Krishnagopal B. Nangpal v. Deputy Commissioner of Income Tax (Bombay High Court) 2025:BHC-OS:11546-DB

(i) Whether the Assessee is entitled to claim exemption under provisions of Section 54(1) of the Act against the entire capital gains of Rs.1,08,30,625/- arising out of sale of his flat in Mumbai, on account of utilization thereof towards purchase of seven row houses in Pune ? To paraphrase, the issue for consideration is whether sale proceeds of one residential house, used for purchase of multiple residential houses, would qualify for exemption under Section 54(1) of the Act ?

(ii) The case pertains to the Assessment Year 1995-96, and accordingly, provisions of Section 54(1) of the Act, prior to its amendment by Finance (No. 2) Act, 2014, are relevant.

(iii) What is relevant is replacement of the expression ‘a residential house’ by the expression ‘one residential house’ by way of 2014 amendment. Prior to the 2014 amendment, capital gains arising from transfer of a long term capital asset, including a residential house, qualified for exemption if the same was invested for purchase or construction of ‘a residential house’. The department has disallowed the claim of the Assessee for adjustment of the entire capital gain arising of sale of the flat in Mumbai, on the ground that the Assessee has purchased seven row houses in project at Pune. According to the department, exemption under Section 54 (1) of the Act is applicable only in respect of investment made in purchase of only one residential house and is not permissible for the purchase of multiple residential houses. The ITAT has accordingly granted the benefit of Section 54(1) of the Act in respect of one of the seven row houses purchased by the Assessee.

(iv) The amendment brought in by Finance (No.2) Act 2014 makes the position clear that after the amendment, the capital gains can be adjusted against purchase of only ‘one’ residential house. The word ‘a’ is consciously replaced by the legislature by the word ‘one’ by way of amendment making the intention clear that after the amendment, it is impermissible to adjust the capital gains arising out of one house towards purchase of more than one houses. If the restriction of adjustment of capital gains against only one house was already there in the unamended Section 54(1), there was no necessity of amendment by specifically using the word ‘one’.

(v) The position appears to be fairly well settled that use of the words ‘a residential house’ in unamended Section 54 (1) of the Act would not mean a single residential house and the contemplated even multiple residential houses. The emphasis in the unamended Section 54 (1) of the Act is on residential nature of the property and the objective was never to restrict the number of residential houses purchased against capital gains. The words ‘a residential house’ were merely descriptive nature of the assets sold/purchased and not restrictive of the number of assets sold or purchased. The position got modified by the Legislature only w.e.f. 01 April 2015.

(v) Also of relevance is the fact that the provisions of Section 54(1) of the Act are beneficial in nature. The benevolent provision is aimed at encouraging the house purchase activities. It therefore needs to be read literally and reasonably. Therefore, even though two interpretations of the provisions of unamended Section 54(1) of the Act may be possible, the one in favour of the Assessee will have to be accepted. Mavilayi Service Co-operative Bank Ltd. and Ors. Vs. CIT & Anr. AIR 2021 SC 612 referred.

K. C. Kaushik Vs. P. B. Rane 1990 (1) 85 ITR 499 (Bombay)

Arun K. Thiagarajan Vs. CIT (Appeals) 2020 (427) ITR 190 (Karnatak)

Tilokchand & Sons Vs. ITO 2019 (413) ITR 189 (Madras)

CIT Vs. Gita Duggal (2013) 357 ITR 153 (Delhi)

CIT Vs. D. Ananda Basappa 2009 (309) ITRA 329 (Karnataka)

ITO Vs. Ms. Sushila M. Jhaveri