Issues In Allowing Exemption U/S 54 & 54F- Long Term Capital Gain

A question that arises, is whether the assessee can invest in more than one residential house and claim capital gains exemption under Section 54 or 54F.  In Gita Duggal case (in 257 CTR 208), the Delhi High Court held that the expression ‘a residential house’ should be understood in a sense that building should be a residential one and that the word ‘a’ should not be understood to indicate a singular number. The court interpreted the word ‘a residential house’ to mean any residential house, in contradistinction to any ‘commercial house property’. Consequently, tax payers were able to claim long-term capital gains tax exemption by investing in more than one house property. However, an amendment was made to the income tax laws, which replaced ‘a residential house’ with ‘one residential house’, with effect from April 1, 2015.

However, even after the amendment, a question arises – is it possible for one to claim long-term capital gains tax exemption, if more than one residential units are purchased, which are used as a single residential unit by the family? The answer is provided by two decisions.

The first one is that of CIT vs D Ananda  Basappa 309 ITR 329 (Kar.), where multiple flats were purchased in the same complex and were used as one unit. In this case, the tax exemption was allowed. A special leave petition filed by the income tax department against this decision was also rejected by the Supreme Court.

Hence, it can be reasonably inferred that even after the amendment of Section 54 and 54F, providing for exemption from long-term capital gains tax, only if the investment is made in one residential house property, one can still invest in more than one house and claim the tax exemption, provided the taxpayer can prove that all such flats are used as a single residential unit by the family. In the abovementioned case, two residential units were purchased, which were separated by a strong wall and were purchased from two different vendors under two separate sale deeds. The exemption was still granted to the tax payer, because both the flats were capable of being used as a single residential unit.

The second decision, which was delivered after the amendments were made, was announced by a Special Bench of the Mumbai Tribunal, in the case of ITO vs Suseela M Jhaveri 26 (ITAT Bom). It was held that if the assessee has purchased more than one residential house and the houses are in different locations, then, the assessee could claim exemption only in respect of one house. However, the taxpayer would be entitled to exemption in more than one unit, if the two adjacent or continuous units are converted into one residential house, and the two units are intended to be used as a single house for the family’s residence.

ACIT, CIRCLE – 21 (2) , MUMBAI VERSUS SHRI MICHELLE N. SANGHVI

Treatment to Capital gain on sale of flat – STCG v/s LTCG – Period of Holding

possession held for more than 36 months – CIT-A treated as LTCG – Held that:- Interest in the property is created the moment the agreement to purchase is entered into in favour of the assessee accompanying with part payment. The date of possession is not material for deciding the period of holding by the assessee for the purpose whether the gain is long term or short term.

CIT(A) has passed a reasoned and elaborate order for coming to the conclusion that the assets held by the assessee was long term asset and directed the AO to recompute the long term capital gain by allowing indexation on the cost of acquisition taking the date of purchase as 18.12.2006. The case of the assessee is also covered by a plethora of decisions of various High Courts and decisions of Coordinate Benches which has been referred to by the first appellate authority. – Decided against revenue

INCOME TAX OFFICER, WARD-23(3)(3), MUMBAI VERSUS SHRI SUSHIL KUMAR AGGARWAL

Holding period of property – LTCG / STCG – While calculating period of holding of property which date is to be consider as date of acquisition – Date of purchase agreement or date of final payment/date of registration or from date of possession

Held that:- As the year of acquisition of the flat has to be considered as the year in which assessee had taken possession of the flat after making part payments by instalments as the assessee became owner of the flat u/s 53A of the transfer of property right Act. The assessee got ownership rights from the date the assessee got possession of the flat which was 20th Dec. 2000. Following the decision in case of Madathil Brothers (2007 (10) TMI 234 – MADRAS HIGH COURT) that holding period has to be reckoned from the date of possession of the property. Therefore, AO has to take the holding period from the date of possession after necessary verification of possession date. Appeal decides in favour of revenue & remand back to AO.

MRS. MADHU KAUL VERSUS COMMISSIONER OF INCOME TAX AND ANOTHER

Nature of Capital gain – LTCG or STCG – Sale of residential property –

The allottee gets title to the property on the issuance of an allotment letter and the payment of instalments is only a consequential action upon which the delivery of possession flows – the provisions of Sections 2(14), 2(29A) and 2(42A) encompasses within its ambit those cases of capital asset which are held by an assessee.

Held that:- The decision in Vinod Kumar Jain v. Commissioner of Income Tax, Ludhiana and others [2010 (9) TMI 850 – Punjab and Haryana High Court] and Circular No.471, dated 15.10.1986 followed –

The flat was allotted to the appellant on 07.06.1986, vide letter conveyed to the assessee on 30.06.1986 – The assessee paid the first installment on 04.07.1986, thereby conferring a right upon the appellant to hold a flat, which was later identified and possession delivered on a later date – The mere fact that possession was delivered later, does not detract from the fact that the allottee was conferred a right to hold property on issuance of an allotment letter – The payment of balance installments, identification of a particular flat and delivery of possession are consequential acts, that relate back to and arise from the rights conferred by the allotment letter – thus, the ITAT has erred in holding that the transaction does not envisage a long term capital gain – Decided in favour of Assessee.

VINOD KUMAR JAIN VERSUS COMMISSIONER OF INCOME TAX

Capital gains on account of sale of residential flat – whether the capital gain arising on allotment of flat under the scheme of the DDA on 27.2.1982 of which actual flat number and delivery of possession took place on 15.5.1986 and the flat having been sold on 6.1.1989, was a long term capital gain; and consequently, whether the assessee was entitled to set off the same under Section 54 of the Act – Held that:- It is concluded that the provisions of Sections 2(14), 2(29A) and 2(42A) encompasses within its ambit those cases of capital asset which are held by an assessee. Once that is so, adverting to the facts of the present case, the assessee was allotted flat on 27.2.1982 on payment of instalments by issuance of an allotment letter and he had been making payment in terms thereof but the specific number of the flat was allocated to the assessee and possession delivered on 15.5.1986. The right of the assessee prior to 15.5.1986 was a right in the property. In such a situation, it cannot be held that prior to the said date, the assessee was not holding the flat. In favour of assessee.

ACIT, 2 (1) , INDORE VERSUS SHRI SANJAY KUMATH AND VICE-VERSA

Claim for deduction u/s 54F – Letter of Allotment:

Held that:- Board vide Circular No. 672 after referring Circular No. 471 extended the facility of exemption u/s 54 & 54F in respect of allotment of flat/house. Thus, as per the CBDT Circular also, the assessee acquired the rights/title in the flat by way of allotment letter on 22.1.2005. This allotment letter was duly confirmed by the assessee by making various payment as narrated above. Out of total payment of ₹ 33.15 lakhs, the assessee made payment of Rs.6.23 lakhs in the month of allotment itself i.e. January, 2005. Subsequent payment was also made as per the terms agreed with the builder. Only after receipt of entire amount, the builder has executed agreement with the assessee on 27.2.2009. The assessee has sold the said flat on 05.03.2009. Since the assessee has acquired all the rights in the flat on 22.01.2005, the period of holding is to be computed with respect to the date of allotment i.e. 22.01.2005. Taking the date of sale as 05.03.2009, the holding period of flat with the assessee was more than 36 months, therefore, there is no infirmity in the order of CIT(A) for allowing assessee’s claim for exemption u/s 54/54F, by treating the capital assets so sold as long term capital assets.

COMMISSIONER OF INCOME-TAX VERSUS ANILABEN UPENDRA SHAH.

Exemption on LTCG on transfer of share in a cooperative housing society

“Whether in law and on facts when the assessee received possession of the flat in October, 1981, and sold the same on December 4, 1982, the assessee is entitled to benefit of section 54/54F  of the Income-tax Act, 1961?” – In the facts of the instance case, it is clear that the assessee acquired shares in the co-operative housing society and was allotted the flat on November 15, 1979, and she transferred those shares on December 4, 1982. Thus, the assessee had held the shares and allotment of the flat in the said co-operative housing society for a period of more than 36 months. Accordingly, the capital gain in question was rightly held by the Tribunal to be a long-term capital gain entitled to the benefit of section 54/54F of the Income-tax Act, 1961.

” By entering into an agreement to allot a flat, the assessee has identified a particular property which he intended to buy from the builder and the builder is also bound to provide the applicant with that property by accepting certain advance amount and making agreement for balance payment as scheduled in the agreement. (Praveen Gupta, assistant commissioner of income-tax [2012] 20 taxmann.com 308 (Delhi).

Thus, going into the provisions, it is not necessary that to constitute a capital asset the assessee must be the owner by way of a conveyance deed in respect of that asset for the purpose of computing capital gain. The assessee had acquired a right to get a particular flat from the builder and that right of the assessee itself is a capital asset. The word ‘held’ used in section 2 (14) as well as explanation to section 48 clearly depicts that assessee must have some right in the capital asset which is subject to transfer. By making the payment to the builder and having received allotment letter in lieu thereof, the assessee will be holding capital asset and, therefore, the benefit of indexation has to be granted to the assessee on the basis of payments made by him for acquiring the said asset and the assessee has rightly claimed the indexation benefit from the dates when he has made the payments to the builder”. Thus, the assessing officer was  directed  to  allow  indexation  from  the date of the allotment rather than the date of possession.

YATIN PRAKASH TELANG VERSUS INCOME TAX OFFICER, WARD NO. 21 (3) (5) , MUMBAI

Deduction u/s 54 – New residential house purchased out of own sources i.e. savings from saving bank account and bank loans.

purchase of new residential house – AO disallowed the claim by observing that the assessee has not utilized capital gains for purchase of new residential house contending that the new residential house has been purchased out of own sources i.e. savings from saving bank account and bank loans. – Held that:- the assessee is entitled to exemption under section 54 even though for the construction of the new house, the amount that was received by way of sale of his old property as such was not utilized. It was held by the Kerala High Court [1999 (9) TMI 955 – KERALA HIGH COURT] that no provision is made by the statue that the assessee should utilize the amount which he obtained by way of sale consideration for the purpose of meeting the cost of the new asset.

Entitlement of exemption under section 54 relates to the cost of acquisition of a new estate in the nature of house property for the purpose of his own residence within the specified period. – assessee has met with all the conditions stipulated under section 54(1) – Deduction allowed – Decided in favor of assessee.

AMIT PAREKH VERSUS I.T.O., WARD 30 (2) , KOLKATA

Exemption u/s. 54 – LTCG – New residential house purchased out of bank borrowing

Assessee had availed house building loan from bank for purchasing a new residential unit – Held that:- Section 54 of the Act provides that the assessee has to purchase a house property for the purpose of his own residence within the period of one year on or after the date on which the transfer of property took place or assessee should have constructed a house property within a period of 2 years after the date of transfer. – It is clear from the AO’s order that the assessee sold his residential units during the financial year 2009-10 and purchased a new residential flat, got its possession on 17-06-2010 and it is well within time prescribed in the Act involving section 54 and thereby the assessee is entitled to claim exemption u/s. 54 – Merely because assessee had availed house building loan of ₹ 82.50 lacs from bank for purchasing a new residential unit, that cannot act as a disqualification for claim of exemption u/s 54 when the primary conditions imposed in Sec. 54 of the Act were satisfied. – Decided in favour of assessee

SANJAY KHANNA, C/O. JEETAN NAGPAL VERSUS DDIT CIRCLE-3 (1) INTERNATIONAL TAXATION, NEW DELHI

Exemption u/s 54 denied – purchase of property in apartment –

To be treated as purchase or construction of residential property – eligibility period of 2 years or 3 years – possession was not taken till filing of return – Held that:- As per CBDT Circular No. 471 dated 15/10/1986 read with Circular No. 672 dated 16/12/2993 the terms of scheme of allotment and construction of new apartment as provided in apartment buyers agreement are similar to those as mentioned in para 2 of CBDT Circular No. 471 dated 15/10/1986. The reliance of the assessee on various case laws supports the case of the assessee. The assessee has complied with all the conditions for making investment of capital gains in asset which cannot be termed as new asset as the old asset was sold on 11/4/2008 and time limit for investing capital gains in construction of new asset would have expired on 10/4/2011 but the assessee prior to that had entered into an apartment buyers agreement on 3/1/2007. Thus, the assessee has proved its stand along with the documentary evidence which was totally ignored by the Assessing Officer as well as by the CIT(A).

Treating the interest expense on borrowed funds towards cost of acquisition of residential house as transferred the assessee had not claimed such interest expense as a deduction on such self occupied property under any Section like that of Section 24(B) or Section 57 of the Act. Therefore, the assessee is entitled to claim it as part of cost of acquisition of such house. The same is supported by the Karnataka High Court judgment in case of CIT Vs. Maithrevi Pai [1983 (11) TMI 43 – KARNATAKA High Court] wherein it is held that interest paid on borrowings for acquisition of a capital asset must fall for deduction u/s 48 of the Act provided the same has not been claimed as a deduction under other heads like those u/s 57 of the Act. Thus, the order of CIT(A) is set aside. – Appeal of assessee allowed.

JOSEPH DEVADASS VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 5 (3) (1) , BANGALORE,

Provisions of Section 54 permits the investment prior to the date of sale of the existing house

Disallowance of deduction u/s 54 – AO was of the view that Section 54 does not mention that the exemption should be given on loan for the purchase of new property  Held that:- Provisions of Section 54 permits the investment prior to the date of sale of the existing house and thereby the condition of the investment of the sale proceeds cannot be understood in the manner that the investment has to be made only from the proceeds of the sale but it is only the amount of investment which is relevant.

If the view taken by the authorities below is accepted then the purchase of the house one year prior to the sale of existing asset cannot be allowed under Section 54(1) – the authorities below have committed a serious error in not allowing the deduction u/s 54 on the ground that the assessee has availed the loan for purchase of new house. Even otherwise when the total investment is much more than the loan as well as the capital gain then the capital gain is treated to be invested in purchase of new house. Hence the claim of the assessee under Section 54 is allowed. – Decided in favour of assessee.

SHRI VISHWANATH ACHARYA VERSUS ACIT–11 (1) , MUMBAI AND VICE-VERSA

Property sold was in the sole name of the assessee and the property purchased was in the joint names of the assessee and his wife

Allowance of deduction u/s. 54 – property sold was in the sole name of the assessee and the property purchased was in the joint names of the assessee and his wife – Held that:- In respect of the issue of purchase of the new asset (flat No. 3205 & 3206 at Oberoi Springs) in the joint names of the assessee and his wife, we find that the provisions of section 54 of the Act do not prohibit the same or mandate that the purchase of the property should be shown entirely in the assessee’s name. In the case on hand even though the wife is shown as joint owner in the sale deed, the AO has not doubted that the consideration for acquisition of the new asset has flown from the assessee; including the loan taken from Kotak Mahindra Bank. In fact, the property is admittedly reflected in the assessee’s Balance Sheet. In this factual matrix of the case, in our considered view, the assessee cannot be denied exemption under section 54 of the Act. See DIT (IT) vs. Mrs Jennifer Bhide – KARNATAKA HIGH COURT  – Decided in favour of assessee.

DCIT, CIRCLE-3 (1) , MUMBAI VERSUS SHRI VEMBU VAIDYANATHAN

Whether date of acquisition of capital asset is date of registration or the date of allotment of letter?

Gain arising from sale of capital asset – LTCG or STCG – CIT(A) treating the gain arising from sale of capital asset as long term capital gain – whether date of acquisition of capital asset is date of registration under Maharashtra ownership of flats (regulation of promotion of construction, sale, management and Transfer Act 1963) and not the date of allotment of letter? – Held that:- the interest of the assessee accrued right from the date of allotment itself. The claim of the assessee is further supported by CBDT Circular No.672 and 471 dated 16/12/1993 and 15/10/1986 respectively clarifying that “the allotee gets title to the property on the issuance of allotment letter and the payment of installments is only a follow of action and taking the delivery of possession is only a formality.” The case of the assessee is further fortified by the ratio laid down in ACIT vs Smt. Sundar Kaur Sujan Singh Gad (2005 (4) TMI 518 – ITAT MUMBAI ) holding date of allotment is the relevant date for computing capital gains. Thus, we find no infirmity in the conclusion of the ld. Commissioner of Income Tax (Appeals) on the issue in hand – Decided against revenue.

Deduction in respect of interest paid on borrowed capital to acquire capital asset – CIT(A) allowed the claim – there is no provision for such deduction, therefore, the conclusion drawn in the assessment order was defended – Held that:- Section 48, which is meant for capital gains clearly envisages allowbility of such expenditure which is incurred wholly and exclusively in connection with such transfer and for the purpose of cost of acquisition of the asset as deduction from the full value of consideration received or accrued as a result of transfer of capital asset, which is chargeable under the head capital gain. The words ‘in connection with’ used in section 48 (i) are very wide in their ambit and hence there is no warrant for importing a restriction that to qualify for deduction the expenditure must necessarily have been incurred prior to the passing of title. The Hon’ble Karnataka High Court in Commissioner Of Income-Tax, Karnataka II Versus Maithreyi Pai (1983 (11) TMI 43 – KARNATAKA High Court ) held that interest on borrows is deductible only if is not allowed u/s 57 of the Act, thus, we find no infirmity in the conclusion drawn by the ld. Commissioner of Income Tax (Appeals) on this issue also, therefore, dismissed. – Decided against revenue.

Additions made invoking the provisions of section 50C – CIT(A) deleted the addition – Held that:-Uncontrovertibly, the impugned payments were made through account payee cheque and the assessee furnished the complete list of vendors to whom the payments were made (through cheque), Cheque No., copy of invoices for the impugned amount were produced before the authorities. Admittedly, without interior work, largely kitchen, carpentry, ceiling and flooring the apartment cannot be come usable, thus, such investment was rightly held to be investment in the residential property, thus, we find no infirmity in the conclusion of the ld. Commissioner of Income Tax (Appeals), therefore, we find no merit in the impugned ground, raised by the Revenue, consequently, dismissed – Decided against revenue.

Allowing deduction u/s 54 – treating the gain so arrived on transfer of capital asset as long term capital gains instead of short term capital gain – Held that:- Considering the peculiar circumstances of that case, it was held that the benefit of section 54 should be extended by taking the date of allotment and occupation as the relevant date of purchase. As the relevant date to be taken for the purpose of applying of section 54 should be the date on which the flat was ready for occupation by the assessee. Taking that date as the date of purchase, is within the period of one year and therefore the capital gains are clearly exempt from tax applying the provisions of section 54. – Decided against revenue.

ITO, WARD-1(3), NASHIK VERSUS SHRI ANIRUDHA ASHOK JAJOO, NASHIK

Wrong section quoted while claiming deduction u/s 54 or u/s 54F – Conditions relevant to sections fulfilled – Held that:- From the various details furnished by the assessee, it is obvious that the assessee is otherwise entitled to deduction u/s.54. The Ld. Departmental Representative also fairly conceded that the assessee is entitled to claim deduction u/s.54. However, since the assessee had made a claim under the wrong section and proper claim was not made before the AO, therefore, the same was denied to him. Since the assessee fulfils the conditions prescribed in section 54 for claiming the deduction, therefore, merely because the assessee had made a claim under a wrong section instead of the correct section, the same in our opinion, should not be a ground to deny the benefit of deduction otherwise allowable to the assessee.

Although, in the instant case, the assessee is a practicing Chartered Accountant and who is supposed to be conversant with the law, however, he has made the claim under the wrong section 54D instead of the correction section 54. However, he is otherwise entitled to deduction u/s.54 as per the facts of the case. Therefore, in view of the various decisions, Paramjeet Singh Chhabra [2015 (4) TMI 939 – ITAT INDORE] relied on by the CIT(A) and in view of the CBDT Circular No. 14 (XL-35) dated 11-04-55, we are of the considered opinion that the relief which is otherwise due to the assessee should not be denied. In this view of the matter and in view of the detailed reasoning given by the CIT(A) and in absence of any distinguishing features brought to our notice, we do not find any infirmity in the order of CIT(A). Accordingly, the same is upheld and the grounds raised by the Revenue are dismissed. – Decided against the revenue.

SMT. PUSHPA DEVI TIRBREWALA VERSUS INCOME-TAX OFFICER, WARD – 8, HYDERABAD

Payment for purchase from a different source and not from sale consideration

Exemption claimed u/s 54 denied – as per CIT(A) since the assessee has made payment for purchase of the plot from a different source and has no actually utilised the sale consideration received from transfer of the original asset – Held that:- As decided in Muneer Khan Versus ITO [2010 (8) TMI 752 – ITAT HYDERABAD] provision contained u/s. 54 is pari materia with S.54F. Therefore, following the aforesaid ratio laid down to hold that exemption claimed by the assessee under S.54 cannot be denied on the ground that the assessee has not utilised the sale consideration received from the sale of flats itself, in purchasing the plot. Law is well settled by the judicial precedents that investment in purchase of pot for construction of house would entitle an assessee to claim exemption u/s.54 or 54F. Board’s circular No.667 dated 18.10.1993 also says so. In favour of assessee.

Disallowance of cost of boundary wall as part of construction cost of the new property – CIT(A) and AO have rejected the assessee’s claim only on the ground that the construction made was not out of sale proceeds of the flats. Held that:- As for claiming exemption under S.54 it is not necessary that the investment in new asset should be out of the sale consideration received from transfer of the original asset only. Thus the assessee is entitled for deduction of Rs.3 lakhs, being expenditure incurred on construction of compound wall. In favour of assessee.

THE ASSISTANT COMMISSIONER OF INCOME TAX 25(3), VERSUS SMT. USHA B. MADAN

Capital Gain – Indexed cost of acquisition under family arrangement –

Which year is used for indexation – PY in which the previous owner first held the asset or the year in which the asset received by assessee as per family arrangement – Held that:- Following the decision in case of Manjula J. Shah (2009 (10) TMI 646 – ITAT MUMBAI) for the purpose of computing long term capital gains arising from the transfer of a capital asset which had become property of the assessee under gift, the first year in which the capital asset was held by the assessee has to be determined to work out the indexed cost of acquisition as envisaged in Explanation(iii) to section 48 after taking into account the period for which the said capital asset was held by the previous owner. Appeal decides in favour of assessee

Capital Gain – Exemption u/s 54 on purchase of car parking space along with flat – Held that:- As the car parking in a society cannot be separately purchase but it is attached with the flat in the society. Therefore, when any flat in the society is purchased along with car parking, then the investment in the flat and car parking will be considered as investment in the residential house. Therefore same is eligible for exemption u/s 54. Appeal decides in favour of assessee

Capital Gain – Whether Cost of improvement along with value of flat eligible for exemption u/s 54 – Assessee claimed exemption u/s 54 on the cost of purchase of new flat, car parking and cost of improvement in the new flat – Held that:- As the assessee has duly recorded all the expenditure in the books of account and the payments were made by account payee cheque. Therefore Assessee is entitled to cost of improvement except the air-conditioning plant which cannot he treated as integral part of the flat. Appeal decides partly in favour of assessee

Deduction/ Exemption under Capital Gain