Exemption u/s. 54F is available even when the assessee purchases residential property exclusively in the name of the spouse and not under joint-ownership

From time to time i get mails from the readers of my blog querying of various types of legal clarifications on the issues pertaining to Income Tax law. This morning i received a mail from one of such readers. His query was that:

When an individual assessee sells a residential house property and within the prescribed time frame invests the proceeds in a new residential house property, but exclusively in the name of his/ her spouse (not in joint name), whether in such case he/ she would still get the deduction u/s. 54F of the Income Tax Act, 1961?

I was glad to share the latest legal scenario of the provision with the reader. I found that, a similar legal issue has been decided recently by Delhi High Court in the case Commissioner of Income Tax vs. Kamal Wahal, reported in the Taxmann [2013] 30 taxmann.com 34 (Delhi).

Hon'ble Delhi High court has decided the following issues:

1. Whether for claiming deduction of capital gains under section 54F, new residential house needs to be purchased by assessee exclusively in his own name?

2. Whether, an exemption could be denied where the assessee has purchased a new house in the name of his wife and not in name of any stranger who was unconnected with him, if the entire investment had come out of proceeds of old property?

While deciding the matter Hon'ble High court has considered the "Rule of purposive construction". 

Briefly the facts of the case is as under:

The assessee is an individual. He retired from IOCL. His income consists of income by way of salary, from house property and other sources. He inherited 50% share in a residential house from his father. This was in July 1968. The other half share was inherited by his brother. In the year which ended on 31.03.2008, both the brothers jointly sold the property which gave rise to proportionate capital gains in the assessee's hands. In computing the capital gains, the assessee claimed deduction under Section 54F on the ground that the sale proceeds were invested in the acquisition of a vacant plot for Rs. 31,25,100/­ and the purchase of a residential house for Rs. 34,35,700/­ in the name of his wife.

The assessing officer while completing the assessment, took the view that under Section 54F, the investment in the residential house should be made in the assessee's name and in as much as the residential house was purchased by the assessee in the name of his wife, the deduction was not allowable. He reduced the deduction and computed the capital gains accordingly.

The assessee went in appeal before the commissioner of income tax (Appeals) and successfully got relief on the basis of judicial precedents (Madras High Court in CIT v. V. Natarajan [2006] 287 ITR 271/154 Taxman 399 and that of the Andhra Pradesh High Court in Mir Gulam Ali Khan v. CIT [1987] 165 ITR 228/[1986] 28 Taxman 572). 

The revenue preferred an appeal before the Tribunal questioning the decision of the CIT(Appeals). The Tribunal, however, by the impugned order, agreed with the decision of the CIT (Appeals) and in doing so followed the judgment of the Madras and Andhra Pradesh High Courts cited supra and also another judgment of the Karnataka High Court in DIT, International Taxation v. Mrs. Jennifer Bhide [2011] 203 Taxman 208/15 taxmann.com 82. It also noted the judgment of the Bombay High Court in Prakash v. ITO [2008] 173 Taxman 311 in which a contrary view was taken but preferred the view taken by the Madras and Karnataka High Courts adopting the rule laid down by the Supreme Court in CIT v. Vegetable Products Ltd [1973] 88 ITR 192 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. The Tribunal also observed that, Section 54F being a beneficial provision enacted for encouraging investment in residential houses should be liberally interpreted. 

Hon'ble Delhi High court arrived at a conclusion after considering the following legal points:

1. Purposive construction was preferred against a literal construction, more so when even applying the literal construction, there is nothing in the section to show that the house should be purchased in the name of the assessee only. As a matter of fact, High court observed that, Section 54F in terms does not require that, the new residential property shall be purchased in the name of the assessee. It merely states that, the assessee should purchase/ construct "a residential house".

2. The assessee in the present case has 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. Further, it also observed that the entire investment has come out of the sale proceeds and that there was no contribution from the assessee's wife.

Based on the above findings of the High court, the matter was decided in favor of the assessee after taking into consideration the objective of the provision of sec-54F of the Income Tax Act, 1961 read with the Rule of Purposive Construction.