Applicability of Section 54F Where Assessee Holds a Jointly-Owned Residential Property

Applicability of Section 54F Where Assessee Holds a Jointly-Owned Residential Property

1. Introduction:-Section 54F of the Income-tax Act, 1961 grants exemption on long-term capital gains arising from the transfer of any capital asset other than a residential house, subject to investment in a new residential house within the prescribed time.

A recurring controversy concerns whether joint ownership of a residential house disqualifies the taxpayer under the proviso to Section 54F(1), which denies exemption if on the date of transfer the assessee:

1. owns more than one residential house (other than the new one), or

2. purchases or constructs another residential house within the prescribed period.

The issue has led to divergent judicial views, resulting in substantial litigation.The ITAT Delhi in Kusum Sahgal (Through LR) v. ACIT revisited this controversy and delivered a comprehensive judgment harmonising various precedents.

2. Core Issue:-Whether exemption under Section 54F can be denied merely because the assessee holds a joint ownership interest (fractional share) in another residential property on the date of transfer?

3. Case Citation;-Kusum Sahgal (Through LR) v. ACIT-ITAT Delhi Bench-Assessment Year: 2015–16-Order Date: 08.11.2023

4. Brief Facts:-The assessee sold a plot of land and earned long-term capital gains.

2. She invested the capital gains in a new residential house and claimed exemption u/s 54F.

3. The Assessing Officer found that the assessee held 1/4th joint ownership in another residential house along with family members.

4. On this basis, the AO held that the assessee “owned” a residential house on the date of transfer.

5. Exemption u/s 54F was accordingly denied.

6. The CIT(A) upheld the AO’s denial.

7. The assessee appealed before ITAT.

5. Statutory Provision: Section 54F

5.1 Section 54F(1) – Main Provision:-Allows exemption if net consideration is invested in purchasing or constructing a new residential house.

5.2 Proviso to Section 54F(1) – Disqualification:-Exemption shall not be allowed if:

• The assessee owns more than one residential house (other than the new asset) on the date of transfer.

5.3 Meaning of “Owns”

Not defined in the Act, leading to interpretational disputes regarding:

• Joint ownership vs. absolute ownership

• Whether fractional ownership qualifies as “owns”

• Whether benami/beneficial ownership also counts

6. Findings of Authorities Below

6.1 Assessing Officer

• Assessee owned 1/4th share in another residential house.

• Therefore, assessee “owned” a residential house on the date of transfer.

• The proviso to Section 54F(1) was triggered.

• Deduction was denied.

6.2 CIT(A):-Upheld AO’s view.Relied on Karnataka High Court’s strict interpretation in M.J. Siwani that even fractional interest constitutes ownership.

6.3 ITAT:-Reversed findings below.

Held that joint ownership does not bar exemption based on multiple High Court rulings and binding principle of resolving ambiguity in favour of the assessee.

7. Discussion & Arguments

7.1 Assessee’s Arguments

1. Joint ownership of family property does not amount to exclusive ownership required under 54F proviso.

2. Numerous High Courts (Madras, Delhi) and ITAT rulings consistently held that fractional/undivided interest does not constitute ownership for purposes of 54F disqualification.

3. Provision must be construed liberally as held in CBDT Circular No. 667.

4. Supreme Court in Vegetable Products mandates adopting assessee-favourable interpretation where two views exist.

7.2 Revenue’s Arguments

1. Karnataka High Court in M.J. Siwani held that even fractional ownership bars exemption.

2. Therefore, assessee was owner of a residential house and exemption must be denied.

8. Tribunal’s Discussion

8.1 Divergence of Judicial Opinion

• Madras High Court → joint ownership does not constitute ownership for 54F bar.

• Karnataka High Court → even fractional share disqualifies assessee.

8.2 No Jurisdictional High Court Ruling

Delhi jurisdiction has no binding High Court judgment directly on the issue.

8.3 Principle of Favourable Interpretation

Following CIT v. Vegetable Products Ltd. (SC):

When two reasonable views are possible, the one favouring the assessee must be adopted.

8.4 Nature of Section 54F as Beneficial Provision:-As held in multiple Supreme Court decisions, beneficial exemptions must be construed liberally.

8.5 Application of Ownership Principles

Cases like Mysore Minerals Ltd. (SC) and Podar Cement (SC) emphasised beneficial interpretation of “owner”.

8.6 Conclusion:- Joint ownership does not amount to exclusive ownership contemplated in the proviso.

9. Outcome:-ITAT Decision

The assessee does not lose Section 54F benefit merely because she held a fractional joint ownership share.

Exemption u/s 54F allowed.Appeal Allowed.

10. Gist of All Cases Cited in the Decision

Favouring Assessee

1. Dr. P.K. Vasanthi Rangarajan (Madras HC) – Joint ownership not a bar.

2. C. Anuradha (Madras HC) – Only exclusive ownership relevant.

3. Raman Chawla (ITAT Delhi) – Co-owned property irrelevant.

4. Sheriar Phirojsha Irani (ITAT Mumbai) – Fractional interest does not disqualify.

5. Mukesh Vakharia (ITAT Surat) – Only exclusive ownership counts.

6. Zainul Abedin Ghaswala (ITAT Mumbai) – Joint ownership not hit by proviso.

7. Dr. Prabha Kapoor (Del HC) – Liberal interpretation of “residential house”.

8. CBDT Circular 667 – Liberal construction of 54/54F.

9. Vegetable Products (SC) – Ambiguity resolved in favour of assessee.

Against Assessee

10. M.J. Siwani (Karnataka HC) – Fractional ownership = ownership → exemption not available.