IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI "G" BENCH, MUMBAI
BEFORE SHRI D.K. AGARWAL, JUDICIAL MEMBER AND
SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER
ITA No.1876/M/2012
Assessment Year: 2008-2009
Yogesh Sunderlal Shah, The Assistant Commissioner of
F/107, Shreepal Industrial Income Tax 24(1), C/13,
Estate, New Oshivara Bridge, Pratyakshakar Bhavan, BKC,
S.V. Road, Jogeshwari (W), Vs. Bandra (East),
Mumbai 400 102. Mumbai 40 051.
PAN: AAKPS 2779 L
(Appellant) (Respondent)
Appellant by : Shri K. Gopal
Respondent by : Shri Jitendra Singh &
Shri Satendra Pande
Date of hearing: 7.8.20012
Date of order : 21.9.2012
ORDER
PER RAJENDRA SINGH, A.M.
1. This appeal by the assessee is directed against the order dated
27.2.2012 of CIT (A) for the assessment year 2008-2009. The only
dispute raised in this appeal is regarding allowability of exemption u/s
54 of the Act in respect of capital gain earned by the assessee from
sale of house property.
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2. The facts in brief are that during the assessment proceedings it
was noted by the AO that the assessee had sold a Bungalow No.32 at
Dariyalal C.H. Society, Mumbai 49, for a consideration of Rs. 3.50
crores on 8.8.2007. On 16.8.2007, the assessee purchased tenancy
rights in two flats in the third floor of `Symphony' situated at junction
of 8th and 12th Road, Khar (West), Mumbai, for a consideration of Rs.
1.85 crores. The assessee computed the long term capital gain from
sale of residential Bungalow at Rs.2,13,02,427/- which was claimed
exempt to the extent of Rs.2,04,11,610/- because of the investments
made in acquisition of the tenancy rights in the new two flats. The AO,
however, observed that the exemption u/s 54 in respect of capital gain
from sale of residential house property was available only when the
assessee purchased or constructed a new residential flat. The
assessee purchased only tenancy rights. The AO, therefore, asked the
assessee to explain as to why the claim u/s 54 should not be rejected.
The assessee submitted that he had acquired tenancy rights in
perpetuity in the new flat which had to be considered as transfer of
ownership of the flat. It was pointed out that as per the tenancy
agreement, the assessee was required to use the said flat for
residential purposes only and not for other purposes and the assessee
was also entitled to bequeath rights in respect of the said flat to any
other person subject to beneficiary complying with the terms of
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agreement. The assessee was also entitled to sublet or to give on
leave and license the said flat and the landlord was not required to
levy and charge transfer fees in respect of such assignment. The
assessee could also avail or raise loan against the flat. Therefore, it
was submitted that the assessee was as good as owner of the flat
which had been acquired for use as a residential house and, therefore,
the assessee was entitled to exemption u/s 54 of the Income Tax Act.
2.1 The AO, however, did not accept the contentions raised. It was
observed by him that there could not be any dispute that the assessee
had purchased only the tenancy rights on paying the monthly rent of
Rs. 500/- p.m. to the landlord. The assessee had neither purchased
the flat nor constructed the flat as required u/s 54. He also referred to
clause-12 of the agreement as per which the tenant was not required
to make any structural alteration in the flat let out. Further, clause-17
provided that the right of the tenant was limited and restricted to the
said flat and nothing more. The said clause also provided that the
landlord was entitled to carryout further construction on the said plot
and / or building without any recourse to tenant and in case any
specific permission / no objection certificate was required, the tenant
was required to grant his irrevocable consent / no objection. AO also
observed that all the rights of the assessee regarding raising loan,
transferring the flat were subject to the permissions or conditions laid
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down by the society. Further, the owner of the flats was the
Laxminagar Co-operative Housing Society and the subsequent
purchasers were tenants. The AO also observed that no doubt the
tenancy right was a capital asset but this was not the type of the asset
for which exemption u/s 54 was available. The exemption was
available only in case of purchase or construction of the flat. The AO
referred to the judgment of the Hon'ble Supreme Court in the case of
CIT vs. TN Aravinda Reddy (120 ITR 46) (SC) in which it was held that
the word "purchase" occurring in section 54(1) had to be given its
common meaning i.e. buy for a price or equivalent of price by
payment in kind or adjustment towards a debt or for other monetary
consideration. The person who is the owner of the property should
possess absolute right in the property which was not so in this case.
The AO, therefore, rejected the claim of the assessee of exemption u/s
54 of the Act in respect of tenancy rights acquired in the new flat.
Accordingly, the claim of deduction u/s 54 of Rs. 2,04,11,610/- was
disallowed.
3. The assessee disputed the decision of AO and submitted before
the CIT (A) that all the conditions for purchase of a flat were satisfied
as the assessee had taken possession of the flat and full payment of
purchase consideration of Rs.1.85 crores had been made in addition to
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monthly rent of Rs. 500/-. The assessee had also paid stamp duty @
5% of the consideration of Rs. 1.85 crores amounting to Rs. 9.25
lakhs. Thus, the residential house had been conveyed to the assessee
within the meaning of the word "conveyance" as defined in clause-9 of
section 2 of Bombay Stamp Act, 1958. The assessee had the right to
mortgage the said flat or re-sale the said flat and all future benefits on
the said flat were allowed to the assessee. The assessee was also
authorised to bequeath the rights with respect to the said flat. It was
also pointed out that under the provisions of Section 27 (iii)(b), the
acquisition of tenancy rights in perpetuity amounted to ownership of
the property for the purposes of computation of income from house
property. Similar provisions were contained in section 269UA(f).
Since, the assessee had been given the possession of the property, it
would constitute transfer u/s 2(47) for the purpose of capital gain. It
was further pointed out that legal title in respect of the flat was not
necessary for the purpose of claiming exemption u/s 54 of the Act.
The assessee placed reliance on the judgment of Hon'ble Supreme
Court in case of CIT vs. Podar Cement Ltd. (226 ITR 625) (SC),
judgment of Hon'ble Supreme Court in case of R.B. Jodha Mal Kuthiala
vs. CIT (82 ITR 570) and the judgment of Hon'ble Bombay High Court
in case of CIT vs. D.V. Laxmichang Nagpal Nagda (211 ITR 804). It
had been held in the said judgments that owner is the person who can
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exercise the right of owner in his own right and legal title of the
property was not necessary. The CIT (A), however, was not satisfied
with the explanation given. It was observed by him that the
judgments relied upon were distinguishable and were not applicable to
the present case. The CIT (A) referred to the judgment of Hon'ble
Bombay High Court in case of Hameed Jaffery vs. CIT reported in 227
ITR 724 (Bom) in which it was held that as per the provisions
contained u/s 54 at the relevant time, the assessee was required to be
in occupation of the property for his own residence or residence of his
parents as a owner in the two year period preceding to the date of
transfer. Since, the assessee was not owner of the property for the
full two year period, the claim of exemption u/s 54 was denied. The
same view was followed in CIT vs. Gopaldas H. Hansrajani (239 ITR
523). By applying the same principle, the CIT (A) observed that
purchase of property by the assessee should be as a owner and not as
a tenant. The assessee in this case was not a owner of the property
and was only a tenant on a monthly rent of Rs. 500/- and therefore,
the provisions of section 54 were not applicable for exemption of
capital gain on sale of the residential house as the capital gain had not
been invested in purchase or construction of a new residential house.
The provisions of section 54 were plain and unambiguous and,
therefore, the same could not be applied in case of purchase of
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tenancy right in respect of flat. CIT (A) accordingly confirmed the
disallowance of claim of deduction u/s 54 of the Act aggrieved by
which the assessee is in appeal before the Tribunal.
4. Before us, the learned AR for the assessee submitted that
Laxminagar Cooperative Housing Society was the owner of the
property. Since, the rules of the society did not permit conveyance of
the land, only the tenancy rights were given. The property had been
constructed by Kasmita Properties Pvt. Ltd., to whom the landlord i.e.
A.D. Daru and S.D. Daru had given development rights. The assessee
had acquired the tenancy right on payment of non-refundable deposit
of Rs. 1.85 crores in addition to monthly rent of Rs. 500/-. The
learned AR for the assessee reiterated the submissions made before
the lower authorities that as per clause-12 of the agreement, the
tenant had unfettered rights to assign, transfer or sublet his flat. The
assessee was also entitled to make alternation in the interior of flat in
terms of clause-12 of the agreement. It was pointed out that the
assessee had perpetual tenancy right which had been deemed as a
owner under the provisions of section 27(iii)(b) and also for the
purposes of section 269UA(f). Thus, the income from the flat was
assessable as the income from house property. Further, the assessee
had been handed over the possession of the flat which amounted to
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transfer under the provisions of section 2(47). The assessee had also
paid stamp duty @ 5% which also shows that it had been treated as a
case of transfer of flat. The learned AR argued that the purposes of
section 54 was to acquire a new residential house and mode of
acquisition was not very relevant. The assessee had, therefore, to be
treated as legal owner for all purposes. Reference in this regard was
made to the CBDT Circular No.8/2/169/15(A-1). He also referred to
the legal opinion of Maya Bhatt & Co., a copy of which was placed at
page 61 of the paper book. The learned AR also placed reliance on the
decision of Mumbai Bench of the Tribunal in the case of M/s Prema P
Shah vs. ITO (100 ITD 60) in support of his contentions.
4.1. The learned DR, on the other hand, strongly supported the
orders of the authorities below. It was argued that the words u/s 54
were `purchase or construction of a new house' and not acquisition
and, therefore, the section could apply only in case of the purchase of
a new flat or construction of a new flat and not to acquisition by any
other mode. It was also submitted that the provisions of section
27(iii)(b) relied upon by the learned AR, treating the perpetual tenancy
as ownership, was limited to the application of the section 22 of the
Act regarding assessment of income from house property. Similarly,
the provisions of section 269UA(f) were applicable for the purposes of
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presumptive purchase of the properties. These provisions had no
application to section 54 of the Act. The learned DR also argued that
the provisions of section 54 were exemption provisions and in respect
of such provisions, in case there are two interpretations, the one which
is favourable to the Revenue has to be followed as held by the Hon'ble
Supreme Court in case of Novopan India Ltd. (3 SCR 549). He placed
reliance on the judgment of Hon'ble Bombay High Court in case of
Hameed Jaffery vs. CIT (227 ITR 724) which was later followed in 239
ITR 523 (Mum). He also placed reliance on judgment of Hon'ble
Supreme Court in case of Suraj Lamp and Industries Pvt. Ltd. (340 ITR
1) in which it was held that the registered deed of conveyance is the
only mode of legal transfer and that general power of attorney, etc do
not create title or interest in the property. The learned DR referred to
the various provisions of the tenancy agreement to point out that the
rights of the tenant in the flat were limited. He referred to clause-15
of the agreement which provided that the landlord was permitted to let
out the flat only on tenancy basis and in no other manner. Thus,
agreement itself provided that it was a case of tenancy and not
purchase. It was also submitted that though as per clause-10, the
tenant was entitled to take loan, that was only against right of the
tenant in the flat and not against any ownership right. The clause-17
provided that the right of tenancy was limited and restricted to the
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said flat and no more. Further, clause- 19 provided that the tenant
was not entitled to do any act that affected the right of the landlord in
the said building and in the said property. It was pointed that in the
agreement the words "tenant" and "landlord" had been used and not
"purchaser or seller" of the flat. Learned DR also referred to clause-12
of the agreement which clearly provided that the tenant was not
entitled to make any structural changes in the said flat. He was
entitled to make changes only inside the flat with MCD permission
without affecting the outer walls. The learned DR further pointed out
that though clause-21 gave unfettered right to the tenant to assign,
transfer or sublet the flat but such unfettered right was only in respect
of tenancy right and not as owner of the flat. It was accordingly
argued that the assessee was only a tenant in the new flat and not
owner of the flat and, therefore, it could not be said that the assessee
had purchased or constructed a new flat. Accordingly, the claim of
exemption under section 54 was not allowable and it was therefore
urged that the order of the CIT (A) should be upheld.
5. We have perused the records and considered the rival contentions
carefully. The dispute is regarding allowability of exemption under
section 54 of the I.T. Act in respect of capital gain earned by the
assessee from sale of a residential property. Under the provisions of
section 54, capital gain arising from transfer of a residential house
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income from which is chargeable under the head income from house
property is exempt if the capital gain is invested in purchase of a new
residential house within one year before or two years after date on
which transfer took place or assessee has constructed a new
residential house within the period of three years after the date of
transfer. In the present case, assessee had sold the residential
property for Rs.3.50 crores on 8.8.2007 and thereafter on 16.8.2007
assessee purchased tenancy rights in flats in the building "Symphony"
on deposit of Rs.1.85 crores which was not refundable and on payment
of monthly rent of Rs.500/-. The case of the assessee is that tenancy
right was perpetual and assessee was therefore deemed owner of the
property under section 27(iiib). The flat taken for tenancy was to be
used for residential purposes and income from the same was
chargeable under income from house property. It has also been
submitted that under the provisions of tenancy agreement, the
assessee was entitled to subletting the flat or to give on leave and
license and could also avail loan against said tenancy right. The
assessee had also the right to assign or transfer the right in the flat
and further entitled to make alteration in the flat. Therefore, it has
been argued that for all practical purposes, the assessee was owner of
new residential property and therefore, assessee should be entitled for
exemption under section 54 of the Act. The case of the revenue is that
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as per requirement of section 54, the assessee had to purchase or
construct a new residential house and then only is entitled for
exemption under the said section. Acquisition of new residential house
by any other mode is not prescribed and, therefore, assessee is not
entitled for exemption.
5.1 We have carefully considered the various aspects of the matter.
We find that under the provisions of section 54, exemption of capital
gain is available in respect of transfer of residential house owned by
the assessee. The purpose of the section is to grant exemption in case
the assessee acquires a new residential house by investing the capital
gain as an owner. It is because of this reason, the words used in
section 54 are "purchase" or "construction" of a new residential house.
The requirement of section is not that assessee may acquire a new
residential house by any other mode. The word "purchase" appearing
in section 54 had come for consideration before Hon'ble Supreme
Court in case of CIT vs. T.N. Arvinda Reddy (120 ITR 46) in which
Hon'ble Supreme Court held that the word "purchase" appearing in
section 54(1) has to be given its common meaning i.e. buy for a price
or equivalent of price by payment in kind or adjustment towards a
debt or for other monetary consideration. Thus, for application of
provisions of section 54, the assessee has to buy a property as an
owner. In this context, it may be appropriate to refer to the judgment
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of Hon'ble High Court of Bombay in case of Hameed Jaffery vs. CIT
(227 ITR 724) which was in the context of old provision of section 54
which required that the property which had been transferred should be
in the occupation of the assessee for his own residence or for the
residence of his parents. The Hon'ble High Court held that occupation
should be as an owner and not as tenant. The exemption under
section 54 from capital gain is available to an assessee, who invests
the capital gain in similar asset being a residential house which would
obviously mean that acquisition of the house should be as an owner as
the capital gain covered under section 54 is the capital gain arising
from transfer of a residential house owned by the assessee.
5.2 Further, as rightly pointed out by the ld. CIT-DR, provisions of
section 54 are exemption provisions and, therefore, in case two
interpretations are possible i.e. whether assessee should acquire the
new residential house as owner or even the perpetual tenancy right
would suffice, the interpretation favorable to the revenue shall be
followed as held by Hon'ble Supreme Court in case of Novopan India
Ltd. (3 SCR 549). In the said case, the Hon'ble Supreme Court held
that the principle that in case of ambiguity, a taxing statute should be
construed in favour of the assessee would not apply to the
construction of an exception or an exempting provision; these have to
be construed strictly. The Hon'ble Supreme Court also held that the
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person invoking an exception or an exemption provision to relieve him
of the tax liability must establish clearly that he is covered by the said
provision. In case of doubt or ambiguity, benefit of it must go to the
State. Following the said judgment, therefore, even if there is some
ambiguity in the provision, the same has to be interpreted in favour of
the revenue because it is an exemption provision. In the present case,
there is no ambiguity. The provision refers to purchase or construction
of a new residential house and it is quite obvious that the same should
be as an owner and not as perpetual tenant.
5.3 The ld. AR for the assessee has referred to the provisions of
section 27(iiib) r.w.s. 269 UA(f) as per which a person having lease
hold right for more than 12 years in property including the period
renewal of lease if any has to be considered as deemed owner. Since
the assessee in this case had perpetual lease, it has been argued that
the assessee was deemed owner and therefore, should be entitled to
exemption under section 54 of the Act. However, we find that the
provision of deemed owner under section 27(iiib) is only for the
purposes of section 22 to 26 as clearly mentioned in the said section,
which relate to computation of income from house property. Therefore,
argument of deemed owner is relevant only in connection with
computation of income from house property and not in relation to
exemption provisions of section 54. Similarly, treating the tenancy as
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conveyance under the Bombay Stamp Act was only for the purpose of
payment of stamp duty and cannot be considered as conveyance of
the title of the property to the assessee as an owner. As for taking
possession of the flat, taking possession can not be considered as
ownership as the possession had been taken as a tenant and not as an
owner of the flat.
5.4 It has also been argued that under the provisions of tenancy
agreement, assessee had right to bequeath the flat, sub-let/lease it
and was also entitled to raise loan against the flat. The assessee had
also right to make alteration in the flat and therefore, considering
these factors and also the fact that the lease was perpetual, the
assessee had to be considered as owner of the flat, entitled to
exemption under section 54. The arguments are however not
convincing. No doubt, the assessee was permitted to sub-let the flat,
to bequeath it and to raise loan but such powers were only in relation
to tenancy right of the assessee and not as owner of the flat. All these
facilities to which assessee was entitled was only against right of the
assessee as tenant in the flat and not as owner. Further, clause-12
clearly provides that the tenant was not entitled to make any
structural changes in the flat which clearly shows that the assessee
was not the owner because an owner has full right in relation to his
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property. The said clause also provided that the tenant had no right to
put up any construction on the aforesaid plot of land. The clause-17
provided that right of tenant was limited and restricted to the said flat.
Further clause-19 placed restriction that tenant was not entitled to do
any act that affected the right of the land lord in the said building and
in the said property which clearly shows that the assessee did not
have the status of land lord and was only a tenant. The owner of the
flat was Laxminagar Co-operative housing Society and as per rules of
the society, there was no provision of transfer of land and, therefore,
subsequent buyers were only tenants and not owners.
5.5 The ld. AR for the assessee has placed reliance on Circular
No.8/2/169-IT(A)-1 dated 25.3.1969 to argue that in terms of the said
Circular the assessee was owner for all practical purposes. The said
circular in our view is distinguishable as the same related to a situation
in which the builder had transferred land and building to the society
and society had allotted the tenancy to the purchasers and possession
of the flat had been given. Thus, in that case society had ownership of
land as the land had been transferred to the society and it was under
these circumstances that it was held that for all purposes including
adjustment and recovery, individual members could be regarded as
legal owners. In the present case there was restriction on transfer of
land which was owned by Laxminagar Co-operative Society. The
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subsequent buyers were only tenants and not owners of land and this
was the reason that only tenancy rights were given to various persons
including the assessee. The builder had no right in the land and,
therefore, only, tenancy right could be given to the buyers. Moreover
the circular related to a case where individual members had paid the
entire cost of the flat as purchaser, which is not so in the present case.
Therefore, the circular does not find any application to the facts of the
case. The ld. AR has also referred to opinion of the solicitor, Maya
Bhatt & Co. placed at page 61 of the paper book but there is nothing in
the opinion to show that the assessee was an owner. The solicitor had
only stated that the land lord had given irrevocable right to the builder
Kashmita Property Pvt. Ltd. to enter the property for the purpose of
development and that the property was free from any encumbrance.
Thus the solicitor had given only an opinion that the builder was
entitled to development right in the property for construction of the
building. So the opinion given is of no help to the assessee. The ld. AR
has also placed reliance on the decision of the Tribunal in the case of
Prema P. Shah vs. ITO (100 ITD 60) and based on the said decision it
has been argued that the assessee has to be treated as owner.
However, on careful perusal of the said decision we find that the said
decision is distinguishable. The property in the said case was on
perpetual lease of 150 years. The Tribunal noted that the rent fixed
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was `peppercorn' rent and was payable only if demanded. Thus, the
assessee in that case was not duty bound to pay rent. It was under
these circumstances that the Tribunal held that the assessee had to be
treated as an absolute owner and entitled to exemption under section
54. In the present case, the assessee was bound to pay the rent as
per the agreement and therefore, it could not be considered as
`peppercorn' rent. The case is therefore distinguishable and not
applicable to the facts of the present case.
6. In view of the foregoing discussion and for the reasons given
earlier, we confirm the order of CIT(A), disallowing the claim of
exemption under section 54 of the Income tax Act.
7. In the result, the appeal of the assessee is dismissed.
Order pronounced in the open court on 21.9. 2012.
Sd/- Sd/-
( D.K. AGARWAL) (RAJENDRA SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai.
Dated : 21.9. 2012
Okk/Jv
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Copy of the order is forwarded to :
1. Assessee as mentioned in the cause title
2. Mumbai.
3. CIT-Concerned
4. D.R. ITAT ` ' Bench, Mumbai
5. Guard File
By order
Assistant Registrar
I.T.A.T, Mumbai.
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