16 December 2019

Perpetual lease is construed as purchase of property and eligible for

exemption under Section 54F of the Income-tax Act

Recently, the Chennai Bench of the Income-tax Taxpayer’s contentions

Appellate Tribunal (the Tribunal) in the case of Shri N.
The taxpayer contended that the lease it had entered
Ramaswamy, Kartha of N. Ramaswamy (HUF) 1 (the
into was for unlimited period. The taxpayer as a
taxpayer) held that when the taxpayer acquires the
perpetual lease holder had enduring right to possess
residential house by means of perpetual lease, it has
and enjoy the property as residential house for
to be construed as acquisition of property/purchase of
unlimited period. Further, the taxpayer also had the
property within the meaning of Section 54F of the
right to transfer the lease/possession to other person
Income-tax Act, 1961 (the Act) and eligible to claim
in the open market. Therefore, the taxpayer
exemption under the same.
contended that, by virtue of Section 2(47)(vi) read
The Tribunal observed that the taxpayer had every with Section 269UA(2)(iii)(f) of the Act, the same has
right to transfer the perpetual lease to third party in to be construed as acquisition of the property, hence,
the open market and also had every right to continue the taxpayer was eligible for exemption under Section
in possession of residential house. Further, the 54F of the Act.
Tribunal observed that as per Section 269UA(2)(iii)(f)
of the Act any lease for a term of not less than twelve Tax department’s contentions
years which includes holding possession of such The tax department contended that the taxpayer had
property thereby taken, has to be construed as merely entered into an agreement for perpetual lease
transfer. Hence, for all practical purposes, the for unlimited period and it was not a purchase made
acquisition of property by perpetual lease exceeding by the taxpayer. The tax department contended that
the period of twelve years, has to be construed as Section 54F, being a beneficial provision, the
purchase within the meaning of Section 54F of the exemption therein can be claimed only for purchase
Act. of property by means of outright sale. Therefore, the
Fact of the case Pr. Comm had rightly found that there was an error in
the order of assessment.
To take the benefit of Section 54F of the Act, the
taxpayer had entered into an agreement for perpetual Tribunal’s decision
lease for unlimited period with Mahindra Residential The Tribunal observed that there was no dispute that
Developers Limited. The Assessing Officer (AO) had the taxpayer entered into an agreement for perpetual
allowed the claim of exemption under Section 54F of lease for an unlimited period with Mahindra
the Act on the same. However, the Principal Residential Developers Limited. The language
Commissioner of Income-tax found that the taxpayer employed by the Parliament in Section 54F is very
had acquired the property from Mahindra Residential clear that the taxpayer has to purchase within a
Developers Limited by way of perpetual lease deed period of one year before or after the date on which
agreement. Therefore, it cannot be construed as the transfer took place or construct a residential
outright/absolute purchase of the property by claiming house within a period of three years after the sale of
exemption under Section 54F of the Act. the property, capital asset. In the instant case, after
the sale of the property, the taxpayer had entered into
_________________ a perpetual lease for an unlimited period. The
1
taxpayer had every right to transfer the perpetual
Shri N. Ramaswamy, Kartha of N. Ramaswamy (HUF) v. ITO (ITA no.
925/Chny/2019) lease to third party in the open market and also had
every right to continue in possession of residential
house.
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Swiss entity. All rights reserved.
 A bare reading of Section 2(47)(vi) of the Act shows The Chennai Tribunal in the instant case has held that
that the agreement or arrangement which has the the taxpayer had entered into perpetual lease
effect of transferring or enabling the enjoyment of exceeding twelve years and therefore the same has
immovable property, has to be considered as transfer to be construed as acquisition of property/purchase of
in relation to capital asset. The Tribunal observed that property within the meaning of Section 54F of the Act.
there was a perpetual lease agreement for unlimited Accordingly, the taxpayer was eligible to claim
period. The taxpayer was in possession of residential exemption under Section 54 of the Act.
house. Therefore, in view of Section 2(47)(vi) of the
Act, the transaction of perpetual lease agreement by
which the taxpayer took possession of property for
unlimited period, has to be construed as purchase of
property within the meaning of Section 54F of the Act.
Furthermore, as per Section 269UA(2)(iii)(f) of the Act
any lease for a term of not less than twelve years
which includes holding possession of such property
thereby taken, has to be construed as transfer. In
other words, Section 269UA(2)(iii)(f) defines transfer
which includes lease for a term not less than twelve
years. In the taxpayer’s case, the lease was not for
less than twelve years. Hence, for all practical
purposes, the acquisition of property by perpetual
lease exceeding the period of twelve years, has to be
construed as purchase within the meaning of Section
54F of the Act.
Thus, the Tribunal held that when the taxpayer
acquires the residential house by means of perpetual
lease exceeding twelve years, it has to be construed
as acquisition of property/purchase of property within
the meaning of Section 54F of the Act. Therefore, the
taxpayer is entitled for exemption under Section 54F
of the Act.
Our comments
The issue with respect to availability of benefit of
Section 54 exemption on leased properties has been
a matter of debate before Courts/Tribunal.
The Mumbai Tribunal in the case of Prema P Shah2
held that where the taxpayer had taken property on
lease of 150 years which was in perpetuity, she would
be treated as absolute owner of property for purpose
of Section 54. Relying on the above decision, the
Tribunal in the case of Asha Ashok Boob3 held that
where the taxpayer had purchased a flat on leasehold
basis for a period of 999 years, she was to be
regarded as absolute owner of said property and,
thus, her claim for deduction under Section 54F was
to be allowed.
However, the Mumbai Tribunal in the case of Yogesh
Sunderlal Shah4 held that since the taxpayer had
purchased only tenancy rights, he was not entitled to
exemption under Section 54 in respect of capital gain
earned from sale of house property. The taxpayer had
argued that under the tenancy agreement, he had
right to bequeath the flats, sub-let/lease them and
was also entitled to raise loan against the flats. He
had also right to make alteration in the flats.
________________
2
Prema P. Shah v. ITO [2006] 100 ITD 60 (Mum)
3
ACIT v. Asha Ashok Boob [2015] 69 SOT 321 (Pune)
4
Yogesh Sunderlal Shah v. ACIT [2013] 21 ITR(T) 97 (Mum)
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Swiss entity. All rights reserved.
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