital gains arising out of one house towards purchase of more than one houses. If the restriction of adjustment of capital gains against only one house was already there in the unamended Section 54(1), there was no necessity of amendment by specifically using the word 'one',” added the bench.

The bench referred to the case of Tilokchand & Sons v. ITO 2019 (413) ITR 189 (Madras) where it was held that “even if the multiple houses are purchased bearing different addresses, the same did not make any difference, so long as the same Assessee has purchased the same out of sale consideration of the sold house.”

The bench held that the provisions of Section 54(1) of the Act are beneficial in nature. The benevolent provision is aimed at encouraging the house purchase activities. It therefore needs to be read literally and reasonably. Therefore, even though two interpretations of the provisions of unamended Section 54(1) of the Act may be possible, the one in favour of the Assessee will have to be accepted.

In view of the above, the bench allowed the appeal.

Case Title: Krishnagopal B. Nangpal v. Dy. Commissioner of Income Tax Special Range – 3, Pune

Case Number: INCOME TAX APPEAL NO. 569 OF 2003

Counsel for Petitioner/Assessee: Nishant Thakkar with Ms. Jasmin Amalsadwala and Mr. Bhavesh Bhatia

Counsel for Respondent/Department: Akhileshwar Sharma

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