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Is It Fair to deny exemption u/s.54/54F merely because the new house is in joint names ?

Subject : Income Tax Law
Month-Year : Dec 2010
Author/s : C. N. Vaze
Chartered Accountant
Topic : Is It Fair to deny exemption u/s.54/54F merely because the new house is in joint names ?
Article Details :

Introduction :

It is an admitted fact that after the disintegration of joint families, we are becoming more and more individualistic. Nevertheless, even today, although in a nuclear form, the family system is still surviving.The social and legal systems still recognise the concepts of family members, close relatives and particularly, the sanctity of relationship between husband and wife.

Even today, the family and especially men feel a psychological comfort by having a residential house in their wife’s name or at least, add her as a joint holder. It is a different matter that such holding by the wife is often used for so-called tax-planning, in a crude manner.

Even the provisions of the Benami Transactions (Prohibition) Act, 1988, protect the holding of property in a spouse’s name [refer S. 3(2)]. The Incometax Act also expressly protects certain transactions from taxability (e.g., S. 56 — gift from relative) or indirectly recognises the importance of close relations (in a negative way) in terms of S. 64, S. 27, S. 40A(2), etc. Needless to state that in ‘jurisprudence’, ‘custom’ is regarded as a primary source of law.

Against this background, it is a matter of grave concern that the Income Tax Department is now denying exemption u/s.54/54F merely on grounds that the new house is purchased in joint name with the spouse !

The unfairness :

In a typical case, the asset sold is in the single name of the husband. He invests the sale proceeds in a residential house and in the agreement to purchase, he adds his wife’s name as a joint-purchaser.

The money flow of sale proceeds and purchase price can easily be traced and established. The husband shows the house in his balance sheet as his asset. He declares income from house property, in his return of income only. No part of the house or income is included in the return of wealth or income of the wife. Yet, the Income Tax Department raises an objection that since a joint interest is created, the condition that the ‘assessee should purchase a residential house’ is not satisfied!

Not only this, but the exemption is denied even for the purchase of a part of the house.

The relevant cases are discussed in the succeeding paragraphs.

Case Law :

Readers may be aware that in the past, the judiciary was very much favourable to assessees in this regard. There are decisions that not only the joint name, but even purchase in the exclusive name of the wife would also be eligible for exemption u/s.54 or u/s.54F.

At the same time, the extreme view that the purchase even in a stranger’s name would also be eligible is difficult to digest. It is too legalistic an interpretation that the Section merely says ‘purchases or constructs’; and is silent about the name in which it should be acquired.

The Mumbai Tribunal has held it against the assessee (case of ITO v. Shri Niranjan Singh Bajaj, ITA No. 2040/Mum./2006). The Members have placed reliance on a Bombay High Court decision in the case of Prakash s/o Timaji Dhanjode v. ITO, 312 ITR 40.

However, the facts in the Bombay High Court decisions were materially different. There, an 86-yearold man purchased the house in his major stepson’s name with an express intention of giving the house to the son. This cannot be equated with a purchase of a house in the joint name with wife. The reasons are obvious :

(i) In terms of S. 27(i), the assessee (husband) alone is deemed to be the owner of the house.

(ii) The Department’s objection that at the time of sale, wife’s signature will be required and she will be entitled to a half share is also taken care of by S. 64. The capital gains will be taxed in the hands of the husband only.

(iii) There are many other judicial decisions granting exemption and approbating purchase in joint names. And with respect, it can be seen that even the Bombay High Court decision (312 ITR 40) is also based on the particular facts of that case. It would be unjust and unfair to generalise the decision.

The Punjab & Haryana High Court in the case of CIT v. Gurnam Singh, 327 ITR 278 has also taken a favourable view recently.

In the following decisions also, exemption has been allowed to the assessee for investment in the sole/joint name with wife :

(1) CIT v. V. Natrajan, 287 ITR 271 (Mad.)

(2) ITO v. Smt. Saraswati Ramanathan, 116 ITD 234 (Del.)

(3) JCIT v. Smt. Armeda K. Bhaya, 95 ITD 313 (Mum.)

Suggestions :

In the context of S. 27, S. 64 and having regard to the social custom, and also considering the fact that the Bombay High Court gave the decision in a different context, the exemption u/s.54/54F should not be denied merely because the purchase is in joint name with spouse. Law should be clarified or the CBDT should issue a Circular to avoid unnecessary and avoidable litigation.

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