Joint Ownership Of The Property Is No Bar In Claiming Exemption Under Section 54F Of The Income Tax Act

Income Tax Appellate Tribunal (ITAT) of Mumbai Bench has allowed the deduction under Section 54F of the Income Tax Act on the grounds that the assessee is not the exclusive owner of multiple residential properties occupied by other family members & has observed that the joint ownership of the property would not stand in the way of claiming exemption under Section 54F of the Income Tax Act.

Fact of the case: 
The appellant/assessee is an individual who filed a return of income declaring total income. The return of income filed by the assessee was selected for scrutiny, and statutory notices under the Income Tax Act, 1961, were issued and complied with. In the assessment completed under Section 143(3), the Assessing Officer disallowed the claim of the assessee for deduction under Section 54F against the capital gain on the transfer of a long-term capital asset. The AO noted that the assessee owned an interest in more than one residential property, and therefore, he was not entitled to a deduction under Section 54F of the Income Tax Act. and therefore, he was not entitled to a deduction under Section 54F of the Income Tax Act.

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The issue raised was whether the co-ownership of the assessee in more than one residential property could make the assessee liable for non-eligibility of deduction under Section 54F. Under Section 54F of the Income Tax Act, 1961, a tax exemption is allowed on the long-term capital gains earned from selling any capital asset other than a house property. The assessee contended that his father, the late Iqbal Ghaswala, along with other five family members, had inherited land on which all six members constructed six flats. All the members occupy one flat each, for which they have been paying electricity bills. The assessee claimed to have filed those electricity bills before the Assessing officer coupled with confirmation letters from the owners of the other flats, to the effect that none of them had any right or interest of whatever nature in each other’s flats.

However, the Assessing Officer disregarded the submission of the assessee and held that since the assessee owned six residential house properties, though jointly, the conditions mentioned in Section 54F of the Act were not fulfilled. Hence, the assessee is not eligible for exemption under Section 54F.

Non-availability of exemption under section 54F – The exemption under section 54F is not available under the following circumstances –

1. The assessee already owns more than one residential house on the date of transfer of the long term capital assets. 

2. The assessee purchases additional residential house (other than the new residential house purchased/ constructed to claim an exemption under section 54F is claimed) within a period of one year from the date of transfer of the long term capital asset.

3. The assessee constructs additional residential house (other than the new residential house purchased/ constructed to claim an exemption under section 54F is claimed) within a period of three years from the date of transfer of the long term capital asset.
The assessee contended that even if the assessee co-owner owns more than one house, fractional ownership of a property does not amount to violating the conditions laid down under Section 54. The assessee is entitled to a deduction. The tribunal allowed the appeal of the assessee and held that unless and until there are materials to show that the assessee is the exclusive owner of the residential property, the harshness of the proviso cannot be applied to the facts.