S. Krishnan – [2025] 174 taxmann.com 454 (Article)
1. Introductory Remarks
The provisions of section 54 and section 54F of the Income-tax Act (the Act) provide for deduction from capital gains in case of reinvestment in residential property (house) subject to fulfilment of certain conditions. But the principal question to be answered is what is a residential house?
The Madras High Court in the case of CIT v. V. Pradeep Kumar [2006] 153 Taxman 138 (Mad.) categorically held that
“the burden is on the assessee to prove that he had actually constructed a new residential house for the purpose of the exemption under section 54F of the Act. Section 54F of the Act emphasises construction of residential house. The construction must be a real one. It should not be a symbolic construction. Mere construction by way of extension of the old existing house would not mean constructing a residential house as contemplated under section 54F of the Act.”
The Third Member Bench of ITAT Chennai in the case of Asstt. CIT v. T.N. Gopal [2009] 121 ITD 352 (Chennai) (TM) following the decision of the Madras High Court in the case of V. Pradeep Kumar (supra) held that a mere extension of the existing building would not give benefit to the assessee under section 54F of the Act.
The Kerala High Court in the case of Pushpa v. ITO [2013] 31 taxmann.com 33 (Ker) held that
“Section 54F of the Act does not provide for exemption in case of renovation or modification of an existing house and what gains exemption is only construction of a new house.”
Let us analyse the precise definition of a residential house from the Act before analyzing the order passed by the ITAT Chennai Bench in the case of Chandra Bhavani Sankar v. ITO [2024] 167 taxmann.com 384 (Chennai – Trib.) wherein the Tribunal, after analysing the facts of the case, held that where the assessee sold a land and invested sale consideration for construction of a residential house [first floor on top of ground floor building which was already existing], since assessee had discharged burden to prove construction of first floor which construction was commenced prior to transfer of land in question and was within time stipulated under section 54F(1) of the Act, the assessee was eligible for deduction under section 54F of the Act.
2. What is a “residential house”? -Inroads into the definition.
There is no precise definition of what constitutes a “residential house” either in section 54 or section 54F of the Act. However, there is a definition of ‘residential unit’ but that definition applies only for section 43CA and for section 56(2)(x) purposes.
Newly inserted Explanation in section 43CA of the Act clarifies that for the purposes of this section, a “residential unit” means –
- an independent housing unit
- with separate facilities for living, cooking and sanitary requirement,
- distinctly separated from other residential units within the building,
- which is directly accessible from an outer door or through an interior door in a shared hallway and not by walking through the living space of another household.
The Supreme Court in the celebrated case of The Tata Engineering and Locomotive Company Ltd. v. The Gram Panchayat, Pimpri Waghere [1976] 4 SCC 177 observed that the correct approach is to construe the word in that sense which people conversant with the subject matter with which the statute is dealing would attribute to it and to ascertain the meaning of the word “house” one must understand the subject matter with respect to which it is used in order to arrive at the sense in which it is used or employed in a statute.
In ascertaining the meaning of the word ” house” for the purpose of this Act, the following observations of Lawrence J. in Annicola Investments Ltd. v. Minister of Housing and Local Government [1965] 3 All ER 850, 853, 854; [1966] 2 WLR 1204, 1211 are apposite –
“The precise meaning of the word ‘ houses’ has frequently arisen for judicial consideration, but mostly in connection with other statutes or in other contexts. Decisions in relation to such other matters appear to me to afford very little, if any, assistance to the determination of the meaning in this case. What seems to be clear is that the word has a distinct fluidity of meaning, and that it is best construed in relation to the context in which it is found, and in relation to the objects and purposes of the Act or of the section of the Act in which it is used. “
The caution uttered by Lawrence J. in Annicola Investments Ltd.’s case [1965] 3 All ER 850; [1966] 2 WLR 1204 that the same word occurring in different enactments has to be given a meaning in relation to the context, the object and the purpose of that enactment, has to be kept in mind.
Though a residential house has not been defined in the statute, the issue as to whether the particular property is a residential house or not arises in the context of the concession for self-occupation for residential purposes under section 23(1) of the Act (this provision is repealed now) and exemption given under the erstwhile Wealth-tax Act 1957 for one residential house. In Globe Theatres Ltd. v. Khan Saheb Abdul Gani, AIR 1956 Mys 57 [FB], the following extract from the English decision in Barlaw v. Smith [1892] TLR 57 was relied upon –
“The Act distinguishes between occupation and residence and requires that the person who occupies must reside in the borough . . . The party may occupy and not ‘reside’ there . . . Residence . . . under the enactment is different from occupation and means where the man lives and where he has his home. It has always been held that a man resides where he lives and has his home.”
Stroud’s Judicial Dictionary defines residence in the following words –
“The word ‘residence’ signifies a man’s abode or continuance in a place and where there is nothing to show that it is used in a more extensive sense. It denotes the place where an individual eats, drinks and sleeps or where his family or his servants eat, drink and sleep. The word ‘residence’ has a variety of meanings according to the statute in which it is used. The term is flexible and must be construed according to the object and intent of the particular legislation where it may be found. ‘Primarily residence’ or ‘place of abode’ means the dwelling and home where a man is supposed usually to live and sleep; they may also include a man’s business abode, the place where he is to be found daily”
In Poonen v. Rathi Varghese, AIR 1967 Ker 1 [FB], it was held that it should constitute an abode or residence, though not for the purpose of the owner. Such residential use should not be casual as in the case of a hotel or choultry.
The Calcutta High Court in the case of CIT v. Smt. Shyama Devi Dalmia [1991] 59 Taxman 433 (Cal.) made a distinction between building let out for commercial purpose and for residential purpose by denying deduction in respect of new construction of property let out for commercial purposes as per second proviso to section 23(1) of Act. This is what the Calcutta High Court observed –
“The benefit conferred by clause (b) of the second proviso to section 23(1) of the Act could only be availed of, if the building was actually used for residential purposes and not otherwise. The nature of the building let out determines the grant or denial of relief. Had the object of the Legislature been to allow this concession irrespective of the user of the building, it was not necessary to qualify the word ‘unit’ by the expression ‘residential’. An owner may construct a building with self-contained floors with the object of letting out the same to the tenants, but such letting out has to be for the purpose of residence of the tenants and not otherwise. A residential unit is that which is used as a residence. Admittedly in this case the units which were let out to the bank were not constructed as residential units. The assessee was, therefore, not entitled to the benefit”
The Madras High Court in the case of C.H. Kesava Rao v. CIT [1983] 14 Taxman 418 (Mad.). held that –
” the second proviso to section 23(1) of the Act contemplates that two conditions are to be satisfied, viz. –
(i) that the building should consist of more than one residential unit; and
(ii) that every residential unit should be such that its annual value is capable of being separately assessed.
Normally, a room in a lodge cannot be taken to be a residential unit. The expression ‘residence” implies some sort of ‘permanency’ and it cannot be equated to the expression ‘temporary stay as a lodger’. Even assuming that each room has all the normal facilities, it cannot be treated as a separate unit. Further the building in this case had been assessed by the Municipal Corporation as a single unit and there was no separate annual value for each room. The question of applying the second proviso to section 23(1) of the Act, therefore, would not arise.”
The ITAT Delhi Bench in the case of Sanjeev Puri v. Deputy CIT [2016] 72 taxmann.com 147 (Delhi – Trib.) made a distinction between residential property and property used for commercial purposes by the assessee in the following words –
“Where a property had been shown as residential house in municipal records but it had been actually used by assessee as his professional office, said property, while adjudicating claim of assessee for deduction under section 54F of the Act could not be treated as residential house based on municipal records ignoring actual user thereof by assessee.”
The residential house which assessee individual/HUF invests (in) must satisfy this definition so as to avail the higher safe harbour limit of 20% of consideration as regards excess of stamp duty value (circle rate) over consideration for purchase. This higher safe harbour limit applies for residential units allotted by developer to buyer from 12.11.2020 to 30.06.2021. For residential units transferred by way of allotment during this period, safe harbour of 20% applies instead of normal 10%. If, in the area where assessee intends to buy a house for claiming deduction under section 54F of the Act, the SDV is between 110% to 120% of consideration then merging two residential units and calling them a single residential house to claim deduction under section 54F of the Act by the assessee, may land the assessee in trouble under section 56(2)(x) of the Act by resulting in excess of Stamp Duty Value (SDV) over consideration being taxed under section 56(2)(x) of the Act.
If in the area where assessee intends to buy a house, SDV trails consideration, then, assessee can buy two units and merge them into one since he is not worried about section 56(2)(x) implications.
In Mohammadanif Sultanali Pradhan v. Dy. CIT [2020] 114 taxmann.com 508 (Ahmedabad – Trib.), it was held that, where assessee claimed exemption under section 54F of the Act by making investment of long-term capital gain in two bungalows located adjacent to each other and used as one residential unit, assessee could not have been denied exemption on reasoning that there were two different registries of buildings/properties as both properties purchased by assessee were a single property located in same geographical area. Under provisions of section 54F of the Act, no definition/clarification about area of residential property, has been provided, hence, one assessee can buy huge bungalow/property say thousand square meters and can claim deduction subject to conditions. Therefore, the assessee could not have been deprived of benefit conferred under statute merely on reasoning that there were two different registries of buildings/properties as from point of view of the assessee, it was single property. Further, in view of the fact that both properties purchased by the assessee were located in same geographical area, assessee would be entitled for exemption provided under section 54F of the Act.
It would appear that the ratio in Mohammadanif Sultanali Pradhan (supra) would apply to section 54F of the Act, since the term “residential house” is not defined along the lines of “a residential unit” as defined for section 43CA and section 56(2)(x) purposes.
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