CIT v Gita Duggal ITA No. 1237/2011 (Del HC) dtd 21.02.2013

Background:

Assessee was the owner of property in New Delhi comprising of the basement, ground floor, first floor and second floor. On 08.05.2006 she entered into a collaboration agreement with a developer for redeveloping the property. According to its terms, the assessee being desirous of getting the property redeveloped/reconstructed and not being possessed of sufficient finance and lacking in experience in construction, approached the builder to develop the property for and on behalf of the owner at the cost of the builder. The builder was to demolish the existing structure on the plot of land and develop, construct, and/or put up a building consisting of basement, ground floor, first floor, second floor and third floor with terrace at its own costs and expenses. In addition to the cost of construction incurred by the builder on development of the property, a further payment of Rs. four crores was payable to the assessee as consideration against the rights of the assessee. The builder was to get the third floor.

The assessee accordingly handed over vacant physical possession of the entire property along with 22.5% undivided interest over the land. The AO first took the view that the sale consideration for the transfer of the capital asset should be taken not merely at Rs. four crores which was the cash amount received by the assessee, but the cost of construction incurred by the developer on the development of the property amounting to Rs. 3,43,72,529/- should also be added to the sale consideration. The assessee thereupon claimed that if the cost of construction incurred by the builder is to be added to the sale price, then the same should also be correspondingly taken to have been invested in the residential house namely the two floors which the assessee was to get in addition to the cash amount, and the amount so spent on the construction should be allowed as deduction under Section 54 of the Act.

The AO rejected the claim for deduction under Section 54 on the footing that the two floors obtained by the assessee contained two separate residential units having separate entrances and cannot qualify as a single residential unit.

Assessee’s contentions:

• Reliance is placed on the judgment of the Karnataka High Court in CIT Vs. B. Ananda Basappa : (2009) 309 ITR 329
• The context in which the expression ‘a residential house’ is used in Section 54 makes it clear that, it was not the intention of the legislation to convey the meaning that: it refers to a single residential house, if, that was the intention, they would have used the word “one.”
• As in the earlier part, the words used are buildings or lands which are plural in number and that: is referred to as “a residential house”, the original asset.
• Therefore the letter ‘a’ in the context it is used should not be construed as meaning “singular.” But, being an indefinite article, the said expression should be read in consonance with the other words ‘buildings’ and ‘lands’ and, therefore, the singular ‘a residential house’ also permits use of plural by virtue of Section 13(2) of the General Clauses Act

Tax Authority’s arguments:

• The two floors which were given to the assessee by the developer and on which the developer had incurred construction cost were independent of each other and self-contained and therefore they cannot be considered as one unit of residence.
• The exemption would be available only in respect of one unit.

HELD:

• Section 54/54F uses the expression “a residential house”. The expression used is not “a residential unit”.
• Section 54/54F requires the assessee to acquire a “residential house” and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied.
• There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use.
• One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house.
• The physical structuring of the new residential house, could be lateral or vertical. The residential house consists of several independent units should be permitted for allowance of the deduction under Section 54/54F.