Meaning of Residential House for Capital gains Tax ?

Meaning of Residential House for the purpose of section 54 and section 54F of Capital gains tax  is explained as under.

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. If there is nothing in the section which requires that the residential house should be built in a particular manner, the income-tax authorities cannot insist upon that requirement. A person may construct a house according to his plans and requirements. Most of the houses are constructed according to the needs and requirements and even compulsions.

For instance, a person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post retirement. 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 even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. 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. There may be several such considerations for a person while constructing a residential house.

The Delhi High Court in the case of CIT v. Gita Duggal (2013) 357 ITR 153 held that the provision of Income-tax Law as provided in section 54 and 54F of the Income-tax Act provides for investment of consideration received on transfer of Long-term Capital Assets in residential house property. The Hon’ble Judges opined that they were unable to see how or why the physical structuring of the new residential house, whether it is lateral or vertical, should come in the way of considering the building as a residential house. Finally it was held that the assessee would be entitled to deduction under section 54 or 54F of the IT Act in respect of first and second floors of the building holding that they were separate and independent residential units having separate entrances and could not be as one unit to enable the assessee to claim the deduction. On the above mentioned reasoning the High Court held that the assessee will be entitled to deduction under section 54 and 54F of the IT Act.

It may also be noted here that as per the Finance No. 2 Act, 2014 it is mentioned that under the provisions of the Income-tax Law the construction of one residential house would be permitted and that such house should be in India only.


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