LTCG TAX EXEMPTION

The Mumbai Bench of the Income tax Appellate Tribunal (the tribunal) on 22nd May 2023 in Zainul Abedin Ghaswala vs CIT(A), NFAC gave a pragmatic judgement disregarding technicalities. This appellate has thus overruled the single residence rider in the long term capital gains (LTCG) tax exemption provision.

In the Zainul Abedin matter, the assessee claimed exemption from long term capital gains (LTCG) tax under section 54F which says if a person who has earned LTCG from a property other than a residential property rolls over the proceeds of such sale into a residential property within the prescribed time. This time period is defined as within one year before such sale or within two years after such sale in case of purchase of a residential property and within three years from sale in case of construction of a residential property. So the assessee is exempted from tax thereon.

This regime was put in place to encourage ploughing back of sale proceeds from say gold, shares etc. into what is perceived to be a more productive and useful residential property. But the exemption comes with a rider---on the date of sale of the capital asset, the assessee should not be owning more than one residential property.

In the above mentioned case, the assessee had a flat in a land inherited from his father along with other five siblings or other legal heirs. The six of them chose to build six separate flats and ever since they were treated as separate units for payment of electricity bills etc. Indeed, all of them gave affidavits that their interests were confined to their respective flats though technically the land belonged to all of them. The Tribunal rejected the contention of the department that since the assessee had joint ownership in the other five flats as well, he was not eligible for section 54F exemption. And it rightly held that his beneficial ownership was confined to only one flat.

The accent of income tax law is on beneficial ownership which is why a Power of Attorney (POA) holder of a property under section 53A of the Transfer of Property Act, is deemed to be the owner of the property despite not being registered in the jurisdictional sub-registrar’s records.

Currently, Tamil Nadu and Karnataka are the only states in India that have adopted the concept of Undivided share or UDS. Thus, if there are six flats of same size built by a builder on a ground of land, each one gets an UDS of 400 square feet. In other words, his beneficial ownership of the plot is restricted to his UDS. The Tribunal has recognized this reality even in the absence of UDS principle holding sway in Mumbai. The assessee after all, the Tribunal recognized, could not intrude into the ownership rights of the remaining five flats in the same land.

This verdict has equal relevance to another rollover scheme contained in section 54 catering to LTCG from residential properties ploughed back into a residential property within the same time span as spelt out in section 54F.

RENT AGREEMENT TERMINATION

Landlord refusing possession on termination of lease does so at his own peril

The landlord, through the expedient of not taking possession from the tenant on termination of the lease, cannot sue for recovery of rent for the period after vacation of the property by the tenant.

In Ameet Bhatia & Another vs Devyani International Ltd matter, the Delhi District Judge recently relied on the Delhi High Court's verdict in HS Bedi vs National Highway Authority of India to come to this sensible conclusion.

In this case, the reason for refusal to take back possession was the damage of property. The court made the observation that in the face of such refusal, the tenant would be deemed to have handed back possession to the owner. He had in a suit filed for the recovery of ₹1,52,77,020 along with interest against Devyani International Ltd, the tenant which ran food outlets such as Pizza Hut, KFC, etc., for not returning the property in the same condition in which it was handed over to the tenant at the beginning of the lease.

Rent is different from damages. If the property is damaged or otherwise defiled, the course open for the owner is to resort to the security deposit which invariably is taken and return the security deposit after deducting therefrom the cost of restoration.

If such deposit is inadequate to repair the property, then a suit can be filed for violating the rental agreement to keep the property in good condition. The remedy does not lie in extending the lease unilaterally and trying to squeeze rent for the period not occupied by the tenant.

— The author, S Murlidharan, is a CA by qualification, and writes on economic issues, fiscal and commercial laws. The views expressed are personal.

Read his previous articles here

(Edited by : C H Unnikrishnan)

First Published:Jun 20, 2023 9:48 AM IST