Analysis of Exemptions Under Capital Gains

Profit on transfer of a capital asset is chargeable under the head Capital Gains. Section 45 makes the gains arising out of the transfer of a capital asset chargeable to tax under the provisions of the Income Tax Act, 1961. However, the chargeability has been subjected to the provisions of sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G & 54H. Sections 54 to 54GB provide exemptions which prescribe that the amount chargeable under section 45 shall be the amount which remains after allowing exemptions under these sections.

INCONSISTENCY IN THE PROVISIONS:

Section 45 (1) reads as under:

“45. Capital gains.

(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place”.

The reading of sub-section (1) of section suggests that while computing capital gains chargeable under section 45, exemptions as provided under sections 54, 54B, 54D, 54EA, 54EB, 54F, 54G and the provisions of section 54H shall be taken into consideration while computing capital gains. However, reference to exemption provisions of sections 54EC, 54EE, 54GA & 54GB is missing in the charging section of capital gains. The absence of the reference of these sections in the charging section creates an inconsistency in the provisions of the Income Tax Act. On one hand these sections provide for the exemptions to the assesse but on the other hand, the charging section does not allow such exemptions. There appears to be a drafting error which needs urgent attention and such error needs to be rectified with retrospective amendment i.e. the date from these exemptions have been brought into the statute.

Scheme of Exemptions

The scheme of exemptions under the head “Capital Gains” provides for the allowance of exemptions to the different assesses for different kinds of capital gains subject to the fulfillment of certain conditions provided under various sections. Although the exemptions provided in sections 54 to 54GB are described as deductions, however, for the purpose of convenience the same have been referred to in this article as exemptions. The exemptions which are discussed in this article are tabulated as under:

Section	Title	Eligible Assessees	Nature of Capital Gain
10(37)	Capital Gains chargeable to tax on compulsory acquisition of an agricultural land in urban areas	Individual or HUF	Long Term or Short Term
54	Profit on sale of Residential House	Individual or HUF	Long Term
54B	Capital Gain on transfer of land used for agricultural purposes	Individual or HUF	Long Term or Short Term
54D	Capital Gain on compulsory acquisition of land or building forming part of Industrial Undertaking	Any Assessee	Long Term or Short Term
54EC	Capital Gain on sale of land or building not to be charged on investment in certain bonds	Any Assessee	Long Term
54EE	Capital Gain not to be charged on investment in units of a specified fund	Any Assessee	Long Term
54F	Capital Gain on transfer of certain capital asset not to be charged in case of investment in residential house	Individual or HUF	Long Term
54G	Exemption of capital gain on transfer of assets in case of shifting of industrial undertaking from urban area	Any Assessee	Long Term or Short Term
54GA	Exemption of capital gain on transfer of assets in case of shifting of industrial undertaking from urban area to any SEZ	Any Assessee	Long Term or Short Term
54GB	Capital Gain on transfer of residential property not to be charged in certain cases	Individual or HUF	Long Term

The exemptions enumerated in the aforesaid table are discussed hereunder:

1. Capital Gains chargeable to tax on compulsory acquisition of an agricultural land in urban areas – Section 10(37) :

a. Applicability : Individual or HUF

b. Nature of eligible gain : Long Term/Short Term

c. Nature of Asset transferred: Agricultural Land

d. Location of Land: Land which is transferred is situated in any of the following areas:

i. Within 2 Kms. from local limits of any municipality or cantonment board having population of more than ten thousand but not exceeding one lakh;

ii. Within 6 Kms. from local limits of any municipality or cantonment board having population of more than one lakh but not exceeding ten lakh;

iii. Within 8 Kms. from local limits of any municipality or cantonment board having population of more than ten lakh.

e. Other conditions: The exemption under section 10(37) shall be available only if the following conditions are also satisfied:

i. Compulsory Acquisition: The exemption shall be allowed only if the land is transferred by way of compulsory acquisition under a law or the consideration of such transfer is approved by the Central Government or RBI;

ii. Usage of transferred Land: By the assessee or any of his parent for agricultural purposes for two years immediately preceding the date on which the transfer took place.

2. Profit on sale of property used for residence (Section 54):

a. Applicability : Individual or HUF

b. Nature of eligible gain : Long Term

c. Nature of Asset transferred: Residential House (Income of which is chargeable under the head “Income from House Property”)

d. Nature of the new asset to be acquired: One Residential House

Amendment w.e.f. 01.04.2020: By the amendment in section 54 by the Finance Act, 2019 (No.1) w.e.f. 01.04.2020, an option to the assessee has been given wherein it has been provided that where the amount of capital gain does not exceed Rs.2 crore the assessee may at his option purchase or construct two residential houses in India. However, such an option can only be exercised by the assessee only once i.e. he cannot exercise the option of purchasing or constructing two houses for the same or any other assessment years.

e. Period of investment : Purchase new house within 1 year prior to or 2 year after the date of transfer of the original asset or construct within 3 year after the date of transfer of the original asset.

f. Place of holding the funds till the date of acquisition of the new asset: If the amount of capital gain is not utilized in the new asset till the due date of filing of the IT Return, the unutilized amount has to be deposited in a scheduled bank in a special account opened in the Capital Accounts Scheme.

g. Quantum of Exemption :

i. 100% if the investment in the new house is equal to or greater than the amount of capital gain.

ii. If the investment in the new house is less than the amount of capital gain, the difference between the amount of capital gain and the amount of investment in the new house would be taxable.

h. Non-utilisation or short utilization of amount deposited in Capital Gain Account Scheme : Amount not so utilized or short utilized would be taxable as LTCG for the previous year during which the period of investment is expired.

However, where the assessee dies before the expiry of the stipulated period, the unutilized amount withdrawn by the legal heirs cannot be taxed in their hands. – Circular no. 743 dated 06.05.1996

i. Lock in period of the new asset : The new asset acquired cannot be transferred within three year from the date of purchase or construction of the new asset. However, if the same is transferred in violation of this condition, then the cost of the new asset shall be reduced by the amount of exemption availed in case of the original asset.

Note: Allotment of flats under the self financing scheme of DDA or other such institutions or co-operative societies shall be treated as construction for the purposes of section 54 and 54F. – Circular no. 471 dated 15.10.1986 & 672 dated 16.12.1993.

3. Gain on transfer of land used for agricultural purposes (Section 54B):

a. Applicability : Individual or HUF

b. Usage of the transferred land: By the assessee or any of his parent for agricultural purposes for two years immediately preceding the date on which the transfer took place.

c. Nature of eligible gain : Long Term/Short Term

d. Nature of Asset transferred: Agricultural Land

e. Nature of the new asset to be acquired: Any other land for being used for agricultural purposes(Whether rural or urban).

f. Period of investment : Purchase new agricultural land within 2 year after the date of transfer of the original asset.

g. Place of holding the funds till the date of acquisition of the new asset:

If the amount of capital gain is not utilized in the new asset till the due date of filing of the IT Return, the unutilized amount has to be deposited in a scheduled bank in a special account opened in the Capital Accounts Scheme.

h. Quantum of Exemption :

i) 100%, if the investment in the new agricultural land is equal to or greater than the amount of capital gain.

ii) If the investment in the new agricultural land is less than the amount of capital gain, the difference between the amount of capital gain and the amount of investment in the new agricultural land would be taxable.

i. Non-utilisation or short utilization of amount deposited in Capital Gain Account Scheme : Amount not so utilized or short utilized would be taxable as LTCG/ STCG for the previous year during which the period of investment is expired.

Consequences on death of the assessee: Where the assessee dies before the expiry of the stipulated period, the unutilized amount withdrawn by the legal heirs cannot be taxed in their hands. – Circular no. 743 dated 06.05.1996.

j. Lock in period of the new asset : The new asset acquired cannot be transferred within three year from the date of purchase of the new asset. However, if the same is transferred in violation of this condition, then the cost of the new asset shall be reduced by the amount of exemption availed in case of the original asset i.e. the amount of capital gain on the original asset.

4. Capital gain on compulsory acquisition of lands and buildings (Section 54D):

a. Applicability : All Assessees

b. Nature of eligible gain : Long Term or short term

c. Nature of Asset transferred: Compulsory acquisition of land or building or any right in land or building forming part of an industrial undertaking belonging to the assessee.

d. Usage of the transferred land & Building: By the assessee for his business purposes for two years immediately preceding the date on which the transfer took place.

e. Nature of the new asset to be acquired: Land or Building for the purposes of shifting or re-establishing or setting up another industrial undertaking

f. Period of investment : Purchase or construction of new asset within 3 years after the date of transfer of the original asset.

g. Place of holding the funds till the date of acquisition of the new asset:

If the amount of capital gain is not utilized in the new asset till the due date of filing of the IT Return, the unutilized amount has to be deposited in a scheduled bank in a special account opened in the Capital Accounts Scheme.

h. Quantum of Exemption :

i) 100% if the investment in the new asset is equal to or greater than the amount of capital gain.

ii) If the investment in the new asset is less than the amount of capital gain, the difference between the amount of capital gain and the amount of investment in the new house would be taxable.

i. Non-utilisation or short utilization of amount deposited in Capital Gain Account Scheme : Amount not so utilized or short utilized would be taxable as LTCG/ STCG for the previous year during which the period of investment is expired.

Consequences on death of the assessee: Where the assessee dies before the expiry of the stipulated period, the unutilized amount withdrawn by the legal heirs cannot be taxed in their hands. – Circular no. 743 dated 06.05.1996.

j. Lock in period of the new asset : The new asset acquired cannot be transferred within three year from the date of purchase or construction of the new asset. However, if the same is transferred in violation of this condition, then the cost of the new asset shall be reduced by the amount of exemption availed in case of the original asset.

5. Capital gain not to be charged on investment in certain bonds (Section 54EC):

a. Applicability : All Assessees

b. Nature of eligible gain : Long Term

c. Nature of Asset transferred: Any Asset (By the Finance Act, 2018 only the long term capital gain arising out of transfer of land or building or both are eligible for exemption under section 54EC e.f. 01.04.2019)

d. Nature of the new asset to be acquired: Long Term specified asset being the Bonds issued by Rural Electrification Corp. Ltd., or National Highways Authority.

e. Period of investment : Investment in the bonds within a period of six months after the date of transfer of the original asset.

f. Quantum of Exemption :

i) 100% if the investment in the Bond is equal to or greater than the amount of capital gain.

ii) If the investment in the Bond is less than the amount of capital gain, the difference between the amount of capital gain and the amount of investment in the bonds would be taxable.

iii) Maximum Investment: The maximum permissible investment in these bonds during the financial year in which the original asset is transferred and in the subsequent financial year is Rs.50 Lacs. In other words the maximum investment in these bonds cannot exceed the amount of Rs.50 Lacs and the investment can be made during the financial year in which the original asset is transferred and in the subsequent financial year.

For example, if an assessee has earned long term capital gain of Rs.60 Lacs from transfer of a land or building on 15 January, 2020. He can make investment of Rs.25 Lacs upto 31.03.2020 and balance Rs.25 Lacs upto 14.07.2020. The amount of investment may vary during these two financial years in such a manner that the total amount invested cannot exceed Rs.50 Lacs in total in both the financial years.

g. Lock in period of the new asset : The new asset acquired cannot be transferred or converted into money within five years from the date of investment. However, if the same is transferred in violation of this condition, then the capital gain arising from the transfer of the original asset which was not charged on the basis of investment in the new Bonds would be chargeable to tax as LTCG for the previous year during which the new bonds have been transferred. (Even loan or advance against the security of these bonds is taken, then this would also be deemed to be converted into money and taxed accordingly.)

No condition has been prescribed in section 54EC which envisages that where the amount of capital gain is not invested in the new asset till the due date of filing of Income Tax Return such amount can be deposited into an account opened with a bank under the capital gains account scheme. Hence, in such a situation the assessee may invest in the prescribed bonds up to 30^th September of the following financial year where he has earned capital gain on 31^st March of the previous year even where his due date of filing of Return is 31^st July. He may do so either by delaying the filing of his Return of Income beyond the due date or by filing the Revised Return.

6. Capital gain not to be charged on investment in units of a specified fund (Section 54EE):

a. Applicability : All Assessees

b. Nature of eligible gain : Long Term

c. Nature of Asset transferred: Any

d. Nature of the new asset to be acquired: Long Term specified asset being the unit or units issued by the notified funds issued before 01.04.2019.

e. Period of investment : Investment in the bonds within a period of six months after the date of transfer of the original asset.

f. Quantum of Exemption :

i) 100% if the investment in the Bond is equal to or greater than the amount of capital gain.

ii) If the investment in the Bond is less than the amount of capital gain, the difference between the amount of capital gain and the amount of investment in the bonds would be taxable.

iii) Maximum Investment: The maximum permissible investment in these bonds during the financial year in which the original asset is transferred and in the subsequent financial year is Rs.50 Lacs.

g. Lock in period of the new asset : The new asset acquired cannot be transferred or converted into money within three years from the date of its acquisition. However, if the same is transferred in violation of this condition, then the capital gain arising from the transfer of the original asset which was not charged on the basis of investment in the new units would be chargeable to tax as LTCG for the previous year during which the new units have been transferred. (Even loan or advance against the security of these bonds is taken would also be deemed to have been transferred and taxed accordingly.)

Note : It is pertinent to note here that the government has till date not notified any such fund for the purposes of section 54EE and one of the conditions of the notified funds is that the units issued on or after 01.04.2019 are not eligible for exemption under section 54EE. The purpose of bringing this section into statute books seems to have been defeated. It is urged to the government to notify the funds for the purpose of this section and make suitable amendments in section 54EE to make this section workable.

7. Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house (Section 54F):

a. Applicability : Individual or HUF

b. Nature of eligible gain : Long Term

c. Nature of Asset transferred: Any asset (other than Residential House)

d. Nature of the new asset to be acquired: Residential house

e. Period of investment : Purchase one residential house in India within a period of 1 year prior to or 2 year after the date of transfer of the original asset or construct within 3 year after the date of transfer of the original asset.

f. Place of holding the funds till the date of acquisition of the new asset:

i) If the amount of capital gain is not utilized in the new asset till the due date of filing of the IT Return, the unutilized amount has to be deposited in a scheduled bank in a special account opened in the Capital Accounts Scheme.

g. Quantum of Exemption :

i)100% if the investment in the new house is equal to or greater than the amount of Net consideration of the sold asset.

ii) If the investment in the new house is less than the amount of the net consideration of the sold asset, the proportionate amount of capital gain would be taxable. For example:

a. Net consideration of the asset sold : Rs.25 Lakh;

b. Net long term capital gain on the asset sold is Rs.10 Lakh;

c. Amount invested in acquisition of new residential house – Rs.20 Lakh

d. Amount of Exemption would be calculated as under:

1000000 X 2000000/2500000 = Rs.800000/-

h. Non-utilisation or short utilization of amount deposited in Capital Gain Account Scheme : Amount not so utilized or short utilized would be taxable as LTCG for the previous year during which the period of investment is expired.

Consequences on death of the assessee: Where the assessee dies before the expiry of the stipulated period, the unutilized amount withdrawn by the legal heirs cannot be taxed in their hands. – Circular no. 743 dated 06.05.1996.

i. Lock in period of the new asset : The new asset acquired cannot be transferred within three year from the date of purchase or construction of the new asset. However, if the same is transferred in violation of this condition, then the amount of capital gain which was not charged to income tax would be chargeable as LTCG in respect of the previous year in which the new asset is transferred.

j. Other conditions : Exemption under section 54F would not be available in the following cases:

i) Owns more than one house: Where the assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or

ii) Purchase another house: Where the asseessee purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset ; or

iii) Purchases or Constructs another house: Where the asseessee purchases any residential house, other than the new asset, within a period of two years after the date of transfer of the origianl asset or constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.

CONSEQUENCES: In the first two cases above [i.e. point no. i) or ii above)] the exemption would not be available at all in the year in which the capital gain arise on the transfer of the original asset and in the last cases [ i.e. point no. iii) above] the amount of capital gain which was not charged earlier would be chargeable to tax for the previous year during which the assessee has purchased or constructed such house.

Exemption not available if existing house is extended – The thrust of section 54F is on construction of a residential house. The construction should not be a symbolic construction. The extension of merely the old existing house would not mean constructing a residential house as contemplated under section 54F – CIT v. V. Pradeep Kumar [2006] 153 Taxman 138 (Mad.)

Note: Allotment of flats under the self financing scheme of DDA or other such institutions or co-operative societies shall be treated as construction for the purposes of section 54 and 54F. – Circular no. 471 dated 15.10.1986 & 672 dated 16.12.1993.

8. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area (Section 54G):

a) Applicability : All

b) Nature of eligible gain : Long Term/Short Term

c) Nature of Asset transferred: Industrial Land/ Building/Plant & Machinery & incurred expenses in connection with the shifting from an Urban Area.

Meaning of Urban Area: It means an area which is declared to be an urban area for the purposes of the sub-section (1) of section 54G.

d) Nature of the new asset to be acquired or expenses to be incurred: Industrial Land/Building/ Plant & Machinery & incurred expenses on such purposes as may be specified in a scheme framed by the Central Government for the purposes of this section.

e) Period of investment : 1 year prior to or 3 years after the date of transfer

f) Place of holding the funds till the date of acquisition of the new asset:

If the amount of capital gain is not utilized in the new asset till the due date of filing of the IT Return, the unutilized amount has to be deposited in a scheduled bank in a special account opened in the Capital Accounts Scheme.

g) Quantum of Exemption :

i) 100% if the investment in the new asset is equal to or greater than the amount of capital gain.

ii) If the investment in the new asset is less than the amount of capital gain, the difference between the amount of capital gain and the amount of investment in the new asset would be taxable.

h) Non-utilisation or short utilization of amount deposited in Capital Gain Account Scheme: Amount not so utilized or short utilized would be taxable as LTCG/STCG for the previous year during which the period of investment is expired.

Consequences on death of the assessee: Where the assessee dies before the expiry of the stipulated period, the unutilized amount withdrawn by the legal heirs cannot be taxed in their hands. – Circular no. 743 dated 06.05.1996.

i) Lock in period of the new asset : The new asset acquired cannot be transferred within three year from the date of purchase or construction of the new asset. However, if the same is transferred in violation of this condition, then the cost of the new asset shall be reduced by the amount of exemption availed in case of the original asset.

9. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone(Section 54GA):

a. Applicability : All

b. Nature of eligible gain : Long Term/Short Term

c. Nature of Asset transferred: Industrial Land/ Building/Plant & Machinery & incurred expenses in connection with the shifting from Urban Area.

Meaning of Urban Area: It means an area which is declared to be an urban area for the purposes of the sub-section (1) of section 54GA.

d. Nature of the new asset to be acquired or expenses to be incurred:

i. Land or Building: Acquired land or building or constructed building for the purpose of business in the SEZ;

ii. Plant or Machinery: Purchased plant or machinery for the purpose of business in the SEZ where the undertaking is being shifted;

iii. Shifted the Original Assets: Incurred cost or expenses in relation to the shifting of the original assets and shifting of the establishment of the undertaking to the SEZ;

iv. Other expenses as specified in the scheme: Incurred expenses on such other purposes as may be specified in a scheme framed by the Central Government.

e. Period of investment : 1 year prior to or 3 years after the date of transfer

f. Place of holding the funds till the date of acquisition of the new asset:

If the amount of capital gain is not utilized in the new asset till the due date of filing of the IT Return, the unutilized amount has to be deposited in a scheduled bank in a special account opened in the Capital Accounts Scheme.

g. Quantum of Exemption :

i) 100% if the investment in the new asset is equal to or greater than the amount of capital gain.

ii) If the investment in the new asset is less than the amount of capital gain, the difference between the amount of capital gain and the amount of investment in the new asset would be taxable.

h. Non-utilisation or short utilization of amount deposited in Capital Gain Account Scheme: Amount not so utilized or short utilized would be taxable as LTCG/STCG for the previous year during which the period of investment is expired.

Consequences on death of the assessee: Where the assessee dies before the expiry of the stipulated period, the unutilized amount withdrawn by the legal heirs cannot be taxed in their hands. – Circular no. 743 dated 06.05.1996.

(Although the reference of section 54GA has not been taken in the aforesaid circular but the aforesaid circular would be applicable in the case of section 54GA because at the time of issue of the aforesaid circular section 54GA was not in existence.

i. Lock in period of the new asset : The new asset acquired cannot be transferred within three year from the date of purchase or construction of the new asset. However, if the same is transferred in violation of this condition, then the cost of the new asset shall be reduced by the amount of exemption availed in case of the original asset.

10. Exemption of capital gains on transfer of residential property in certain cases(Section 54GB)

a. Applicability : Individual or HuF

b. Nature of eligible gain : Long Term

c. Nature of Asset transferred: Residential property (being a house or plot of land)

d. Nature of the new asset to be acquired

Subscription in Equity Shares of an “Eligible Company”: The assessee has utilized the net consideration for subscription in equity shares of an eligible company which is an eligible start up before the due date of furnishing of Return of Income under section 139(1) subject to the following conditions:

> Utilization of the subscribed amount by the company: The amount of the subscription received as above by the company has to be utilized within one year from the date of subscription for acquiring new asset being plant & machinery. However, the following plant & machinery shall not be eligible to qualify as new asset:

i. Previously used: Any machinery or plant which was used either within or outside India before its installation by the assessee.

ii. Installed in office premises: Any machinery or plant which is installed in any office premises or residential accommodation including guest house.

iii. Office appliance: Any office appliance including computer or computer software. However, computers or computer software for any technological driven eligible start-up shall qualify as a new asset.

iv. Any vehicle

v. 100% deduction allowed: Any machinery or plant the whole cost of which is allowed as deduction while computing income under the head “Profits and gains of Business or Profession” (whether by way of depreciation or otherwise).

> Meaning of Eligible Company: It means a company which fulfils the following conditions:

> Incorporated during the previous year: It is a company which is incorporated during the period from 1^st April of the previous year in which such capital gain arises to the due date of furnishing the Return of Income under section 139(1).

> Engaged in : It is engaged in manufacture of an article or thing or in an eligible business.

> More than 25% share capital or voting rights: In such a company the assessee is having more than 25% share capital or voting rights after the subscription in shares by him.

> ELIGIBLE START UP : It is a company which qualifies to be an eligible start up

(Eligible Business or Eligible Start-up shall mean a business which is defined in sub-section (4) of section 80IAC.

e. Period of investment :

i. By the assessee: Before the due date of furnishing of Return of Income under section 139(1)

ii. By the Company: Within one year from the date of subscription for acquiring new asset being plant & machinery

f. Place of holding the funds till the date of acquisition of the new asset by the company:

If the amount of the net consideration, which has been received by the company for issue of shares to the assessee and to the extent which has not been utilized for the purchase of the new asset till the due date of filing of the IT Return, the unutilized amount has to be deposited in a scheduled bank in a special account opened in the Capital Accounts Scheme.

g. Quantum of Exemption :

i)100% if the investment in the new asset is equal to or greater than the amount of Net consideration of the sold asset.

ii) If the investment in the new asset is less than the amount of the net consideration of the sold asset, the proportionate amount of capital gain would be taxable.

h. Non-utilisation or short utilization of amount deposited in Capital Gain Account Scheme: Amount not so utilized or short utilized would be taxable as LTCG in the hands of the assessee for the previous year during which the period of investment is expired.

i. Lock in period of the equity shares subscribed by the assessee or new asset acquired by the company : The equity shares subscribed by the assessee or the new asset acquired by the company cannot be transferred within five years from the date of subscription of the shares by the assessee or purchase of the new asset by the company (Three years where the new asset is computer or computer software in case of an eligible new start-up). However, if the same is transferred in violation of this condition, then the amount of capital gain which was not charged under section 45 shall be chargeable under the head ‘capital gains’ of the previous year in the hands of the assessee in which such violation takes place in addition to the taxability of the gains arising out of the transfer of the shares or the new asset in the hands of the assessee or the company as the case may be.

EXTENSION OF TIME FOR INVESTMENT [S. 54H]: For availing exemptions under s. 54, 54B, 54D, 54EC & 54F the assessee has to invest in the specified asset within the time limits allowed under those sections. However, where the transfer of the original asset was by way of compulsory acquisition under any law, the period of investment would, in those cases would be reckoned from the date of receipt of the compensation and not from the date of transfer of the asset.

11. Taxability of Compensation Received by Land Owners for Land Acquired Under RFCTLAAR Act, 2013

The capital gain arising out of the transfer of those agricultural lands which do not satisfy the conditions laid down in clause (37) of section 10 or the lands which are not agricultural land and which are subjected to compulsory acquisition by the government is not exempt under section 10(37). In such cases section 96 of the RFCTLAAR Act, 2013 comes to the rescue if such cases are covered by the provisions of the said Act. Section 96 of Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (‘RFCTLAAR Act’) provides that income tax shall not be levied on any award or agreement (Except those made under section 46) made under RFCTLAAR ACT, 2013. Hence section 96 of the RFCTLAAR Act shall have an overriding effect on the provisions of the Income Tax Act and no income tax shall be payable on the amount of capital gains which arise on account of any award or agreement (whether for the transfer agricultural land or even other land) under the provisions of the RFCTLAAR Act except those mentioned in section 46 of the said Act.

Circular no. 36/2016 [F.No. 225/S8/2016-ITA.II] dated 25.10.2016 has put out the following clarification:

“As no distinction has been made between compensation received for compulsory acquisition of agricultural land and non-agricultural land in the matter of providing EXEMPTION from income-tax under the RFCTLARR Act, the EXEMPTION provided under section 96 of the RFCTLARR Act is wider in scope than the tax-EXEMPTION provided under the existing provisions of Income-tax Act, 1961. This has created uncertainty in the matter of taxability of compensation received on compulsory acquisition of land, especially those relating to acquisition of non-agricultural land. The matter has been examined by the Board and it is hereby clarified that compensation received in respect of award or agreement which has been exempted from levy of income-tax vide section 96 of the RFCTLARR Act shall also not be taxable under the provisions of income-tax Act, 1961 even if there is no specific provision of EXEMPTION for such compensation in the Income-tax Act, 1961.”

12. Analysis of Important Judicial Pronouncements

a. Availability Of Exemptions On The Depreciable Assets

The scheme of exemptions under the head allows exemption only if the capital gain arises from long term capital asset. As per the deeming provisions of section 50 of the Income Tax Act, 1961 the capital gain arising out of the transfer of a depreciable asset shall be deemed to be a capital gain arising out of transfer of a ‘Short Term Capital Asset’. In such a situation a question arises whether those exemption can be allowed on such capital gains where the asset transferred is long term capital asset but due to the deeming fiction of the section 50 the capital gain arising out of transfer from such an asset is deemed as ‘Short Term Capital Gain’. This question has been examined by the Hon’ble Gujarat High Court in the case of CIT v. Aditya Medisales Ltd. [2014] 266 CTR 98 (Guj.). The following question was raised before the Hon’ble Gujarat High Court:

“Whether the Tribunal was correct in allowing exemption under Section 54EC of the Act of Rs.30,28,732/- on the capital gain in respect to Automatic Electrical Load Monitoring System, included in the depreciable assets under the meaning of Section 50 of the Act, without appreciating that exemption under Section 54EC of the Act was not allowable in the case of assets covered by the provisions of Section 50 of the Act, since, Section 50 of the Act being special provision cannot be overridden by provisions of Section 54EC of the Act?”

The Hon’ble Gujarat High Court in their order dated 02^nd September, 2013 has concurred with the judgments of Bombay High Court in the case of CIT v. ACE Builders P. Ltd. [2006] 281 ITR 210 and Gauhati High Court in the case of CIT v. Assam Petroleum Industries (P.) Ltd. [2003] 262 ITR 587 and observed as under:

“We are in agreement with both the decisions of the Gauhati High Court as well as Bombay High Court in holding that Capital Gain arising of Long Term Capital Asset, if invested in specified asset, the assessee is not charged capital gains and exemption provided under section 54EC of the Act cannot be denied to the assessee only on account of the fact that deeming fiction is created under section 50 of the Act. In other words, legal fiction created under Section 50 of the Act is though restricted to computation of capital gains, such deeming fiction cannot restrict application of Section 54EC which allows exemption of capital gains, if assessee makes investment in the specified assets. Thus, the assessee cannot be charged to capital gains when short term gains of long terms capital assets get invested in the areas specified under the law.”

B. Whether Exemption Can Be Denied For Claim Of Exemption Under Wrong Section

Due to ignorance of law or mistake on the part of the assessee, can the exemption be allowed to him, where he is otherwise eligible to claim exemption under the provisions of a particular section of the Income Tax Act, has claimed deduction under some other section. This question came before the consideration of the Hon’ble ITAT, Mumbai in the case of ACIT v. Jai Kumar Gupta (HuF) [2019] 177 ITD 558 (Mum).

In this case, the assessee HUF was having long term capital gain from the sale of a residential house at Malad and against such capital gain the assessee claimed exemption under section 54F of the Income Tax Act instead of section 54. The A.O. issued a show cause notice to disallow the claim under section 54F. In response to such notice the assessee requested to allow exemption under section 54 as the exemption under section 54F was wrongly claimed. However, the A.O. rejected the application of the assessee and he further observed that since the assessee is owning more than one house other than the new asset, hence it was also not eligible to claim exemption under section 54F too. Therefore, the exemption claim under both the sections were denied. The claim of the assessee was accepted by the CIT(Appeals). Thereafter, the department went into appeal to the ITAT and the Hon’ble ITAT, Mumbai has observed as follows:

“Merely because the assessee, by ignorance of law or mistake, has claimed deduction under section 54F instead of section 54 of the Act, such ignorance of law/mistake on the part of the assessee cannot be utilized to its disadvantage by the Assessing Officer. The duty of the Assessing Officer is to correctly compute the real income of the assessee in accordance with the statutory provisions.”

C. Allowability Of Exemption In Case Of Residential House Consisting Of Several Independent Unit

In the case of CIT v. Gita Duggal [2013] 357 ITR 153 (Delhi) a question came up before the Hon’ble Delhi High Court as to whether the fact that the residential house consists of several independent units can be permitted to act as an impediment to the allowance of the exemption under section 54/54F. In the said case the assessee was to get two floors in addition to the cash amount under the agreement of development of the property with the builder. The A.O. allowed the exemption under section 54/54F in respect of the cost of the construction of one of the floors on the ground that both the floors were independent residential units, hence the exemption could be allowed in respect of one of the units because the sections 54/54F allows exemption in respect of one residential unit as the language used is ‘a residential unit’. Hon’ble Delhi High Court first discussed the implications of the term ‘a residential unit’ and observed that such term does not mean one residential house and the exemption can be claimed in respect of more than one residential house. By the amendment in sections 54 & 54F this controversy has come to an end. However, the following observations of the Hon’ble Delhi High Court add new dimensions to the construction of multiple units within a same building and the exemption can be allowed in respect of more than one independent residential units within a building:

“There could also be another angle. Section 54/54F uses the expression “a residential house”. The expression used is not “a residential unit”. This is a new concept introduced by the assessing officer into the section. Section 54/54F requires the assessee to acquire a “residential house” and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans and requirements. Most of the houses are constructed according to the needs and requirements and even compulsions. For instance, a person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. We are therefore, unable to see how or why the physical structuring of the new residential house, whether it is lateral or vertical, should come in the way of considering the building as a residential house. We do not think that the fact that the residential house consists of several independent units can be permitted to act as an impediment to the allowance of the deduction under Section 54/54F. It is neither expressly nor by necessary implication prohibited.”

Similar views have been taken by the Hon’ble Andhra Pradesh High Court in the case of CIT v. Syed Ali Adil [2013] 215 Taxman 283 (AP)

d. Purchase Of New Residential House In The Name Of Spouse

For the purpose of claiming exemption under section 54F is it necessary to purchase the new asset in the name of the assesssee himself/herself. This question came up for the consideration of the Hon’ble Delhi High Court in the case of CIT v. Kamal Wahal [2013] 351 ITR 4 (Del). The facts of the case are as under:

“The assessee is an individual. He retired from IOCL. His income consists of income by way of salary, from house property and other sources. He inherited 50% share in a residential house in E-2/13, Vasant Vihar, Delhi in 2003 from his father. This was in July 1968. The other half share was inherited by his brother. In the year which ended on 31.03.2008, both the brothers jointly sold the property which gave rise to proportionate Capital gains in the assessee’s hands. In computing the Capital gains, the assessee claimed deduction under Section 54F on the ground that the sale proceeds were invested in the acquisition of a vacant plot for Rs. 31,25,100/- and the purchase of a residential house for Rs. 34,35,700/- in the name of his wife.

The assessing officer while completing the assessment, took the view that under Section 54F, the investment in the residential house should be made in the assessee’s name and in as much as the residential house was purchased by the assessee in the name of his wife, the deduction was not allowable. He reduced the deduction and computed the Capital gains accordingly.”

The Hon’ble Delhi High Court while allowing the exemption claim of the assessee has observed as under:

“It thus appears to us that the predominant judicial view, including that of this Court, is that for the purposes of Section 54F, the new residential house need not be purchased by the assessee in his own name nor is it necessary that it should be purchased exclusively in his name. It is moreover to be noted that the assessee in the present case has not purchased the new house in the name of a stranger or somebody who is unconnected with him. He has purchased it only in the name of his wife. There is also no dispute that the entire investment has come out of the sale proceeds and that there was no contribution from the assessee’s wife.

Having regard to the rule of purposive construction and the object which Section 54F seeks to achieve and respectfully agreeing with the judgment of this Court, we answer the substantial question of law framed by us in the affirmative, in favour of the assessee and against the revenue.”

E. Whether Incomplete Construction Of House Would Qualify For Exemption Under Section 54/54F

Where the assessee has invested amount of capital gain or sale consideration as the case may be in construction of a residential house and the construction of the house is not complete due to the reasons beyond the control of the assessee, the exemption under section 54/54F shall not be denied.

In the case of CIT v. Sambandam Udaykumar [2012] 345 ITR 389 (Karnataka), the assessee sold shares of a private limited company and a part of the sale consideration was invested in purchase of house property from a builder and the construction of the property was going on. The assessee claimed exemption under section 54F. During the course of the assessment proceedings the inquiries as to whether the construction was complete was carried out by the Revenue. In the inquiry report the photographs of the construction site were produced which showed the progress of the construction and the sworn statement of the Senior Marketing Executive of the Builder company disclosed that the construction was stopped at the time of making inquiries and the flooring work, electric work, fitting of door shutters and window shutters were pending. Due to the incomplete stage of construction of house the A.O. concluded that the construction of house was not complete even after the elapse of three years time from the date of transfer of the shares and denied the exemption under section 54F.

Aggrieved by the denial of the exemption the assessee preferred an appeal before CIT(Appeals) who also rejected the appeal of the assessee. Thereafter, the assessee went into appeal to the ITAT, where the claim of the assessee was accepted.

The department preferred an appeal against the order of the ITAT with the Karnataka High Court. The Hon’ble Karnataka High Court has made following observations in their order:

Section 54F of the Act is a beneficial provision of promoting the construction of residential house. Therefore, the said provision has to be construed liberally for achieving the purpose for which it was incorporated in the statute. The intention of the Legislature was to encourage investments in the acquisition of a residential house and completion of construction or occupation is not the requirement of law. The words used in the section are ‘purchased’ or ‘constructed’. For such purpose, the Capital gain realized should have been invested in a residential house. The condition precedent for claiming benefit under the said prevision is the Capital gain realized from sale of capital asset should have been parted by the assessee and invested either in purchasing a residential house or in constructing a residential house. If after making the entire payment, merely because a registered sale deed had not been executed and registered in favour of the assessee before the period stipulated, he cannot be denied the benefit of section 54F of the Act. Similarly, if he has invested the money in construction of a residential house, merely because the construction was not complete in all respects and it was not in a fit condition to be occupied within the period stipulated, that would not disentitle the assessee from claiming the benefit under section 54F of the Act. The essence of the said provision is whether the assessee who received Capital gains has invested in a residential house. Once it is demonstrated that the consideration received on transfer has been invested either in purchasing a residential house or in construction of a residential house even though the transactions are not complete in all respects and as requited under the law, that would not disentitle the assessee from the said benefit.

The Hon’ble High Court further observed that “The object of enacting section 54 of the Act i.e. to encourage investment in a residential building is completely fulfilled.”

Similar views have been taken by the Hon’ble Karnataka High Court in the case of Pr.CIT v. Dilip Ranjrekar [2019] 260 Taxman 317 (Karnataka)

f. Can exemption be Claimed in Respect of Amount in Excess of Net Consideration Received Where Assessment is Completed by Adopting Notional Value under Section 50C

In the case of Gouli Mahadevappa v. ITO a similar question arose before the Hon’ble Karnataka High Court. The following are the facts of the said case:

Facts: The appellant-assessee sold a house plot in RMV II Stage, Bangalore, for Rs. 20,00,000 under registered sale deed dated 05.06.2004. The Assessing Authority found that the registration value of the property fixed under the Karnataka Stamp Act is Rs. 36,00,000/-. The assessee, however, had reinvested Rs. 24,00,000 for construction of residential house at Gangavathi and sought exemption in proportion of the amount reinvested for construction from the payment of capital gain tax under Section 54F of the Income-tax Act. However, the A.O. allowed exemption in proportion to the actual amount of sale consideration. CIT(Appeals) and the ITAT upheld the order of the A.O.

While allowing the appeal of the assessee the Hon’ble Karnataka High Court has made following observations:

“That part of the order of the Assessing Authority and the Appellate Authority does not appear to be sound and proper The ultimate object and purpose of Section 50C of the IT Act is to see that the undisclosed income of capital gains received by the assessees should be taxed and the law should not encourage and permit the assessee to peg down the market value at their whims and fancy to avoid tax. In other words, the ultimate object is to curb the growth of black money. When the capital gain is assessed on notional basis, whatever amount invested in new residential house within the prescribed period, under Section 54F of IT Act the entire amount invested, should get the benefit of deduction irrespective of the fact that the funds from other sources are utilized for new residential house. In that context, whatever total amount actually invested by the assessee for construction of house at Gangavathy should be deducted irrespective of the fact that part of the funds invested are from different sources and not from the capital gains. In that view of the matter, the amount assessable towards net capital gain should be Rs.10,06,494/-“

With due regard the aforesaid judgment of the Hon’ble Karnataka High Court needs reconsideration. The following specific question of law was put forth before the Hon’ble High Court but the court in its wisdom did not answer the same:

‘Whether on the facts and the circumstances of the case, the Income Tax Tribunal is correct in law in holding that the “Capital gains” and “the Net Consideration” have to be worked out within the framework of section 54F of the Act, without imposing any fiction created by any other section and that the capital gains arising from the transfer of any long term capital asset for the purpose of section 54F has to be worked out applying section 48 without imposing section 50C into it?’

A very pertinent question was raised as to whether the term ‘Net Consideration’ have to be interpreted within the framework of section 54F of the Act, without imposing any fiction created by any other section. The Hon’ble Court chose not to answer the same. However, it allowed the exemption worked out on the basis of the actual amount of investment even if it was in excess of the net consideration.

In the following judgment of the Hon’ble ITAT, Jaipur Bench the aforesaid question has been dealt with.

g. Whether Provisions of Section 50C(1) Are Applicable For Determining Exemption Under Section 54F:

There has been always a problem in the cases where the net consideration is much less than the deemed consideration as per section 50C. The deeming fiction of section 50C has been placed in the statute books to compute the amount of capital gain in terms of section 45 read with section 48. However, the scheme of exemption under sections 54 to 54H have been drafted in such a manner that the computation of exemption has to be done in such a manner as prescribed in those sections. The term ‘Net Consideration’ has been defined in section 54F which is as under:

“net consideration”, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

Sub-section (1) of section 50C reads as under:

“(1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.”

The term ‘net consideration’ has been defined under section 54F to mean “Full Value of consideration received or accruing as a result of transfer of the capital asset as reduced…..” whereas as per the provisions of section 50C it is stated that the value adopted for the purposes of payment of stamp duty shall be deemed to be the full value of consideration for the purposes of section 48. It means both the sections are independent and for the purpose of computing capital gain under section 48 the value as per section 50C has to be adopted whereas for the purpose of computing exemption under section 54F the net consideration shall be the value of full consideration received or accruing as a result of transfer of the capital asset as reduced by any expenditure incurred wholly or exclusively in connection with such transfer. The deemed consideration as per section 50C cannot be adopted for the purposes of section 54F. Had there been any such intention of the statute the term net consideration would have been linked to section 50C.

A similar matter was raised in the case of ITO v. Rajkumar Parashar [2018] 192 TTJ 603 (JAIPUR). The Hon’ble Jaipur Bench of ITAT has allowed the contention of the assessee and computed the exemption under section 54F taking into account the actual full value of consideration and not the value as per section 50C. The following observations have been made the Hon’ble ITAT:

“What is therefore relevant is the investment of the net consideration in respect of the original asset which has been transferred and where the net consideration is fully invested in the new asset, the whole of the capital gains shall not be charged under section 45 of the Act. The net consideration for the purposes of section 54F has been defined as the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. In other words, the consideration which is actually received or accrued as a result of transfer has to be invested in the new asset. In the instant case, undisputedly, the consideration which has accrued to the assessee as per the sale deed is Rs. 24,60,000 and the whole of the said consideration has been invested in the capital gains accounts scheme for purchase of the new house property which is again not been disputed by the Revenue. The consideration as determined under section 50C based on the stamp duty authority valuation is not a consideration which has been received by or has accrued to the assessee. Rather, it is a value which has been deemed as full value of consideration for the limited purposes of determining the income chargeable as capital gains under section 48 of the Act. Therefore, in the instant case, the provisions of section 54F(1)(a) are complied with by the assessee and the assessee shall be eligible for deduction in respect of the whole of the capital gains so computed under section 45 read with section 48 and section 50C of the Act.”

Disclaimer: While every effort has been made to avoid errors in compiling, editing and printing, the author is not responsible for the consequences of any action taken on the basis of this article.