Delhi High Court Upholds Restriction of Section 54F Exemption to a Singular Residential Unit: “A Residential House” Cannot Be Interpreted as Multiple Distinct Flats

Court’s Decision

The Delhi High Court held that under Section 54F of the Income Tax Act, 1961, the term “a residential house” must be interpreted in a singular sense, thereby limiting the benefit to a single residential unit. The Court dismissed the appeal by the assessee, confirming the Income Tax Appellate Tribunal’s (ITAT) decision to allow the exemption only for the higher-value flat among the two purchased.

Facts

1. The assessee sold an inherited plot in Jaipur during the Assessment Year (AY) 2013-14 for ₹77,75,000.
2. She used the sale proceeds to purchase two residential flats located in the same tower in Noida but situated on separate floors and opposite ends of the building.
3. The assessee claimed capital gains exemption under Section 54 and Section 54F of the Income Tax Act, arguing that both flats together constituted “a residential house.”
4. The Assessing Officer (AO) rejected the claim, concluding that the flats were distinct, physically and legally separate, and could not be combined into a single unit.

Issues

1. Whether the term “a residential house” under Section 54F of the Act includes multiple residential units or is restricted to a single residential unit.
2. Whether the assessee is entitled to claim an exemption under Section 54F for both flats purchased with the proceeds of the capital gain.

Petitioner’s Arguments

1. Broad Interpretation of “A Residential House”: The assessee argued that the phrase should include multiple residential units within the same property or tower.
2. Pre-2014 Legal Framework: The assessee contended that the amendment in 2014 that specified “one residential house” was clarificatory and prospective. Hence, it did not apply to her case (AY 2013-14).
3. Judicial Precedents: Reliance was placed on decisions such as Gita Duggal v. CIT and Gumanmal Jain v. CIT, which interpreted the term to allow flexibility for multiple units to qualify as a single residential house.

Respondent’s Arguments

1. Restrictive Interpretation of “A Residential House”: The Revenue argued that Section 54F benefits apply only to a single residential unit, as evident from the use of the singular term “a residential house.”
2. Physical and Legal Separation: The flats were distinct, located on different floors, and physically and legally incapable of forming a unified dwelling unit.
3. Judicial Support: The Revenue relied on decisions such as Pawan Arya v. CIT, which emphasized the singular intent of the provision.

Analysis of the Law

1. Statutory Language: Section 54F of the Act refers to “a residential house” and “a new asset,” emphasizing singularity in its plain meaning.
2. Legislative Intent: The provision aims to provide tax benefits for reinvesting in a single residential property. Any broader interpretation would contradict the legislative intent.
3. Amendment of 2014: The amendment clarifying “one residential house” was introduced to resolve ambiguities but did not alter the inherent legislative intent of restricting the benefit to a single residential unit.

Precedent Analysis

1. Gita Duggal v. CIT: In this case, the Court allowed an exemption for multiple floors as they were constructed on a single plot and could practically function as a unified residential unit. However, this was distinguished as in the present case, the flats were on different floors and at opposite ends of the building.
2. Pawan Arya v. CIT: The Punjab & Haryana High Court held that multiple residential units in separate locations cannot qualify as “a residential house.” This decision supported the Revenue’s restrictive interpretation.
3. D. Ananda Basappa v. CIT: In this case, the flats were adjacent and modified into a single unit, which justified the exemption. The present case lacked such adjacency or unification.

Court’s Reasoning

1. Interpretation of “A Residential House”: The Court observed that the term “a residential house” is singular and does not include multiple residential units unless they are functionally unified.
2. Physical and Legal Separation: The two flats purchased by the assessee were physically and legally distinct, located on separate floors and opposite ends of the tower, making them incapable of forming a single residential unit.
3. Judicial Precedents: The Court distinguished earlier cases like Gita Duggal and D. Ananda Basappa, highlighting that those cases involved residential units that were adjacent or combined to function as a single house.

Conclusion

The Court upheld the ITAT’s decision to grant the exemption under Section 54F for only one flat (the higher-value flat). The second flat’s value was liable to be taxed as a long-term capital gain. The appeal was dismissed.

Implications

1. Tax Planning: Taxpayers cannot claim exemptions for multiple residential units under Section 54F unless they are adjacent, modified, or capable of being used as a unified dwelling.
2. Judicial Clarity: The judgment reinforces a restrictive interpretation of Section 54F, aligning with the legislative intent.
3. Legislative Intent: The decision underscores the importance of adhering to statutory language and contextual interpretations.

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