The Bombay High Court, on 2 November, held that the Income Tax Department cannot add the entire purchase cost of a second flat to a taxpayer's income while computing capital gains under Section 54F of the Income Tax Act, 1961, merely because the exemption claimed for that flat is denied.
A Division Bench comprising Justices B.P. Colabawalla and Farhan P. Dubash found that the Department had incorrectly computed the taxpayer's capital gains by adding Rs. 4.78 crore, representing the purchase cost of the second flat, to his income. The judges observed:
“In Exhibit “A” to the affidavit-in-rejoinder the Petitioner has determined that if effect is given to the provisions of Section 54F(1)(b), the correct amount of capital gains would be Rs.2,93,47,526/- which computation is not disputed by the learned counsel appearing for the Revenue. This is also apparent from the plain language of the section and, therefore, the addition of Rs.4,78,45,668/- being the amount invested in purchase of Flat No.4107 is manifestly incorrect.”
The case concerned a taxpayer who sold tenancy rights and shares and invested the proceeds in two adjoining flats in Mumbai. He claimed exemption under Section 54F for both flats, contending that he had purchased them with the intention of using them as a single residential house.
However, the Income Tax Department treated the flats as two separate residential units and allowed the exemption for only one flat. It also added the entire purchase cost of the second flat to his income.
The taxpayer argued that even if the Department denied the exemption for the second flat, it could not add the entire purchase price to his taxable income. He also pointed out that the Department had computed capital gains of Rs. 13.24 crore, exceeding the total consideration he had received from selling his assets.
The Department rejected his request to rectify the computation and directed him to deposit Rs. 38.75 lakh as a condition for staying recovery of the remaining tax demand.
The Court found that the Department had failed to justify the computation of capital gains at Rs. 13.24 crore, particularly when the assessment order itself did not mention this figure. It also noted that the Revenue did not dispute the taxpayer's revised computation of Rs. 2.93 crore.
However, the Bench clarified that it was not deciding whether two adjoining flats intended to be used as a single residential house would qualify for exemption under Section 54F. It left this question open for the appellate authority to consider.
Accordingly, the High Court reduced the pre-deposit required for staying recovery from Rs. 38.75 lakh to Rs. 6.50 lakh and stayed recovery of the remaining Rs. 32.24 lakh pending disposal of the taxpayer's appeal and for four weeks thereafter. It also requested the Commissioner of Income Tax (Appeals) to decide the appeal expeditiously.
For the Petitioner: Senior Advocate Percy Pardiwala, along with Advocates Nitesh Joshi and B.N. Jadhav.
For the Income Tax Department: Advocate P.A. Narayanan.