This article is based on a real life situation faced by one of our clients related to the sale of his apartment and the consequent capital gains tax.

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By way of a background, readers would be aware that exemption from tax on long-term capital gains arising from sale of a residential house is available under Section 54 if the taxpayer purchases or constructs “a” residential house within the stipulated periods. Similar exemption is available under Section 54F for capital gains arising out of the sale of any other taxable long-term asset other than a residential house. Eg: commercial property, gold, units of non-equity funds, etc.

Now, the main issue causing the confusion and ambiguity is the article ‘a’ used before ‘residential house’. The word seems to imply that the exemption would be available only against purchase of one residential house and not two or more. In other words, when an assessee invests the capital gains under Section 54 or the net sale proceeds under Section 54F in purchasing or constructing two residential houses, only one of these, as opted for by the assessee, could be allowed for the tax concession.

Much ado about an AUnder this background, one can’t help but wonder whether it was plain English usage that led to the use of the article “a” or did the lawmakers really intend the exemption only for one house. For example consider the following sentences — “The constitution bestows upon a citizen the following rights.” — Does this mean only one citizen or all citizens?

Also, “A man should stand by his rights and duties.” — Does this pertain only for one man or more than one man?

“A person who comes to the rescue of another person in difficulty is a good Samaritan.” — Does this include all those persons who help the one or more in difficulties or only one of them?

My feeling is that “a” is used as an article to precede a noun. The other two articles “an” or “the” could not be used for grammatical reasons; therefore “a” had to be used.

Adopting the literal meaning of the article “a” as “only one” goes against the very spirit, purpose and intent of the legislation which desires to give a boost to the housing sector. No wonder then that this ambiguity has given rise to conflicting case laws.

In the case of Fulwanti C Rathod vs ITO, ITAT Mumbai Bench ‘E’ (ITA 1092/Mum. /1995), dated May 3, 2002, the learned judge observed, “The word ‘a’ can be equivalent to the word ‘any’. Also as per the General Clauses Act, singular includes plural.” In this case, the judge was referring to the Wealth-Tax Act and the Estate Duty Act, where the words used were, ‘one house’ as against the words ‘a house’ used in the Income-Tax Act.

On the other hand, in the case of Gulshanbanoo R Mukhi vs Joint CIT Appeal #3369 (BOM) of 2000 [AY 96-97] dated January 16, 2002 ITD 649 (Mum) ITAT Mumbai Bench ‘C’, it was held that ‘a’ can be ‘any’ but ‘any’ cannot be ‘many’.

Then there is the Allahabad High Court case of Shiv Narain Chaudhari vs CWT (108ITR104) where it was held that if the two flats of the building are situated in same compound and within common boundaries and have unity of structure, then they could be regarded as constituting one house. Another judgment If the stand that ‘a’ is not two is accepted, then ‘a’ can also not mean half. The background is that one of the conditions of the exemption under the then existing Section 54F was that the investor should not be owning another house other than the new house. In other words, say the taxpayer had sold some commercial property. He could save the consequent capital gains tax by investing the net sale proceeds in a residential house (new house). However, this was allowed only upon the condition that he didn’t already own another residential house (old house).

In the case of ITO vs Rasiklal N Satra (280ITR243 dated September 19, 2005), the assessee sold shares (this was when long-term capital gains earned on shares were taxable) and claimed exemption under Section 54F by investing the same in purchase of residential flat at Vashi, Navi Mumbai. The assessing officer (AO) noticed that the assessee was co-owner of a flat in Sion (West), Mumbai.

Now since the assessee already owned an old house, the AO denied him the Section 54F exemption. To this, the assessee contended that since he co-owned the old house along with his wife (they were joint owners), he was not an independent owner of the house and exemption can be denied only where he was the absolute owner of the house.

It was held that since the legislature has used the word ‘a’ before the words ‘residential house’, it must mean a complete residential house and would not include a shared interest in the house. Where the property is owned by more than one person, it cannot be said that any one of them is the sole owner of the property. In such case, no individual person on his own can sell the entire property. Joint ownership is different from absolute ownership. Ownership of a residential house meant ownership to the exclusion of all others.

Since Satra did not have full ownership of the house, it was held that the he was not the owner of ‘a’ residential house on the date of sale of the shares. Consequently, the exemption under Section 54F could not be denied to him.

Finally In spite of such contradictory decisions arising out of ambiguity, CBDT has not issued any clarification in spite of requests from many quarters. We have been given to understand that some of the ITOs have been sticking to the literal meaning of ‘a’ as ‘one’, and others don’t. A clear cut clarification from CBDT would help a number of taxpayers as also reduce the number of litigations arising out of this issue. The writer is Director, Wonderland Consultants a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com