Where land being long term capital asset and building being short term capital are sold then, assessee was entitled to claim benefit of section 54 deduction in respect of both assets, i.e., land as well as building.   

Case: C.N. Anantharam vs. Assistant Commissioner of Income Tax

Facts:

The assessee obtained a site on settlement and constructed a three-storied building. The land on which building was constructed was a long-term capital asset and the assessee held the building for a period of less than 36 months prior to the date of transfer.

The assessee, while filing the return claimed deduction under section 54 against the sale of said land and building. Regarding this, the AO, during the assessment proceedings noticed that capital gains as was attributable to long-term capital asset viz land would not qualify for relief under section 54. Though, land was a long-term capital asset but the building which stood on the same was short-term capital asset and thus, Sec. 54 shall not be applicable in this case.

On appeal, the Tribunal held that section 54 did not provide bifurcation of capital gain arising from the sale of land and building separately and to allow deduction in case any one of them as long-term capital asset. Accordingly, the Tribunal upheld the order passed by the AssessingOfficer.

Aggrieved y the order, the assessee appealed to the High Court.

The Court highlighted that if the land on which the building is constructed is a long term capital asset and the amount received towards the sale of such land when it is assessed as a long term capital gain and taxed. In view of Section 54(1) if that consideration from the sale of the land is utilized in acquiring a residential house, the benefit from exemption is to be extended. Otherwise, the section looks absurd. The land that is adjoining the residential house is entitled to benefit under Section 54(1) of the Act but the land on which the residential house would not be entitled to such benefit, we cannot impute any such intention to the legislature.

When the legislature has used the word ‘or’ which means the word buildings or lands appurtenant thereto, it should be understood disjunctively having regard to the context in which it is used. It cannot be read as ‘and’.

Held:

Thus, in view of above, the Court held that the assessee is entitled to the benefit of section 54(1) in respect of land and building.That land may be the land on which the residential house is constructed or the land appurtenant to the residential house.

Thus, claim Sec. 54 on sale of short-term asset being building if developed on land, which is long-term asset.

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