The villain causing the confusion is the article ‘a’ used before ‘residential house’. The word seems to imply that the exemption would be available only against purchase of one residential house and not two, or more. In other words, when an assessee invests the capital gains u/s 54 or the net sale proceeds u/s 54F in purchasing or constructing two residential houses, only one of these, as opted for by the assessee, will be allowed for the tax concession.
Now, under this background, one can’t help but wonder whether it was plain English usage that led to the use of the article “a” or did the lawmakers really intend the exemption only for one house. For example consider the following sentences ---
“The constitution bestows upon a citizen the following rights.” --- Does this mean only one citizen or all citizens?
“A man should stand by his rights and duties.” --- Does this pertain only for one man or more than one man?
“A person who comes to the rescue of another person in difficulty is a good Samaritan.” --- Does this include all those persons who help the one or more in difficulties or only one of them?
My feeling is that “a” is used as an article to precede a noun. The other two articles “an” or “the” could not be used for grammatical reasons; therefore “a” had to be used.
Adopting the meaning of the article “a” as “only one” is against the very spirit, purpose and intent of the legislation which desires to give a boost to the housing sector. No wonder, this ambiguity has given rise to conflicting case laws.
In the case of Fulwanti C Rathod v ITO, ITAT Mumbai Bench ‘E’ (ITA 1092/Mum./1995), dt 3.5.02, the learned judge observed, “The word ‘a’ can be equivalent to the word ‘any’. Also as per the General Clauses Act, singular includes plural.” The judge referred to the principle of interpretation that when there was a doubt as to its meaning, it had to be understood in the same sense it harmonised with the objective of the enactment. Referring to the Wealth-tax Act and the Estate Duty Act, the words used therein were, ‘one house’ as against the words ‘a house’ used in the Income-tax Act.
On the other hand, in the case of Mrs. Gulshanbanoo R. Mukhi v Joint CIT Appeal #3369 (BOM) of 2000 [AY 96-97] dt 16.1.02 ITD 649 (Mum) ITAT Mumbai Bench ‘C’, it was held that ‘a’ can be ‘any’ but ‘any’ cannot be ‘many’.
Allahabad High Court in the case of Shiv Narain Chaudhari v CWT (108ITR104) held that if the two flats of the building are situated in same compound and within common boundaries and have unity of structure, then they could be regarded as constituting one house.
In spite of such contradictory decisions arising out of ambiguity, CBDT has not issued any clarification in spite of requests from many quarters, including yours sincerely. We have been given to understand that some of the ITOs have been sticking to the literal meaning of ‘a’ as ‘one’, if they do not like your face; not otherwise.
A difficulty
If the stand that ‘a’ is not two is accepted, then it can be claimed that ‘a’ is also not half. Consequently, if an assessee reinvests an amount in a residential property, jointly held with another individual, say his wife, the related exemptions either u/s 54 or u/s 54F would not be available. Yes, this appears to be preposterous, but we have very strong reasons, backed up by a case law, ITO vs Rasiklal N. Satra (280ITR243 dt 19.9.05).
Here the assessee declared capital gains of Rs. 6,68,698 on sale of shares and claimed exemption u/s 54F by investing the same in purchase of residential flats at Vashi, Navi Mumbai. The Assessing Officer noticed that the assessee was co-owner of a flat in Sion (West), Mumbai. Accordingly, the assessee was asked to explain as to why exemption u/s 54F be not denied. In reply, the assessee contended that he was not an independent owner of the house and exemption can be denied only where the assessee is the absolute owner of the house. He also filed details of purchase of the house which showed that he along with his wife had purchased the house on April 13, 1994, for a total consideration of Rs. 3,05,000 out of which the assessee had invested Rs. 1,60,000 and the balance amount was invested by his wife. However, the Assessing Officer did not accept the contention of the assessee since in his view, the assessee could be said to be the owner of house at Sion (Mumbai) on the date of sale of the original asset.
The learned judge observed, “We proceed on the basis of the language employed by the Legislature. The word ‘residence’, as per Strand's Judicial Dictionary, means a place where an individual or his family eat, drink and sleep. So a residential house would mean a building or part of the building where one can eat, drink and sleep. Here, we may clarify that house is not being equated with a building since a building may comprise of many houses. So house means an independent unit where one can eat, drink and sleep. In view of this definition, we hold that the flat at Sion, Mumbai, was a residential house since the assessee along with his family was living in that house.
“The only question remains as to whether the assessee can be said to be the owner of that residential house. The Legislature has used the word ‘a’ before the words ‘residential house’. In our opinion, it must mean a complete residential house and would not include a shared interest in a residential house. Where the property is owned by more than one person, it cannot be said that any one of them is the owner of the property. In such case, no individual person on his own can sell the entire property. No doubt, he can sell his share of interest in the property but as far as the property is considered, it would continue to be owned by co-owners. Joint ownership is different from absolute ownership. In the case of a residential unit, none of the co-owners can claim that he is the owner of residential house. Ownership of a residential house, in our opinion, means ownership to the exclusion of all others. Therefore, where a house is jointly owned by two or more persons, none of them can be said to be the owner of that house. This view of ours is fortified by the judgment of the honourable Supreme Court in the case of Seth Banarsi Dass Gupta v. CIT [1987] 166ITR783, wherein, it was held that a fractional ownership was not sufficient for claiming even fractional depreciation u/s 32 of the Act. Because of this judgment, the Legislature had to amend the provisions of Sec. 32 w.e.f. 1.4.97, by using the expression ‘owned wholly or partly’. So, the word ‘own’ would not include a case where a residential house is partly owned by one person or partly owned by other person(s). After this judgment the Legislature could also amend the provisions of section 54F so as to include part ownership. Since the Legislature has not amended the provisions of Sec. 54F, it has to be held that the word ‘own’ in Sec. 54F would include only the case where a residential house is fully and wholly owned by the assessee and consequently would not include a residential house owned by more than one person. In the present case, admittedly the house at Sion, Mumbai, was purchased jointly by the assessee and his wife. It is nobody's case that the wife is a benami of the assessee. Therefore, the said house was jointly owned by the assessee and his spouse. In view of the discussions made above, it has to be held that the assessee was not the owner of a residential house on the date of transfer of the original asset. Consequently, the exemption under section 54F could not be denied to the assessee.”
Finally
All said and done, all this is theory. In practice, the Department normally grants the exemption on tax on long-term capital gains u/s 54 or 54F only against one house where the assessee has purchased or constructed two or more houses in his own name. However, the exemption is granted even if such a house is held jointly.
Yes, this is the normal practice. But the ITOs are reported to take advantage of the ambiguity depending upon their whims and fancies.
To Conclude
If ‘a’ is one and not two or more, ‘a’ cannot be anything less than one. Clarification from CBDT is imminently required not only to enable the assessees take correct actions and a litigations, but also to ward off rent seeking, if any, by the ITOs.
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