Section 54F exemption: Small House Can Get Big Gains

Income tax officer: "I can't give Section 54F exemption for your house, as it has no living room, bedroom or even kitchen. "The assessee said: "But, it has a door, sir. A living room, bedroom or kitchen is not essential. But, a door is a must. Or else, strangers, thieves and animals would troop in. As I have the most required thing for a residence, Section 54 exemption must be given."

What happens when a house is considered small and not granted Section 54F exemption ? The Delhi Tribunal, in a recent judgement, [2023] 153 t554 – ITAT rightly ruled that the assessee should get Section 54F benefit.

[2023] 153 - ITAT

Girish Mohan
v.
ACIT

The assessee got an order from the Ld CIT(A), wherein it was observed:

a.		The assessee has constructed a very small residential house and land size was very big. The cost of construction is very small when compare to the price of land.
b.		Assessee failed to prove that the small dwelling unit was intended to be used for residential purpose.
c.		Considering the status of assessee (by seeing his returned income) it is not acceptable that assessee was intending to use the dwelling unit as his residential house.
d.		It has to be assumed from the marginal heading of section 54F that the intention of legislature was to extend the benefit of exemption u/s 54 only when the property purchased by the appellant was intended to be used as residential house.
e.		The exemption claimed is only restricted to the land beneath under constructed portion and no deduction for vacant portion of land.

The CIT(A) allowed the deduction of 54F but restricted the deduction to constructed portion.

An appeal was filed by the assessee against the order of the ld CIT(A)-1, Gurgaon, dated 23.09.2019 for AY 2016-17, in which one ground of appeal was:

That the Ld CIT (A) has erred on facts and in law in upholding the disallowance of deduction claimed u/s. 54F.

The assessee raised ground that earlier, the AO has alleged that assessee is merely possessing a piece of land without any construction thereon and hence not entitled for deduction of 54F.

The assessee pointed out to AO about the incurring of expenses on construction of house, further assessee has also pointed out the source of those expenses. However the AO very conveniently ignored the submissions of the assessee.

The submissions of the assessee on section 54F exemption, regarding the CIT's order are as under

a.

The observation of the CIT(A) that the legislature wanted that the exemption should only be allowed to an assessee who intended to use the new residential house for residence purpose is legally incorrect in as much no such requirement is mentioned in section 54F The marginal notes of section 54F and provisions of section 54F nowhere suggest that investment should be in such residential house where assessee intends to reside. This issue has been examined by the various benches of the ITAT, in the following decisions:-

(i)		Mahavir Parsad Gupta v. Jt. CIT [2006] 5 SOT 353 (Delhi)
(ii)		ACIT v. Omprakash Goyal [IT Appeal No. 647 (Jp) of 2011, dated 2-2-2012]
(iii)		DCIT v. Kanwal Mohan Singh Sehgal [IT Appeal No.500 (D) of 2019, dated 25-8-2022]

The next observation of the CIT(A) that the size of the constructed portion is very small and the exemptions benefits cannot be extended to the land appurtenant is also not tenable in law. Reliance can be placed on the following judgments

(i). Kanwal Mohan Singh Sehgal (supra)

ii. Addl. CIT v. Narendra Mohan Uniyali [2009] 34 SOT 152 (Delhi)

That the new investment was in fact a residential house has been proved by assessee with following documents:

Site plan approved by Rajasthan State Govt clearly mentioned character of land is residential

A CLU (Change of Land) granted in respect of land purchased by assessee from the previous owner Omprakash Chandel

Valuation report

Water and electricity bills

TRIBUNAL FINDINGS

On careful consideration of the above rival submissions, the Tribunal said: "We note that the assessee has relied on three orders of coordinate benches of the Tribunal to support his claim of deduction u/s 54F of the Act.' In the case of Mahavir Prasad Gupta (supra) it was held that mere non-residential use would not render a property ineligible for benefit of section 54F of the Act, if it is otherwise a residential house, and the assessee if found to have constructed a residential house, whatever might be the use it had been put to, the assessee can be said to have fulfilled the conditions envisaged u/s 54F of Act.

Further, the assessee has also relied on Om Prakash Goyal (supra) case wherein it was held that when the land is purchased and building constructed thereon, it is not necessary that such construction should be on the entire plot of land.

Furthermore, the ld AR also placed reliance on the case of Kanwal Mohan Singh (supra) ITAT, Delhi Bench wherein it was held that the disallowance of deduction u/s 54F of the Act is not valid on the solitary ground that residential house is constructed on agricultural land.

Ld counsel placing reliance on the order of coordinate bench of the Tribunal [Mahavir Prasad Gupta (supra)] submitted that even non residential use of residential house would not render a property ineligible for benefit/ deduction u/s 54F of the Act. The Delhi Tribunal said it was in agreement with the said contention of ld counsel of assessee.

The ld CIT(A) also observed that the size of constructed portion is very small and the exemption benefit cannot be extended to the land appurtenant is not tenable in law. In the case of Kanwal Mohan Singh (supra) the Tribunal has relied on the order of ITAT Jaipur in the case of Shyam Sunder Makhija v. ITO [1991] 38 ITD 125 wherein, it was held that the farmhouse is also a residential house and section 54F does not put any rider with direction in respect that investment in acquisition of land appurtenant to the building will not qualify.

The Tribunal noted that the site plan approved by the competent authority clearly reveals that the character of land has been mentioned as residential. The change of land (CLU) use order/ permission in respect of land purchased by the assessee from the previous owner Sh. Om Prakash reveals that the competent authority has authorized change of land use to the assessee pertaining to the land constructed by the assessee. Valuation report submitted by the assessee reveals that the valuer in his report has mentioned the property is residential. The valuer has also considered the fact that there is a water and electricity connection as per bills submitted by assessee. The valuer estimated the life of constructed house as 65 years and mentioned that walls are brick load bearing walls type, brick stepped foundation are used, there is superstructure above ground floor, brick is made of cement mortar, marble flooring is done and finishing has been done with cement plaster. These details supports contentions by the assessee that the house was not a simple dwelling house but built with strong building material which provide a long life to the structure of building/ house.

In the light of the above factual position, the Tribunal held, "we find ourselves agree with the contention of the ld counsel of the assessee based on the order of ITAT Jaipur Bench in the case of Om Prakash Goyal (supra) wherein, the Tribunal under similar facts and circumstances held that since all the conditions claiming exemption u/s 54F of the Act have been satisfied, therefore, it will futile exercise if the matter is sent back to the file of the AO particularly when all the details are placed on record from which it is established that assessee purchased the plot of land and has constructed residential unit/ house for his use." The tribunal also held that the house constructed on agricultural land or on other land does not matter, but the fact matters that the residential house is constructed. The valuation report and other documentary evidence including change of land use (CLU) certificate issued by the Haryana Govt authorities and the certificate issued by Sarpanch of Village Biranwas, Tehsil Kotkasim Distt. Alwar, Rajasthan clearly reveal that the assessee has constructed residential buildings comprising of two rooms, kitchen, toilet having electricity and water connection and a borewell with a septic tank, which was being used as residential unit. Therefore, the Tribunal added, "we are unable to agree with the basis taken by the ld CIT(A) that in proportion to the size of plot/ land the constructed portion is very small and thus, the exemption benefit u/s 54F of the Act cannot be extended to the cost of land appurtenant to the house."

Therefore, on the basis of foregoing discussion the Tribunal said: "We reach to a legal conclusion that the assessee, for claiming deduction u/s 54F of the Act, has submitted sufficient and all possible documentary evidence under his command, before authorities below to show that the assessee purchased land, constructed a residential unit consisting of two rooms, kitchen and bathroom with electricity and water facility supported by connection of borewell and septic tank built therein. The change of land use certificate reveals that the assessee obtained permission from the competent authority before using agricultural land for the purpose of construction of residential house on entire 1.26 hectare of land. Therefore, the Tribunal held it was inclined to hold that the authorities below have erred in dismissing the claim of the assessee for deduction u/s 54F of the Act and hence, the AO is directed to allow the same to the assessee.

SIZEABLE !

A man said to friend: "I got a small house constructed and now, the income tax department is refusing to give Section 54 benefit."

The friend asked: "Why did you build a small house ?"

The man said: "We have many relatives. So, if I build a sizeable house, they will all keep scampering in." !!!

The Delhi Tribunal's judgement is a welcome move. Many assesses face hardships as house constructed is held to be defective and Section 54F exemption is denied. Nothing can be more agonizing. It is hoped that Section 54F is not snatched away on such frivolous grounds, any more.

SECTION 54F & SMALL EXCUSES

In an interesting case [ACIT v. Pareshkumar Ramanlal Jani [IT Appeal No. 3022 & CO No. 308/Ahd/2014, dated 10-10-2017], the judge observed: "What has weighed in the mind of the Assessing Officer is that 'there is no kitchen and due to shrubs it is not fit for residence.' In my opinion a kitchen need not be in a separate room to be called as a residential house. Shrubs on the plot will not disentitle a person to reside in the house once such shrubs are removed."

In present Girish Mohan case, the first amazing thing was that though a house of two rooms, kitchen and bathroom existed it was held to be non-existent ! Next, it was considered too small, for getting Section 54F exemption. Not content, it was said that land appurtenant was too big and the house too small.

Let us recapitulate, what was said in Amit Gupta v. Dy. CIT [2006] 6 SOT 403 (Delhi) case, where it has been explained, succintly:

"The requirement of section 54F is that the property should be a residential house. The expression 'residential house' has not been defined in the Act. The popular meaning of the word is a place or building used for habitation of people. It is used in contradistinction to a place which is used for the purpose of business, office, shop, etc. It is not necessary that a person should reside in the house to call it a residential house. If it is capable of being used for the purpose of residence, then the requirement of section 54F is satisfied. The fact that the asressee did not actually use the same for his residence would not disentitle him to the claim of exemption under section 54F."

There are a lot of reasons, why Section 54F exemption can be given to an assessee:

Section 54 lays a lot of emphasis on regular house, but Section 54F does not.

The word 'residential house' is nowhere defined under Income-tax Act.

The Board circular No. 667 dtd. 18.10.1993 specifies that in cases where the residential house is constructed within the specified period, the cost of such residential house can be taken to include the cost of plot also.

Long-term capital gains are specified for house construction under Section 54, but net sales consideration is to be spent on house under Section 54F, which is more exacting for the hapless assessee. Hence, a liberal approach is essential in Section 54F, than in Section 54.

SMALL HOUSE CASES

In one case, the Karnataka High Court in CIT v. M A Patel [IT Apeal No.380 of 2012] had to decide whether a small house qualifies for Section 54F exemption. The AO had stated the house was too small to exist on half acre of land and therefore, declined to grant exemption. The Tribunal favoured assessee, but Department disagreed. The High Court ruled in favour of assessee.

But, in Rita Gaur v. Dy. CIT [2004] 90 ITD 24 Lucknow case it was held: "The very intention of the Legislature is that benefit can be extended only when assessee is able to prove on record that he has constructed a residential house." The mere construction of boundary wall, installation of tube-well and construction of one room would not be taken as construction of residential building and benefit under section 54F of the Act was not given to the assessee.

Surprisingly, in one instance, the income tax department was quite liberal. In ITO v. Somchand Kanji [IT Appeal No.1717 (Bang.) of 2016] there was a constructed shed of 100 Sq.ft. with ACC sheet roofing and walls of brick and mortar and cement flooring and the assessee's employee had been staying to look after the property. The Department held that the fact that civic amenities were not available in the building constructed cannot be the basis to hold that the property in question is not a residential house. It was capable of being used as a residential house de hors these facilities. These facilities could come in due course and make the property more habitable. The section does not lay down any standards of habitation like existence of civic amenities etc.

Since there was a person already living in the structure, it can be said that it was in a habitable condition even though basic amenities such as electricity and water supply were not there. The Khata issued by the Bangalore Municipality mentions the description of the property as residential property and determined annual value at Rs.780/-.

The court held that if it is capable of being used for the purpose of residence then the requirement of section is satisfied

DOES LAND APPURTENANT GET SECTION 54 RELIEF

A comical situation arose in Girish Mohan case, when it was pointed out that only land on which building was built should get Section 54F benefit, not other land appurtenant at the spot ! This was a too hyper-technical argument.

It was also said that land appurtenant is too large and house is small in comparison.

Thankfully, in Addl. CIT v. Narendra Mohan Uniyal [2009] 34 SOT 152 (Delhi) case, it was held that the comments of the AO to the effect that exemption u/s 54F is eligible only for construction of house is not tenable insofar as even cost of land forming part of the residential unit on which no construction is done is also eligible for exemption u/s 54F. Thus, the cost of vacant land appurtenant to and forming part of the residential unit is to be considered for claim of exemption u/s 54F even if no construction has been done on the appurtenant land.

In C. Aryama Sundaram v. CIT [2018] 97 74/258 10/4107 ITR 1 (Mad.) also the ruling was that It is the cost of the new residential house and not just the cost of construction of the new residential house, which is to be adjusted. The cost of the new residential house would necessarily include the cost of the land, the cost of materials used in the construction, the cost of labour and any other cost relatable to the acquisition and/or construction of the residential house.

A SMALL HOUSE ON AGRICULTURAL LAND ?

Another query raised in Girish Mohan case was that the house was built on agricultural land. Hence, no Section 54F exemption should be allowed. The question has been clarified in Kanwal Mohan Singh Sehgal (supra) case where it was ruled that there is no restriction or legal bar, for the claim of exemption, to make the investment in a residential house on the agricultural land.

Silly questions like why a wealthy person with many cars was using the small house need to be struck down, as in Somchand Kanji (supra) case.

SUMMING UP

Once, a person was asked by ITO, why he built a small house and still claimed Section 54F exemption. He said: "The land appurtenant to my house contains shed, where my cattle stay, a kennel where my dogs lounge, a pool for my swimming strokes and a makeshift unit, where my watchman guards. So, the whole house is quite big."

The law does not require the residential house to be of particular size or shape or specifications and the size of open vast land is also not relevant.

In R. Satish Kumar Reddy v. ACIT [IT Appeal No. 1681 (Hyd.) of 2011, dated 18-10-2021] when the Assessing Officer said that the 8 ft x 8 ft structure could not be considered as a building / residential house, the AR reminded that a residential house can mean a 'a house or hut or super-structure, which is fit for human habitation.'

Here's a light tale about what ghosts think about Section 54F and small houses.

One ghost said: "I fully agree with the income tax officer that a small house should not get Section 54F exemption. A small house is not much fun to haunt. Because, the people can run out easily, when we chase them. Also, there is not much space for us to fly. A big house is a great haunting place. We can chase inmates, as they run from room to room. And, we can fly, and soar all over the place."