1. The Capital Gain Tax provisions are covered under sections 45 to 55 of the Income Tax Income-tax Act, 1961. These provisions are complicated & the controversy and resultant litigations on capital gains tax have thrown innumerable decisions.
In this Series of Capital Gain Tax Exemption, an attempt has been made to simplify the provisions with the help of Illustrations & the relevant legal decisions by various Tribunals & Hon’ble Courts.
2. Illustration 1: Mr. Anupam sold a residential property on 23.10.2022. He had entered into an agreement with the builder for the purchase of a new flat. The agreement date was 21.12.2020. The possession letter of the said flat was received on 23.01.2022 (within 1 year before the transfer of residential property).
2.1 Query: Whether Mr. Anupam is entitled to claim the benefit of exemption under section 54 even if the date of the agreement is more than 1 year before?
2.2 Statutory Provision: Any Long Term Capital Gain, arising to an Individual from the Sale of a Residential Property shall be exempt to the extent such capital gain is invested in the Purchase of another Residential Property within 1 year before or 2 years after the transfer of the Property sold
2.3 Legal Decision: – It was held by Pune Tribunal in the case of Sanjay Vasant Jumde v. Income-tax Officer (IT) that the new property shall be deemed to have been acquired only when it was ready, full consideration had been paid and possession was received by the assessee and, therefore, date of possession of flat would be the actual date of purchase for claiming exemption under section 54.
2.4 Answer to Query 1: Mr. Anupam is entitled to claim the benefit of exemption under section 54 as the possession letter received within one year of the transfer of property.
3. Illustration 2: Mr. Bimal transferred shares on 21-8-2018. He had entered into an agreement for the purchase of a flat on 30-12-2016 and paid the consideration to the builder. Thereafter, under an agreement, the flat was transferred in his name on 18-3-2019 and thereafter a registered sale deed was executed in favor of Mr. Bimal on 28-3-2021.
3.1 Query: Mr. Bimal is entitled to claim an exemption under section 54F, though the payment for the construction of the new residential property was made 1 year before the sale of Shares.
3.2 Statutory Provision (Sec 54F): An assessee being an individual, the capital gain arises from the transfer of any long-term capital asset, not being a residential house, and the assessee has within one year before or two years after the date on which the transfer took place purchased, or has within three years after that date constructed, one residential house in India, he is entitled to the benefit under section 54F of the Act.
3.3 Legal Decision: In the case of M. George Joseph v. Deputy Commissioner of Income-tax, Circle-12(2), Bangalore, it was held by the Hon’ble HIGH COURT OF KARNATAKA that to claim an exemption under section 54F, the same sale consideration doesn’t need to be used for construction of a new house property. The payments made one year before the date of the transfer of shares will not make the assessee disentitled to claim an exemption under section 54F.
3.31 It is pertinent to note that exemption under section 54 is dependent on the date of acquisition of the property and not on the date of payment made in respect of such property.
3.3.2 It is also held that the flat under an agreement to sell in respect of undivided land and an agreement to build is considered as construction (not purchase) of a residential house.
4. Illustration 3: Ms. Charu sold residential flats on 26-9-2022 She had purchased land on 27-1-2020 and constructed a house thereon. She claimed exemption under section 54 on account of construction expenses only which were incurred within one year prior to the sale of flats.
4.1 Query: Whether Ms. Charu is eligible to claim under section 54, the expenditure on the construction of the house, incurred within one year before the sale of the flat.
4.2 Legal Decision: It is held by Hon’ble Allahabad High Court, in the case of CIT v. H K that “Exemption on capital gains under section 54 cannot be refused merely on the ground that construction of new house had begun before the sale of the old house.
5. Illustration 4: Mr. David sold an old residential house property and within three years from the date of such sale, constructed a new residential house on the land. The said land was purchased three years prior to the sale of the old property.
5.1 Query: Whether the cost of a new residential house would necessarily include the cost of land, cost of materials used in construction, cost of labour, and any other cost relatable to the acquisition and construction of a residential house? If such land was purchased three years prior to the sale of the old property, then also the cost of land will be included in the cost of new property for exemption under Sec 54?
5.2 Legal Decision: It is held by the Hon’ble HIGH COURT OF MADRAS in the case of C. Aryama Sundaram v. Commissioner of Income-tax-3, Chennai that Section 54(1) is specific and clear. It is the cost of the new residential house and not just the cost of construction of the new residential house, which is to be adjusted. The cost of the new residential house would necessarily include the cost of the land, the cost of materials used in the construction, the cost of labour, and any other cost relatable to the acquisition and/or construction of the residential house. n. The said section does not exclude the cost of land from the cost of a residential house
5.2.1 Further, it is axiomatic that section 54(1) does not contemplate that the same money received from the sale of a residential house should be used in the acquisition of the new residential house.
5.2.2 If the Legislature has intended that the very same money that had been received as consideration for the transfer of a residential house should be used for the acquisition of the new asset, section 54(1) would not have allowed adjustment and/or exemption in respect of property purchased one year prior to the transfer.
5.2.3 It is also not a requirement of section 54 that construction could not have commenced prior to the date of transfer of the asset resulting in capital gain. The construction should be completed within the prescribed time.
To be continued….
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