Naveen Jolly vs. ITO in I.T.A. NO.320 OF 2011, Karnataka High Court

Issue: The subject matter before the bench in the present appeal is to determine whether the
appellate authority was justified in law in confirming the denial of exemption claimed by
appellant u/s 54F of the Income Tax Act, 1961 and also to interpret liberally the proviso (a)(i)
of section 54F(1).

Factual Background:
The individual assessee derived long term capital gain of Rs. 1,55,47,315/- and constructed a
residential property and claimed exemption u/s 54F of the Act. The assessee at the time of
transfer of shares was the owner of 9 other properties and the same were let out for
commercial purposes, the rental receipts therein were taxed under house property. The
assessing officer recorded a finding that properties owned by the appellant are residential
apartments and exemption under Section 54F was denied.

Ld. CIT (A) dismissed the appeal on the ground that out of nine properties, seven flats have
been granted with the sanction to let out for commercial purposes whereas the other two
properties has got plan sanction of residential in nature but were actually been used for
commercial purposes as service apartments. The claim of the assessee that the properties be
not treated as residential houses on the basis of usage was not accepted. Hon’ble ITAT
upheld the order of CIT (A) interalia on the ground that it is of no importance as to how the
assessee utilise the units i.e. whether these residential units are used for commercial purposes
or residential purposes, so long as these units were recognized as residential units.

Case of Assessee:
The assessee submitted that at the time of determining whether the building is a residential or
commercial unit, the “usage” of the property is to be considered. the assessee submitted that
in a building where 2 units were situated and have been granted sanction to be used as
residential unit but on the contrary are offered as service apartments and being used for
commercial purposes as service apartments. Therefore, the service apartments could not have
been treated as residential units

Alternatively, it is submitted that even if two apartments are treated to be residential, then
also since, they are situated in the same building, therefore, the apartments have to be treated
as one residential only. Reliance was placed on the following:

  • CIT vs. Iifthiqar ashiq, (2016) 239 taxman 443 (Madras),
  • Firm Ganga Ram Kishore Chand vs. Firm Jai Ram Bhagat Ram, AIR 1957 Punjab
  • Globe Theatres Ltd. vs. Khan Saheb Abdul Gani and another, 1956 Mysore 57 ((S) AIR
    V 43 c 25 Dec.),
  • C.H.Kesava Rao vs. CIT, (1985) 156 ITR 369 (Madras),
  • CIT vs. Ouseph Chacko, 271 itr 29 (kerala),
  • Sanjeev Puri vs. DCIT, (2016) 180 TTJ 649 (Delhi-Trib),
  • P.N.Shukla vs. CIT, (2005) 276 ITR 642 (Allahabad)
  • CIT vs. Smt.Shyama Devi Dalmia, (1992) 194 ITR 114 (Calcutta),
  • ITO vs. Smt.Rohini Reddy, (2010) 122 ITD 1 (Hyderabad),
  • Bajaj Tempo Ltd. vs. CIT, (1992) 196 ITR 188 (SC),
  • CIT vs. Srisambandam Udaykumar, (2012) 345 ITR 389 (Karnataka)
  • Gita Duggal (2013) 357 ITR 153 (Delhi) and Gita Duggal (2015) 228 taxman 62 (SC).

Revenue’s case: The department on the other hand submitted that clause (a) did not apply
but clause (b) to proviso to Section 54F (1) apply to the facts of the case. Further, w.r.t the
question of determination, whether the property is a residential or a commercial unit, the
sanction granted in respect of the property is to be considered and not the usage.

Further, in order to support its contention, the counsel for the department submitted that the
legislature had used both the expressions “owned” and “used” in section 32(1) of the Act the
same had not been used in proviso to Section 54F (1) of the Act, reference was made to
section 32(1) wherein the expressions ‘owned’ and ‘used’ are contained simultaneously,
while in section 54F(1) only the term “owned” is referred to. Further, the requirement u/s
54F(1) is that the assessee ought to be the owner of the “residential house” and he may or
may not be the user. The department has placed its reliance on the decision of the supreme
court in the case of Commissioner of Income Tax vs. Calcutta Knitwears (2014) 43 446 (SC).


  • The bench came to a conclusion that the expression ‘residence’ implies some sought of
    permanency and cannot be equated to the expression ‘temporary stay’ as a lodger.
    Reliance was placed on decision of Hon’ble Madras High Court in the case of C.H.
    Keshavrao wherein it was held that expression ‘residence’ implies some sought of
    permanency and cannot be equated to the expression ‘temporary stay’ as a lodger.
  • The usage of the property has to be considered for determining whether the property in
    question is a residential property or a commercial property. Accordingly, the view of
    Kerala, Delhi, Allahabad, Calcutta and Hyderabad High Courts was concurred with. Even
    if the property in question is residential, if it is used for commercial purposes, it cannot be
    treated as a residential unit for the purposes of section 54F.
  • With regard to the alternative submission, their lordships went on to hold that the assessee
    owns two apartments in same building which has to be treated as one residential unit and
    the bench relied on the case of Gita Duggal (2013) 357 ITR 153 (Delhi) and Gita
    Duggal (2015) 228 taxman 62 (SC).