The facts stated in the query are as under:-
a) assessee had inherited the farmland (agriculture) on demise of his father/ forefathers.
b) the said land was acquired by the government,
c) on account of acquisition, assessee received approx. `1 Cr as compensation,
d) assessee wants to buy a flat in the name of his son out of compensation money received from the government,
e) total investment is made by the assessee through his bank account. Not a single penny was spent by his son.
Hence the query arose as to whether father is entitled to deduction u/s 54/54F of the Act and whether son has to face any taxation on account of flat purchased in his name by his father.
2. As per the provisions of sub-section (1) r/w sub-section (5) of section 45 of the Act, where any gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, it is chargeable to income tax under the head “capital gain” and shall be deemed to be income of the previous year in which transfer/acquisition took place. Hence the assessee is liable to tax under the head “Capital Gain”, however he is entitled to deduction u/s 54/54F of the Act.
As per the provisions of section 54, where in the case of an assessee being an individual or HUF, the capital gain arises from the transfer of a long term capital asset being building or land appurtenant thereto and being a residential house, the income of which is chargeable under the head “Income From House Property” and assessee had within a period of one year before or two years after the date on which the transfer took place, purchased or has within a period of 03 years after that date constructed one residential house in India then the assessee is entitled to deduction to the extent capital gain is invested in such purchase or construction of a residential house.
In the present case, assessee has sold the farmland and not the residential house. It is understood that only the farmland is acquired by the government on which, no farmhouse was constructed. If farmhouse was used by the assessee as a residential house then only deduction u/s 54 is available. In the present case, only the farmland is acquired by the government and therefore, section 54 deduction is not available.
3. Section 54 prescribes transfer of building or land appurtenant thereto, means land should be contiguous to the building. The expression “Land” appurtenant thereto has not been defined in the Act and therefore, it must be understood in its popular and non-technical sense. If the building together with the land is treated as an indivisible unit and enjoyed as such by the persons occupying the building, it is an indication that the land is appurtenant to the building. However, where the building has extensive land appurtenant thereto and part of such land can be put to independent user without causing any detriment to the enjoyment of the building then inquiry can be made by the Assessing Officer as to the requirement of persons occupying the building, consistent with their social standing etc. If any surplus is arrived at on such inquiry then the extent of such surplus land may not qualify to be treated as land appurtenant to the building.
In any case, it is clear from the section that if capital gain arises on transfer of building or land appurtenant thereto, the income of which is chargeable under the head “Income From House Property”, and within the specified period an assessee acquires a house property for the purpose of his own residence, then the capital gain shall be reduced by the cost of new house property. The basic requirement is that the capital gain should arise from the transfer of buildings or lands, the income of which is chargeable under the head “Income From House Property”. If land alone is sold, the provisions of section 54 will have no application, in as much as the income from the land is not chargeable under the head “Income From House Property”. In order to secure benefit of section 54, it is necessary that the building together with land is transferred and income from such building and land is chargeable under the head “Income From House Property” u/s 22 of the Act.
4. In P K Lahiri v. CIT (2005) 275 ITR 17 (ALL), it is held that section 54 would have application only when the property is sold alongwith the appurtenant land and not where appurtenant land is sold independently of the property.
5. In Patel Chunibai Dajibai v. Narayan Rao (1965 AIR 1457)(SC), it is pointed out that it is a rule of statutory interpretation that where conditions are positive “OR” is to be read as alternate, but where conditions are negative, “OR” is to be construed as cumulative. To be understood as “AND”, in the context of section 54, the reasoning is that section does not contemplate two separate sales of property and appurtenant land. If appurtenant land can be sold independently, it ceases to be appurtenant which goes with the property.
6. In so far as section 54F is concerned, where in case of an assessee being an individual or HUF, capital gain arises from the transfer of any long term capital asset not being a residential house and the assessee has within a period of one year before or two years after the date on which transfer tool place, purchased or has within a period of three years after that date constructed one residential house in India, the deduction is available to the extent the net consideration is invested in the residential house so purchased or constructed.
In the present case, farmland is a long term capital asset in the hands of assessee and the investment is made in the residential house, deduction is available u/s 54F of the Act.
It is understood that the assessee had purchased/constructed the flat within the period prescribed in section 54F. Now question arises as to whether flat is purchased in the name of son and not in his own name then whether deduction is available under this section.
There are divergent views existing on the subject. In CIT v. Kamal Wahal (2013) 351 ITR 4 (Del), assessee had purchased the property in the name of his wife. Delhi High Court considered various judgements i.e. judgement of Madras High Court in the case of CIT v. V Natarajan (2006) 287 ITR 271 (Mad) and judgement of Andhra Pradesh High Court in Mir Gulam Ali Khan (Late) v. CIT (1987) 165 ITR 228 (AP) and also another judgement of Karnataka High Court in Director of Income Tax (International Taxation) v. Mrs Jennifer Bhide (2012) 349 ITR 80 (Kar) and also the contrary judgement of Bombay High Court in Prakash v. ITO (2009) 312 ITR 40 (Bom). Delhi High Court adopted the rule laid down by the Supreme Court in CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC) which says that if a statutory provision is capable of more than one view, then the view which favours the tax-payer should be preferred. Section 54F being a beneficial provision, enacted for encouraging investment in residential houses should be liberally interpreted. Delhi High Court also considered earlier judgement of Delhi High Court in the case of CIT v. Ravindra Kumar Arora (2012) 342 ITR 38 (Del) and the judgement of Punjab & Haryana High Court in the case of CIT v. Gurnam Singh (2010) 327 ITR 278 (P&H) and held that the predominant judicial view is that for the purposes of section 54F, the new residential house need not be purchased by the assessee in his own name nor is it necessary that it should be purchased exclusively in his name. It is further to be noted that assessee had not purchased the new house in the name of a stranger or somebody who is unconnected with him. He has purchased it only in the name of his wife. There is also no dispute that the entire investment has come-out of the sale proceeds and there was no contribution from the assessee’s wife. Having regard to the rule of purposive construction and the object which section 54F seeks to achieve, deduction u/s 54F was allowed to the assessee.
However in Antony Parakal Kurian v. Asstt CIT (2022) 442 ITR 38 (Kar), Karnataka High Court have held that a comparative study of section 54 & 54F would indicate that section 54 deals with profit on sale of property used for residence, whereas section 54F deals with capital gain on transfer of certain capital assets not to be charged in case of investment for residential use. The proviso (a)(i) to section 54F(1) of the Act makes a distinction from section 54, in as much as the language employed, more particularly, the phrase “owns”. Section 27 of the Act defines “owner of house property” for the purpose of sections 22 to 26 of the Act only. Hence section 54F cannot be treated on par with section 54. To qualify for exemption u/s 54F of the Act, what is mandatory is the investment to be made in residential house in the name of the assessee only. The phrase “owns” in the proviso plays a significant role. The assessee should not own more than one residential house other than the new asset, on the date of transfer of the original asset. This phrase “owns” is conspicuously absent in section 54. Accordingly, Karnataka High Court held that where the property is purchased by the assessee in the name of his wife then deduction u/s 54 is available but deduction u/s 54F is not available. The divergent view is taken by the Bombay High Court in Prakash v. ITO (2009) 312 ITR 40 (Bom) and Punjab & Haryana High Court in Kamal Kant Kamboj v. ITO (2017) 397 ITR 240 (P&H).
7. In so far as son is concerned, he has not to face either tax consequences or any other legal consequences. If it is the assessee’s property in the benami name of son then it might have passed muster, under the Benami Transaction (Prohibition) Act. Section 3 of the Act states that no person shall enter into benami transaction. Whoever enters into benami transaction shall be punishable with imprisonment for a term which may extend to 3 years or with fine or with both. Section 2(9) of the Benami Act defines the term “benami transaction”. It excludes from its scope the property held by the person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual.
Thus in the present case, investment made by the father in the name of his son is outside the ambit of the definition of “benami transaction” and therefore, the son cannot be proceeded with even under Benami Transaction (Prohibition) Act.
8. In conclusion, it is stated that the father is entitled to deduction u/s 54F of the Act and the son has not to face any consequence for such transaction.
Source: AIFTP Journal November 23