CAPITAL GAINS –Issues u/s 54 and 54F

BY, CA NAVEEN KHARIWAL G MOB: 9880683725 EMAIL ID: [email protected]

1

SECTION 54:

 “(1) [Subject to the provisions of sub-section (2), where, in the case of an

assessee being an individual or a Hindu undivided family

],  the capital gain arises from the transfer of a

long-term capital asset

,  being

buildings

or

lands

appurtenant thereto,  and being a

residential

house,  the income of which is chargeable under the head "Income from house property", and  the assessee has within a period of [one year before or two years after the date on which the transfer took place purchased], or  has within a period of three years after that date constructed, a residential house, then],  instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place,  it shall be dealt with in accordance with the following provisions of this section, that is to say,— 2

(

i

) if the amount of the capital gain [is greater than the cost of [the residential house] so purchased or constructed, the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be

nil

; or (

ii

) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.

3

  [(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or  which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and  utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and  such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset : 4

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,— (i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and (ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.” 5

• Profit on sale of property used for Residence

Section 54 Basic Conditions

Individual or HUF Transfer of long term capital asset buildings or lands appurtenant thereto Residential house The income of which is chargeable under the head “income from house property” -

Compliance for exemption

Purchase a residential house - one year before - two years after the date of transfer constructed a residential house - with in period of 3 years after the date of transfer Restriction on transfer of new assett 6

Exemption U/s 54

Capital Gains > Cost of the new residential house - diff liable to tax u/s 45.

Capital Gains < Cost of the new residential house - No taxability u/s 45.

7

New Asset

Not to be transferred with in a period of 3 years of its purchase or construction as the case may be In case transferred: Gain to be short term capital gain Cost of acquisition depends upon extent of exemption availed at the time of its acquisition if fully exhausted - Nil Otherwise - Balance 8

Section 54F:

Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.

 54F. (1) [Subject to the provisions of sub-section (4),   where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of any long-term capital asset,    not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or [two years] after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,— (a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45 ; (b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45: 9

    (2) Where the assessee purchases, within the period of [two years] after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head "Income from house property", other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of sub section (1), shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.

10

 the date of its purchase or, as the case may be, its construction,   (3) Where the new asset is transferred within a period of three years from the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such new asset is transferred.]   [(4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit ; and,  for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset : 11

 Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,— (i) the amount by which— (a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds (b) the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub section (1) been the cost of the new asset, shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires ; and (ii) the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid.

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Profit on sale of capital asset other than residential house

Section 54F Basic Conditions

- Individual or HUF - Transfer of long term capital asset - Other than residential house

Compliance for exemption

- Purchase a residential house - one year before or - two years after the date of transfer or - constructed a residential house - with in period of 3 years after the date of transfer - Eligibility as well as other conditions to be fulfilled 13

Conditions for section 54F

Assessee should not own more than one residential house other than the new asset on the date of transfer of the original asset Should not purchase/ construct any other residential house within two years / three years respectively of the transfer of the original asset Restriction only for RH where income chargeable under the head “Income from house property” New asset not to be transferred before three years from the date of its purchase/ construction, in case transferred LTCG exempted earlier to be taxed in the year of sale 14 14

Exemption U/s 54F

Net consideration > Cost of the new residential house - Proportionate diff liable to tax u/s 45.

Net consideration < Cost of the new residential house - No taxability u/s 45.

15 15

SCOPE OF THE PROVISIONS

In CIT v Aravinda Reddy (TN), the Supreme Court Succinctly Summed up the object, purpose and symmetry of the section in the following words: “if you sell your house to make a profit, pay Caesar what is due to him. But, if you buy or build another, subject to the conditions of section 54(1), you are exempt.” The language, the purpose and the symmetry of the section was therefore held to be plain. Thus, if the assessee buys and also further constructs a house which is used for his residence, exemption under this section cannot be refused.

16

Self financing scheme - DDA. [S. 2(29A), 2 (42A)]

Allottee of a flat under self financing scheme of the DDA gets title to the property on issuance of allotment letter as clarified vide Circular No. 471 dt 15-10-1986, and therefore, capital gain arising on sale of flat by the assessee on 6th Jan., 1989 which was allotted to him on 2nd Feb., 1982, by issuance of an allotment letter was a long term capital gain, irrespective of the date of allotment of specific flat number and delivery of possession on 15th May, 1986, assessee was entitled to exemption under section 54 on reinvestment of sale proceeds in another house. ( A. Y. 1989-90).

- Vinod Kumar Jain v. CIT (2011) 244 CTR 346 / (2010)

195 Taxman 174 / 46 DTR 185 (P&H)(High Court)

17

Circular : No. 471 [F. No. 207/27/85-

IT(A-II)], dated 15-10-1986.

Investment in a flat under the self-financing scheme of the Delhi Development Authority to be treated as construction for the purposes of capital gains.

Cost of the new asset is the tentative cost of construction.

18

Circular : No. 672, dated 16-12-1993

Allotment of flats/houses by co-operative societies and other institutions, whose schemes of allotment and construction are similar to those of DDA, should be treated as cases of construction for purposes of sections 54 and 54F .

19

Is investment in more than one house possible U/s 54 ?

In favour of revenue

• Exemption u/s 54 can be claimed only in respect of one house provided conditions of Sec 54 are satisfied.

K.C. Kaushik v ITO 185 ITR 499 (Bom.)(1990)]

• Assessee was not entitled to exemption in respect of two independent residential houses situated at different locations. (A. Y. 2005-06) -

Pawan Arya v. CIT (2011) 237 CTR 210 / 49 DTR 123 / 200 Taxman 66 (P&H)(HC)

-Allowed only for one flat.

-

[Gulshanbanoo R. Mukhi v. JCIT 83 ITD 649 (ITAT- Mum) (2002)]

20

In favour of revenue In Asstt. CIT v. Dr. P.S. Paricha (2008) 20 SOT 468 (Mum).

The taxpayer acquired two adjoining residential flats in one building and gave them on rent to two different tenants. The Tribunal held that the eligibility for exemption under section 54 would be limited to one flat only; as it was occupied by two tenants the two flats could not be treated as single residential unit.

InDy. CITv. Ranjit Vithaldas Lokupavan [2008] 25 SOT 420 (Mum.)

the taxpayer reinvested the capital gain in two different places. The taxpayer claimed that, though the flats were located at different places, a common kitchen and common prayer place were held for being treated as single unit. The Tribunal rejected the taxpayer's claim for the reason that they were not contiguous and could not be treated as one unit. In result, the taxpayer became eligible for exemption only for the amount invested in one residential unit.

21

In favour of the assessee: In ITO v. Ms. Sushila MJhaveri [2000] 107 lTD 327 (Mum.)(SB)

the taxpayer acquired two adjoining flats and by removing the intermediate walls with a common kitchen it was used as one residential house. Since both the units were combined and made into one unit, investment in two flats was held as eligible for exemption under section 54.

In Prem Prakash Bhutani v. Asstt. CIT [2009] 31 SOT 38 (Delhi)(URO)

even construction of several residential units meant for family members and in the presence of evidence in the form of ration card where all the residents were shown as belonging to same family, it was held that such independent portions occupied by the family members were eligible for exemption notwithstanding fact that several independent residential units were occupied in the same place.

22

In favour of the assessee: The Karnataka High Court in CITv. D. Ananda Basappa [2009] 180 Taxman 4

the taxpayer transferred a residential building and invested the long-term capital gain in acquisition of two residential flats situated side by side by means of two separate registered sale deeds and claimed exemption for both the residential units acquired.

Both the units were in the occupation of two different tenants. The Court held that the apartments were situated side by side and the builder had made necessary modifications to make them one unit by fixing opening door in between those two apartments. The mere fact that when the Inspector visited the premises they were occupied by two different tenants was not a ground to hold that the apartments were not one residential unit. The aspect of one registered sale deed or more than one deed could not be determinative of the building being considered as one residential unit or otherwise.

23

In favour of the assessee:

The Court referred to section 13 of the General Clauses Act, 1897 wherein it is declared that whenever the singular is used for a word, it is permissible to include the plural. The expression 'a' residential house should be understood in a sense that building should be of residential nature and 'a' should not be understood to indicate a singular number.

24

Dismissal of the special leave petition

in Ananda Basappa’s (D) case (2010) 320 ITR (St.) 19 was in following words.

“Their Lordships S.H. Kapadia and Aftab Alam JJ. Dismissed the Department’s special leave petition against the judgment dated October 20, 2008 of the Karnataka High Court in ITA No.

113 of 2004 reported in 309 ITR 329

whereby the High Court held that the assessee was entitled to exemption under section 54 on purchase of two flats which were combined to make one residential unit

. CIT v Ananda Basappa (D) (2009) 309 ITR 329 (kar.)” 25

•

CITv. Smt.Jyothi K.Mehta [2011] 12 taxmann.com 440 (Kar.)

the taxpayer sold a residential house and acquired two flats and claimed exemption under section 54 of the Act. The Assessing Officer held that the taxpayer was already owner of a residential flat at Bombay and she had purchased two flats out of the sale proceeds. Hence, the taxpayer was not entitled to claim exemption from the capital gains. The Commissioner (Appeals) factually found that the two flats were utilized as a common residence and, hence, the taxpayer was eligible for exemption under section 54. The Tribunal too, upheld the order of the Commissioner (Appeals).

26

The Karnataka High Court held that the two flats acquired by a taxpayer were situated side by side. The builder had effected necessary modifications to the flats to make them one unit by opening the door in-between the two apartments. It was further held that the taxpayer could have purchased both the flats in one single sale deed or could not have narrated the purchase of two premises as one unit in the sale deed, did not make any difference. The Court made reference to the precedent in

CITv. Smt.KG.Rukminiamma

[2011] 196 Taxman 87/[2010] 8 taxmann.com 121 (Kar.).1n

Smt.

KG. Rukminiamma's

case (supra) it was held that the expression 'a residential house' used in section 54 does not convey the intention of the Legislature to mean a single residential house as eligible for exemption. If that was the intention, the Legislature might very well have used the word 'one' instead of 'a residential house'.

27

The Court in

Smt. Jyothi K Mehta's

case

(supra)

also made reference to section 13(2) of the General Clauses Act, 1897 and held a new asset acquired after the sale of the original asset can also be buildings or lands appurtenant thereto, which also should be 'a residential house'. The letter 'a' in the context it is used should not be construed as meaning 'singular'. Being an indefinite article the expression should be read in consonance with the other words 'buildings' and 'lands'. A further evidence that the two residential units were situated side by side and necessary modifications were made by means of a door in between the units to make it as a single unit satisfied the requirements. The Court, accordingly, held that the taxpayer was eligible for exemption under section 54 for both the residential units which could be used as a single residential unit.

28

In favour of the assessee:

• Two adjoining flats converted into single residence, exemption allowed.

[ACIT v Mrs. Leela P. Nanda 286 ITR (AT) 113 (Mum)(2006)]

• Four flats purchased in same building but on different floors because of large size of family, which maintained a common kitchen and a common ration card, exemption allowed.

[Vyas (K.G.) v ITO 16 ITD 195 (Bom.)(1986)]

29

Contd….

In favour of the assessee:

• Several self occupied dwelling units which were contiguous and situated in the same compound and with in the common boundary having unity of structure should be regarded as one residential house.

[Shiv Narain Choudhary v. CWT 108 ITR 104 (All)(1997)]

• More than one units converted into one single house allowed for the purpose of sec. 54F as well.

[Neville J. Pereira v. ITO 8 Taxmann.com 68 (Mum. ITAT)]2010)]

30

Investment in two adjacent flats.

The assessee had purchased two adjacent flats which were interconnected and used as one residential house. Assessing Officer denied the exemption. On appeal the Tribunal held that the Assessing Officer shall allow the exemption in respect of both the flats if it is found that the flats are being used as one residential house and the investment was made by assessee himself. In appeal by revenue the Bombay High Court up held the decision of Tribunal.

- CIT v. Joe B. Fernandes ITA No. 1467 of 2007 dt. 10-12-2008 429 (2012) 43. B.BCAJ (January- 2012 – P. 41)

31

Investment in residential unit by merging 4 flats and that too prior to handing over of the possession of said residential unit

The assessee earned capital gain from sale of ancestral property. The assessee claimed exemption u/s 54F in respect of amount invested towards purchase of four flats which were converted into one residential unit. The AO allowed exemption only in respect one flat by holding that flat were separate and independent residential unit having separate kitchen and entrance and thus, according to him flat could not be said as adjacent flats even though builders had referred them as composite unit.

32

• • It was held by the Tribunal that, if requirement of assessee family was met-out only by enlarging residential unit by merging 4 flats and that too prior to handing over of the possession of said residential unit, then said converted residential unit would be treated as a residential house as stipulated u/s 54F and thus, claim of the assessee was allowed. (AY 2007-08)

ACIT v. Deepak S. Bheda (2012) 52 SOT 327 (Mum.) (Trib.)

33

Multiple sales & purchases of residential houses.

Though section 54 refers to capital gains arising from “transfer of a residential house”, it does not provide that the exemption is available only in relation to one house. If an assessee has sold multiple houses, then the exemption under section 54 is available in respect of all houses if the other conditions are fulfilled. If more than one house is sold and more than one house is bought, a corresponding exemption under section 54 is available.

However, the exemption is not available on an aggregate basis but has to be computed considering each sale and the corresponding purchase adopting a combination beneficial to the assessee.(A. Y.

2006-07)

- Rajesh Keshav Pillai v. ITO (2011) 44 SOT 617 / 60 DTR 402 / 141 TTJ 183 (Mum.)(Trib.)

.

34

Sale of commercial properties/capital asset and Investment in two residential units

Assessee sold two commercial properties/ capital assets and claimed deduction under section 54F on ground of purchase of two residential units being ground and first floor in a Group Housing Complex. Assessing Officer disallowed same on ground that deduction was not allowable as two distinct properties were purchased. Commissioner (Appeals) considering all the factors held that assessee had in possession was one single unit comprising of two floors of one and same double storied residential house having common stair case kitchen, etc. The Tribunal held that assessee would be entitled to exemption as claimed. (A. Y. 2005-06).

- ACIT v. Sudha Gurtoo (2011) 48 SOT 393 / 7 ITR 653 (Delhi)(Trib.)

35

Whether Investment should be in assessee’s name –

Where a liberal view was taken • Sec. 54 clearly says that if the assessee is owner of the property, he is entitled to exemption

even if the new property purchased is in the name of his wife but the same is assessed in the hands of the assessee.

[CIT v. V. Natarajan 154 Taxman 399 (MAD.) [2006]]

36

Profit on sale of property used for residential house and Property purchased in the joint names of assessee and husband.

To claim exemption under section 54 and 54EC what is material is investment of sale consideration in acquiring residential premises or constructing a residential premises or investing amount in bonds set out in section 54EC, there is no requirement that such investments should be in name of assessee only. Assessee sold her residential house property and invested part of sale proceeds in purchasing residential house property and specified bonds in joint names of assessee and her husband.

37

The Court held that as entire consideration had flown from assessee and no consideration had flown from her husband, merely because either in sale deed or in bonds her husband’s name is mentioned, in law, he would not have any right, and assessee could not be denied benefit of deduction under section 54 and 54EC. (A. Y. 2007 08).

- DIT v. Jennifer Bhide (2011) 203 Taxman 208

(Karn.)(High Court)

38

Purchase of house in joint names of assessee and his wife, assessee is entitled to exemption under section 54F.

Assessee purchased the house in the joint name of assessee and his wife and claimed exemption under section 54F. The assessing Officer has allowed exemption only to the extent of 50 percent, which was confirmed by Commissioner (Appeal). On appeal to the Tribunal, the Tribunal allowed the full exemption to the assessee.

39

• • On further appeal to High Court by revenue the Court held that as the wife has not contributed to purchase and whole purchase consideration was paid by assessee, it would be treated as the property purchased by the assessee in his name and merely because he had included the name of his wife and the property purchased in the joint name of his wife would not make any difference and the assessee is entitled to exemption under section 54F.Accordingly the appeal of revenue was dismissed.(A.Y. 2007-08)

CIT v. Ravinder Kumar Arora ( 2012) 342 ITR 38/75 DTR 406/252 CTR 392 (Delhi) (High Court)

40

Investment in property in joint name-Benefit of exemption to be allowed for entire amount of investment .[S. 22 to 26, 27(i), 64(i)(iv)]

The assessee sold the inherited property and purchased a new residential property in joint name with his wife and claimed deduction under section 54. The Assessing Officer allowed the exemption only to the extent of 50% investment on the ground that 50% property belongs to wife. On appeal the Commissioner (Appeals), granted the exemption of entire amount . On appeal by revenue, the Tribunal held that the name of assessee’s wife was entered in the sale agreement just for purpose of security , and for purpose of sections 22 to 26, 27 and 64. Assessee would be owner of whole property and income there from would be assessable in his hands, therefore benefit of section 54 of entire amount invested in new property was to be allowed. Appeal of revenue was dismissed. (A.Y 2007-08)

ACIT v. Suresh Verma ( 2012) 135 ITD 102/72 DTR 82 (Delhi)

(Trib.)

41

Purchase of house jointly with spouse is eligible for exemption.

The assessee had made long-term capital gain on sale of shares. The sale proceeds were invested in purchase of row house in the joint names and exemption under section 54F was claimed. The Assessing Officer denied the exemption on the ground that the property was purchased in joint name of wife. In appeal Commissioner (Appeal) confirmed the denial of exemption.

42

• • On appeal to Tribunal, the Tribunal held that total consideration for the house had been met by the assessee and the name of wife was added only for the sake of convenience. The Tribunal drew the support from the section 45 of the Transfer of Property Act which provides that the share in the property will depend on the amount contributed towards the purchase consideration.(A.Y.2004-05)

(ITA no 4285/Mum/2009 dated 2012.Bench ‘F’)Vasudeo Pandurang Ginde

v.ITO (2012) BCAJ –July –P.57(Mum.)(Trib.)

6-6-

43

Contd….

Whether Investment should be in assessee’s name –

Where a narrower view was adopted • House property in the name of HUF sold but new house purchased in the name of Karta and his mother-To claim the benefit of sec. 54F the residential house which is purchased or constructed has to be of the same assessee.

[Vipin Malik (HUF) Vs CIT 183 Taxman 296 (Delhi)(2009)]

• Exemption u/s 54F is allowed only when the new residential property is purchased by the assessee in his own name and not in name of his adopted son.

[Prakash v. ITO 173 Taxman 311 (Bom.) [2008]]

44

Nexus between capital gain and amount of investment u/s 54 is not Necessary.

Held that

the assessee had initially utilized the sale proceeds on sale of its residential flat in commercial properties and, later on, he purchased two residential flats within a period specified in sub-section (2) of section 54. The Revenue’s main dispute was that the sale proceeds were utilized for purchase of a commercial property and residential house was purchased out of the funds obtained from different sources, as such, the identity of heads has been changed Assessee is not required under the provision for sec 54 to establish the nexus between the amount of capital gain and the cost of new asset .

[ Ishar Singh Chawla Vs. CIT 130 TTJ (Mum) (UO) 108 (2010) and Ajit Naswanit Vs. CIT 1127 Taxman 123 (Delhi) (Mag.) (2001)]

45

Whether capital gains earned by assessee can be utilized for other purpose, and as long as assessee fulfils condition of investment of equivalent amount in asset qualifying for relief under section 54F, by securing money spent out of capital gains or from other sources available to it either by borrowal or otherwise, he is eligible for exemption under section 54F in respect of entire amount of capital gains realised?

Judgement: Held, yes - Whether merely because capital gains earned had been utilized for other purposes and borrowed funds were deposited in capital gains investment account, benefit of section 54F exemption cannot be denied

[2012] 24 taxmann.com 104 (Hyd.) J.V. Krishna Rao V Deputy Commissioner of Income-tax, Circle 3(3), Hyderabad*

46

A residential house was purchased by assessee - Assessee contended that she had sold certain shares and sale proceeds of said shares were invested for purchasing of said house and, accordingly, claimed deduction under section 54F – Tribunal considered entire facts and circumstances of case and came to conclusion that assessee was not entitled for deduction under section 54F on reason that assessee had not utilized sale consideration of shares for purchase of house property and house was purchased by assessee partly from bank loan and partly from loans taken from family members and others – Assessee filed miscellaneous application for rectifying said order - Whether since sale proceeds of shares were not appropriated towards purchase of residential house, Tribunal, was justified in disallowing deduction under section 54F –

Held, yes - [In favour of revenue] [2012] 18 taxmann.com 265 (Hyd. ITAT) Smt. V. Kumuda v. Deputy Commissioner of Income-tax, Circle-16(2), Hyderabad *

47

Contd….

• Where assessee utilized the sale consideration for other purposes and borrowed the money for the purpose of purchasing the Residential House Property to claim exemption u/s54,it was held that the contention that the same amount should have been utilized for the acquisition of new asset could not be accepted.

•

[Bombay Housing Corporation v. Asst. CIT 81 ITD 454 (Bom) (2002)]

48

Purchase of new residential house -Deposit under Capital Gains accounts scheme.

Assessee having deposited the sale proceeds of property in his bank account under the capital gains account scheme within the prescribed period and purchased a new property by availing of a loan which was paid out of the same bank account, he has complied with the provisions of Capital Gains Accounts Scheme and, therefore, assessee is entitled to exemption under section 54F. (A. Y. 2006-07)

- P. Thirumoorthy v. ITO (2011) 49 DTR 91 / 135 TTJ 75 / 7 ITR 10 (UO)(Chennai)(Trib.)

49

Link capital gain & investment

Capital asset sold resulting in long term capital gains and sale proceeds utilized for business.

New residential house property purchased after getting the same financed from bank Other stipulations for exemption complied Whether assessee entitled to deduction u/s 54F Exemption u/s 54F not admissible

Milan Sharad Ruparel v. ACIT 121 TTJ 770 (Mum)

Ajit Vaswani v. (2001) CIT 117 Taxman 123 (Delhi) (Mag.)

50

Whether Capital gain arising from transfer of a self occupied residential house would be entitled to exemption

Section 54 of the Income-tax Act provides for exemption in respect of capital gain arising from the transfer of a long-term capital asset, being a residential house, the income of which is chargeable under the head

‘Income from house property’ Board clarified that Income from a self-occupied residential house is chargeable under the head ‘Income from house

in respect of a self-occupied residential house

property’ even though in

certain circumstances such income may be computed at nil or at a negative figure by virtue of section 23(2) read with section 24 of the Act. Thus, a person shall be entitled to claim exemption under section 54 of the Act even

Circular : No. 538, dated 13-7-1989

51

Does mere sale of appurtenant land qualify for relief under section 54

• Benefit u/s 54(1) is not available in case of sale of land adjoining to the building.

The land appurtenant to the building means that the ownership of building and land appurtenant should be of same person. If building is owned by one person and land is owned by another, it will be the case of land adjoining to the building and by no stretch of imagination it can be called land appurtenant to the said building.

[P.K. Lahri v. CIT 146 Taxman 349 (ALL.) [2005]]

52

Land appurtenant to a building is a question of fact Land appurtenant thereto implies lands which are necessary for the effective enjoyment of the building as a residential house Tests as per judicial precedents

S Radha Krishnan vs CIT (1984) 145 ITR 170 (Madras) CIT vs M Kalpagam (1997) 227 ITR 733 (Madras) CIT vs Zaibunisa Begum (1985) 151 ITR 320 (AP) L & T vs Trustees (1988) 4 SCC 260

53

In CIT v Kalpagam (M) (1997) 227 ITR 733 (Mad) following five tests have been understood as relevant for the meaning of the expression:-

(1) If the building together with the land is treated as an indivisible unit and enjoyed as such by the persons occupying the building, it is an indication that the land is appurtenant to the building; (2) If the building has extensive lands appurtenant thereto and even if the building and the land have been treated as one single unit and enjoyed as such by the occupiers, an enquiry could be made to find out whether any part of the land contiguous to the building can be put to independent user without causing any detriment to the enjoyment of the building. Such enquiry should be conducted not based on any artificial considerations, but from the point of view of the persons occupying the building. The number of persons or different branches of families residing in the building, the requirements of persons occupying the building, consistent with their social standing, etc., are relevant for the purpose.

If any surplus is arrived at on such enquiry, then the extent of such surplus land may not qualify to be treated as land appurtenant to the building; 54

(3) If there is any evidence to indicate that any portion of the land contiguous to the building was applied to user other than the enjoyment of the building, then that provides a safe indication regarding the extent of land applied for such user. For instance, the land used by the occupiers for commercial or agricultural purpose although forming part of the land adjacent to the building, does not qualify to be treated as land appurtenant to the building; (4) If the owner or occupier is deriving any income from the lands which is not liable to be assessed as income from house property under section 22 of the Act, then such portion of the land does not qualify to be treated as land appurtenant to the building; and (5) Any material pointing to the attempted user of the land for purposes other than the effective and proper enjoyment of the house would also afford a safe guide to determine the extent of surplus land not qualifying to be treated as land appurtenant to the building.

55

The above tests are illustrative and by no means exhaustive. It is for the tax authorities to apply their mind properly to the facts of each case and to devise tests suitable and appropriate to each case.

56

MEANING OF RESIDENTIAL HOUSE

• It is not necessary that a person should reside in the house to call it a residential house. If it is capable of being used for the purpose of residence than the requirement of the sec. 54F is satisfied.

[Amit Gupta v. DCIT 6 SOT 403 (Delhi)(2006) & Mahavir Prasad Gupta 5 SOT 353 (Del)(2006)]

• Mere assessee’s efforts to use residential property for commercial purposes also claim of deduction u/s 54F cannot be denied.

ITO vs Shri Suresh Chand Kukreja (ITAT INDORE)

(

I.T.A.No. 235/Ind/2011.)

• Exemption u/s 54 cannot be claimed on the basis of a mud structure not worthy of the caption ‘residential house’.

[M.B. Ramesh v. ITO 320 ITR 451 (Kar.) [2010] ]

57

Mere construction of room without amenities like boundary wall, kitchen , toilet electricity , water and sewerage connection etc cannot be held to be house ,hence benefit of section 54 cannot be granted.

The assessee claimed the long term capital gain arising from the sale of his residential house to be exempted u/s. 54 on the ground that investment was made for purchase of residential plot in Janta Enclave, Ludhiana and subsequently he had constructed a room on the said plot, which was let out at the rate of Rs.250 per month. The Assessing Officer concluded that the residential house constructed by the assessee was only one room set and as it was having no amenities, the exemption u/s. 54 could not be granted.

58

In the instant case, in order to examine the entitlement of the assessee for exemption u/s. 54, it is to be seen whether the assessee had constructed residential house within three years of the transfer of his property. For doing so, the meaning of the term `house’ is to be explored. The term `house’ has not been given any statutory definition and, thus, has to be assigned meaning as understood in common parlance. As per dictionary, it means abode, a dwelling place or building for human habitation. A building, in order to be habitable by a human being, is ordinarily required to have minimum facilities of washroom, kitchen, electricity, sewerage etc. In view of the above, it was held that the house in question was not a residential house and therefore, the assessee was not entitled to the benefit u/s.

54.

Appeal of assessee was dismissed.A.Y.1997-98)

Ashok Syal v. CIT, Jalandhar(2012) 209 Taxman 376 (P & H)(High Court)

59

S.54F: Mere construction of sunshade is not construction of new house hence not eligible for exemption.

• For the purpose of s. 54F, the residential house so constructed is referred to as new asset. Obviously, anew house is not something which is either an extension or addition made to an existing structure. Inthe present case, approval plan of the Corporation pertains only to roof changing (sunshade projection)and for construction/extension of/to the first floor. Assessee was not therefore entitled to exemptionunder s. 54F.

Pushpa v. ITO (2012) 79 DTR 218 (Ker)(High Court)

60

Whether Investment in CGAS and return to be filed within time allowed under section 139(1)

Section 54(2) requires that in case the capital gain is not appropriated by the assessee for purchase for a new asset or for constructing of the new asset before the date of furnishing the return of income under section 139, he should deposit the same not later than the due date prescribed for filing a return of income under section 139(1) in a specified bank account.

A plain reading of the above clearly shows that the amount in question should be deposited in the specified bank account before the due date prescribed for furnishing the return of income under section 139(1). There is no dispute on the fact that the assessee has fulfilled this condition. There is no requirement that the assessee should file her return of income before the due date prescribed under section 139(1). On the contrary it is suffice if the assessee furnished the return of income under section 139. The revenue in this case is equating the requirement of depositing the money in the specified bank account before the due date for filing of the return specified under section 139(1) as a requirement that the assessee should file the return within the time prescribed under section 139(1). Section 54(2) does not specify such requirement. Thus, this basis of rejection of the claim under section 54 is wrong.

[Esther Christopher Mascarenhas v. ITO 9 Taxmann.com 99 (Mum.-ITAT)

61

(2011)]

Investment in property within time allowed under section 139(4), entitled to exemption

The assessee has invested the sale consideration in his new residential house which he acquired on 15-10-2008. The assessing officer has held that as the assessee has not invested the amount in capital gain account scheme , before due date of filing of return of income which was 31-7-2008, as per section 54(2) , the exemption was denied. On appeal the Commissioner (Appeals) allowed the claim of assessee on the ground that the investment was made within the period of section 139(4). On appeal by revenue , the Tribunal also confirmed the order of Commissioner (Appeals) holding that since the assessee had invested in the new property within time allowed under section 139(4) , the assessee would be entitled to exemption under section 54. (A.Y. 2008-09)

ITO v. Sapna Dimri (2012) 50 SOT 96 (Delhi) (Trib.)

62

Booking of the flat with the builder is to be treated as construction of flat and extended period under section 139(4) has to be considered for the purpose of utilisation of capital gain amount

The assessee sold the property and invested in residential property. The Assessing Officer denied the exemption on the ground that the assessee has failed to deposit the balance amount in the account in any of the specified bank as required under section 54 and utilize the same in accordance with the scheme framed by the Government and could not produce evidence regarding taking possession of the new flat. On appeal Commissioner (Appeals) confirmed the disallowance. On appeal to Tribunal the Tribunal held that the assessee had booked the new flat with the builder and as per agreement , the assessee was to make payment by installments and the builder was to hand over the possession of the flat after construction.

63

Based on the circular no 672 dated 16-12-1993(1994) 205 ITR (St) 47, read with circular no 472 dated 15-10-1986,(1986) 162 ITR (st)17 the case of the assessee was to be considered as construction of new residential house and purchase of flat. The Tribunal held that in the case of assessee had invested the capital gains in construction of a new residential house within a period of three years, this should be treated as sufficient compliance of section 54 and it was not necessary that the possession of the flat should also be taken within the period of three years. The Tribunal also held that the due date of filing of return of income under section 139(1) has to be construed with respect to the due date of section 139(4) as the section 139(4) provides for the extended period of filing return as an exception to the section 139(1) and considering this there is no default as the entire amount of capital gain had been invested within due date under section 139(4) .(A.Y. 2006-07).

Kishore H.Galaiya v.ITO ( 2012)137 ITD 229/ BCAJ –July –P. 58 (Mum.)(Trib.)

64

Assessee’s case was that since return for assessment year 1996-97 could be furnished before expiry of one year from end of relevant assessment year or before completion of assessment, whichever is earlier, under sub section (4) of section 139, he could fulfil requirement under section 54 for exemption of capital gain from being charged to income-tax on sale of property used for residence up to 30-3-1998 – Whether assessee was entitled to claim benefit under section 54 on entire amount of capital gains –

Held, yes

2006] 157 TAXMAN 398 (GAU.)

HIGH COURT OF GAUHATI – CIT v. Rajesh Kumar Jalan

65

Assessee earned long-term capital gain of Rs. 38.67 lakh on sale of shares - It claimed exemption under section 54F for Rs. 27.44 lakh in its return of income under section 139(4) filed on 9-1-2009 as it had made an investment in acquisition of a residential flat – Assessing Officer denied exemption on ground that due date of filing of return under section 139(1) was 31-7-2008 while sale deed for acquired flat was executed on 19-9-2008 - Whether since amount was utilized by assessee for purchase of new residential flat before 9-1-2009, same would be qualified for deduction under section 54F(1) – Held, yes - [In favour of assessee]

R.K.P. Elayarajan v. Deputy Commissioner of Income-tax 52 SOT 159

66

Deposit of amount in capital gains account scheme by date mentioned under section 139 (4).

If a person has not furnished the return of the previous year within time allowed under Sub section (1) i.e. before 31st July of the Assessment year, the assessee can file the return before expiry of one year from the end of the relevant previous year. The assessee has deposited the amount before filing of return under section 139(4), therefore the assessee is entitled to the benefit of exemption under section 54. (A. Y. 2006-07).

- CIT v. Jagriti Agrawal (Ms) (2011) 339 ITR 610 / 203 Taxman 203 / 64 DTR 333 (P&H)(High Court)

67

Investment in residential house - Revision of orders prejudicial to revenue - Exemption - Capital gains - Investment in house with in time specified under section 139(4). (S. 263)

Commissioner passed the order under section 263 withdrawing exemption under section 54F, on the ground that new house was registered in favour of the assessee beyond the due date prescribed under sub section (1), of section 139 and that the assessee failed to deposit the sale proceeds as provided under section 54F(4). High Court held that Tribunal was justified in setting aside the order of the Commissioner by holding that the investment made by the assessee being with in time specified under section 139 (4) ,the assessee is eligible for exemption under section 54F in view of the binding decision of the Jurisdictional High Court. (A. Y. 2006 07).

- CIT v. Vrinder P. Issac (Smt.) (2011) 64 DTR 376 (Karn.)(High Court)

68

Whether Investment in residential house‐ outside India is eligible for exemption

.

• Property purchased in

foreign country

is also eligible for exemption u/s 54.

The new house may be in India or outside India

[Prema P. Shah Vs. ITO 101 TTJ 849 (Mum)(2006)]

Held: No, Income Tax Act, 1961 applies only to India

Leena J Shah v. ACIT (2006) 6 SOT 721 (Ahd)

69

• • There is nothing in s. 54F to suggest that the new residential house acquired should be situated in India and therefore, assessee is eligible to claim exemption u/s.

54F notwithstanding the fact that the houseproperty purchased in outside India.

(A.Y. 2009 – 2010)

Vinay Mishra v. ACIT (2012) 79 DTR 1/20 ITR 129 (Bang) (Trib.)

70

Transfer of a long-term capital asset, being

buildings or lands

appurtenant thereto, • • •

S.54: Capital gains‐Property used for residence‐Exemption‐Sale of two residential houses invested in acquiring single residential house is eligible for exemption.

If other conditions as regards time limit etc. are fulfilled, exemption u/s. 54 is allowable where capital gains arising from sale of two residential houses are invested in a single residential house.

Dy. CIT v. Ranjit Vithaldas (2012) 79 DTR 377/ 150 TTJ 581 (Mum.)(Trib.)

71

Whether exemption is allowed on the basis of actual sales consideration or as per deemed sales consideration u/s. 50C

 It has been held that for claiming exemption u/s 54F ( or 54 or any other exemption under the head long term ) there must be two computation of capital gains – one by taking actual sales consideration and one by taking deemed sales consideration as per section 50C of the IT Act. The maximum long term exemption is restricted to the amount of capital gains computed by taking actual sale consideration received or amount invested for buying house or constructing house if that is less than that.

Gouli Mahadevappa v. ITO (2011) 49 DTR 207 / 128 ITD 503 / 9 ITR 129 / 135 TTJ 489 (Bang.)(Trib.)

72

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, when sale consideration was shown at Rs. 20,00,000/- stamp duty valuation was Rs. 36,00,000/ and the assessee invested in new house Rs. 24,00,000/- including Rs.

20,00,000/- sale consideration, he could claim exemption under section 54F only of Rs. 18,06,494/- and not entire Rs. 36,00,000/-. (A.

Y. 2005-06).

- Gouli Mahadevappa v. ITO (2011) 49 DTR 207 / 128 ITD 503 / 9 ITR 129 / 135 TTJ 489 (Bang.)(Trib.)

Gyan Chand Batra v ITO (2010) 133 TTJ 482 / 45 DTR 41 (Jaipur)(Trib.) Tribunal has taken different view.

73

Exemption not available where builder not even allotted plot within 3 years

• Where assessee sold his agricultural land and deposited part of consideration with a builder for purchase of a plot on which no construction activity could be started within a period of 3 years because no plot was ever handed over to him, benefit of section 54F was not available to assessee - The main thrust of the section 54F is construction of a residential house; the Legislation in its wisdom has specifically provided the period of three years, it cannot be enlarged to indefinite period

[Pankaj Wadhwani v. CIT 18 Taxmann.com 33 (Indore ITAT)[2012]]

74

Construction within 3 years

Assessee has made payments out of the capital gains with in the stipulated time Builder failed to hand over the property with in the prescribed time Exemption u/s 54/ 54F cannot be denied

CIT vs RC Sood (2000) 108 Taxman 227 (Del) CIT vs Ms Hille JB Wadia (1995) 216 ITR

75

Whether Construction of house property can be started before the date of transfer.

Construction of house property can be started before the date of transfer.

[CIT v. HK Kapoor 150 CTR 128 (All) (1998)] Subramanya Bhat 165 ITR 571 (1987)]

76

Whether Purchase of Fractional interest is not barred

• Assessee purchases residential house 15% share property in which in the he was already staying, Exemption u/s 54 cannot be denied.

CIT vs Chandan Ben Magan Lal 245 ITR 182 (Guj) (2000) CIT vs TN Arvinda Reddy 120 ITR 46 (SC) (1979)

77

S. 54F: Capital gains –Investment in residential house- Exemption cannot be denied for holding joint property with her husband , since assessee did not own any property in status of an individual as on date of transfer , claim was allowed.

Assessee held a property jointly with her husband.

She transferred another property owned by her individually for consideration under a development agreement. It was held that joint ownership of a property could be held to stand in her way of claiming exemption u/s. 54F,hence, since assessee did not own any property in status of an individual as on date of transfer, her claim was to be allowed.(A.Y.2000-01)

P.K. Vasanthi Rangarajan(Dr.)(Smt)v. CIT, Chennai (2012) 209 Taxman 628/252 CTR 336 (Mad.) (High Court).

78

Pre condition that assessee should not own more than 1 residential house Share in a joint property is ‘owned wholly or partly’ whereas in section 54F the word is ‘owned’ For denial of exemption u/s 54F the assessee should own a complete residential house and does not include shared interest in a residential house

ITO vs Rasik Lal N Satra (2006) 98 ITD 335 (Mum)

79

Whether 54 is admissible either for purchase or for construction or for both:

Where the assessee had partly invested the capital gains on the purchase of another house and partly on the construction of additional floor to the house so purchased within the prescribed time limit, it was held that the Income-tax Officer was not justified in restricting exemption to investment on purchase only, holding that the exemption under section 54 was admissible either for purchase or for construction but not for both.

[Sarkar (B.B.) v CIT (1981) 132 ITR 661 (Del)].

80

Can capital gains exemption u/s 54F or 54 be claimed for buying land also?

Yes, one can claim exemption from capital gains u/s 54 or 54F for land purchase , but only if the said land is part of land on which house is being constructed. This is the decision in

ACIT vs Narendra Mohan Uniyal 32 SOT 152 (Delhi)

81

Circular : No. 667, dated 18-10-1993

In cases where the residential house is constructed within the specified period, the cost of such residential house can be taken to include the cost of the plot also.

82

Delay in Registration of Sale deed Immaterial

Payment made but sale deed could not be executed with in 2yrs; whether assessee is entitled to benefit u/s 54 ?

Legal transfer is more important not mandatory, payment of consideration coupled with taking over of possession

CIT v. Dr Laxmichand (1995) 211 ITR 804 (Bom) CIT v. Shahzada Begum (1988) 175 ITR 397(AP)

83

Purchase of new flat - Section 53A of Transfer of Property Act, 1882.

Assessee sold a building on 30-4-2004 and claimed deduction under section 54 in respect of capital gain arising on sale of building as he has invested in a new flat on 25-6-2003. i.e. with in one year from date of transfer of building. Assessing Officer was of the view that as registration of transfer deed of building was dated 26-8-2004 hence, claim under section 54 was denied. The Tribunal held that buyer had performed their part of their obligation as on 30-4-2004, in such a situation, mere non registration of transfer deed would not change date of transfer of building to 26-8-2004. Tribunal held that assessee was entitled to deduction under section 54. (A. Y.

2005-06).

-

Sureshchandra Agarwal v. ITO (2011) 48 SOT 210 (Mum.)(Trib.)

84

•

Construction in another property not eligible for exemption:

An assessee gifted some land to his wife.

He, thereafter constructed a building on the said land.

The Government acquired the land and building and paid compensation for land to the wife and for the building to the assessee (husband). It was held that capital gain on land was assessable in the hands of the husband by virtue of section 64 but he was not entitled to exemption under section 54 in respect of capital gain on the acquisition of the land of the wife as the capital gain to the wife did not arise on transfer of a residential house.

[T.N. Vasavan v CIT (1992) 197 ITR 163 (Ker)].

85

Collaboration agreement

Whether repurchase of a part of the property sold will entitle assessee to claim benefit u/s 54 Held, yes

CIT v. Phiroze H. Patel (1994) 205 ITR 377 (Bom)

86

Purchase/ construction

Property being would apply ?

developed by the builder under collaboration agreement Assessee to get some portion of the dwelling unit Whether time limit of 2 yrs or 3 yrs The case would fall under purchase of property by way of construction

ITO v. Abbas Ali Shiraz (2006) 5 SOT 422 (Bang.)

Construction may be by a third party

CIT v. Uma Budhia (2004) 141 Taxman 39 (Kol.)

87

Incomplete house

Capital gains invested in construction of residential house with in the stipulated time More funds required to complete the construction in a particular manner Assessee entitled to exemption as the utilization of the capital gains is complete

Ajay Goyal v. ITO (ITA No 493 of 2004 dt 9-5-2005)

88

Invested in purchase of land, construction not completed, entitled to exemption.

The assessee had invested full sale consideration received on sale of original asset in purchase of plot of land and started construction of a new house, though not completed. In view thereof the assessee was entitled to the exemption under section 54F of the Act, in as much as the thrust of the said section is on investment of net consideration received on sale of original asset and started construction of a new residential house, though the new house is not completed the assessee had complied with provisions of section 54F and hence is entitled to benefit of exemption claimed by assessee.(A.Y.2007-2008)

Rajneet Sandhu(Smt) 7(Chandigarh) (Trib.) v.

DY.CIT(2012) 49 SOT

89

Section does not require construction to be complete within specified period, just because the construction is not complete the assessee cannot be denied the exemption.

The assessee sold shares for Rs. 4.18 crores and within 12 months, invested Rs. 2.16 crores thereof to construct a house property and claimed exemption under section 54F.

However, as even after the expiry of 3 years of the date of transfer, the construction of the house was not complete and sale deed was not executed, the Assessing Officer & CIT(A) denied relief under section 54F though the Tribunal granted it. On appeal by the department to the High Court, the High Court held dismissing the appeal: Section 54F is a beneficial provision for promoting the construction of residential house & requires to be construed liberally for achieving that purpose.

90

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’. The condition precedent for claiming benefit under section 54F is that the capital gain should be parted by the assessee and invested either in purchasing a residential house or in constructing a residential house.

Merely because the sale deed had not been executed or that construction is not complete and it is not in a fit condition to be occupied does not disentitle the assessee

to claim section 54F relief (CIT v.Sardarmal Kothari and another (2008) 302 ITR 286 (Mad.) followed).(A.Y. 2006-07)

156 CIT v. Sambandam Udaykumar(2012) 345 ITR 389 /

206 Taxman 150 / 72 DTR 232 (Karn.)(High Court)

91

construction was not completed but as the full consideration was paid to builder, the assessee is entitled for exemption-Exemption was allowed only in respect of one house.

The assessee paid the entire consideration when the building was under construction and claimed the exemption under section 54F. The assessing Officer rejected the claim on the ground that the flat was not ready within two years of transfer. The Tribunal held that as the assessee having paid full consideration before the statutory period of two years from the date of sale of shares and has acquired the right in the flats constructed by the builder the benefit of exemption under section 54F cannot be denied.

92

• • The Tribunal allowed the exemption in respect of one flat because the purchase was by two separate agreements though the both the flats were on the same floor and the certificate by architect being a self serving document and nothing has been produced from the builder to show that the flats were used as one unit. (A.Y. 2005-06)

Sudhakar Ram v. ACIT (2012) 72 DTR 187 / 49 SOT 90 (Mum.)(Trib.).

93

Assessee unable to construct residential house within prescribed period, exemption to be granted under special circumstances where intention of the statute is satisfied

During the relevant assessment year, the assessee sold the capital asset and earned long term capital gain. Subsequently, assessee invested entire sale consideration in purchasing a land for construction of a residential house.

However, assessee was prevented petition filed by the owner of the land.

from constructing the house on the said land for the prescribed period of 3 years due to Order of status quo by Civil Court as a result of injunction 94

• • The Tribunal observed that the conduct of assessee unequivocally demonstrates that assessee had proceeded to construct a residential house, based on which he had claimed exemption, thus under certain special facts and circumstances the assessee would be entitled to exemption under Section 54F of the Act as the intention of the statute was fully satisfied by the assessee. (A.Y. 2007-08)

V.A. Tharabai(Smt.)v. Dy.CIT ( 2012) 50 SOT 537 (Chennai)(Trib.)

95

Death of the assessee

Legal heirs entitled to exemption if conditions satisfied

CV Ramanathan (1980) 155 ITR 191 (Madras) Mir Ghulam Ali Khan (1987)165 ITR 228 (AP)

Deposit in Capital Gains Scheme A/C inherited by the legal heirs No obligation to utilize the same for purchase or construction of the residential house because the same is not income but estate devolving upon the legal heirs.

Circular No. 743, dt 13-7-1989

96

Benefit u/s 54/ 54F – “construction” includes remodeling

Benefit only for new construction or for remodeling & renovation also covered.

Benefit not restricted to new construction alone

CIT v. ar Mathavan pillai (1996) 219 ITR 696 (Ker) CIT v. Narsimhan PV (1990) 181 ITR 101(Mad)

Mere extension of old existing house would not mean construction.

The construction must be real one and not a symbolic construction.

CIT v. Pradeep Kumar (2006) 153 Taxman 138 (Madras)

97

Firm’s Property when used for residential purpose :

Where a firms property is used for residence of partners and thereafter distributed to the partners upon dissolution of the firm and the partner sells the same, exemption can be claimed by the partner under section 54. For this purpose, period for which this property was held by the firm shall also be taken into account for determining the question whether the house property in exemption was a long-term capital asset or not.

[CIT v M.K. Chandrakanth (2002) 258 ITR 14 (Mad)].

Sale proceeds out of transfer of an asset other than a residential house acquisition of property prior to transfer of asset – deduction allowed

The assessee purchased a residential house and within one year of such purchase, sold his insurance survey business and claimed deduction under section 54F against the purchase of residential house. The Assessing Officer rejected the same on the ground that the property was not purchased out of sale consideration of the transferred asset. It was held that the assessee was entitled to the deduction under section 54F since the section itself provides for acquisition of property prior to transfer of asset.

- CIT v. R. Srinivasan (2011) 198 Taxman 26

(Mad.)(Mag.)(High Court)

99

Investment in residential house Time limit

Where the assessee had purchased a flat after one year of sale of original asset and constructed a new house within three years of sale of original asset proviso (ii) to section 54F was not attracted and assessee was entitled to exemption under section 54F in respect of new house constructed by him. (A. Y. 2006-07)

- P. R. Kulkarni & Sons (HUF) v. Addl. CIT (2011) 49 DTR 442 / 135 TTJ 630 (Bang.)(Trib.)

100

Purchase price of new house adjusted - Construction of new house.

Assessee sold the land to MTDC on 31st March 2005, and possession of new constructed bungalow has been given by the MTDC to the assessee on 31st March 2008 and even otherwise as the entire purchase price of the new house property was adjusted on 31st March 2005, itself i.e. the date of transfer of land in question to MTDC, assessee was entitled to exemption under section 54F. The contention of the revenue stating that as construction was not started prior to date of filing of return i.e. 31st July 2005, the assessee should have deposited the consideration received on transfer of land in capital gains account with the bank which has not been done. The Tribunal held that there was no occasion for depositing the amount in question as it was not received by the assessee any point of time. According to the Tribunal the view of Assessing Officer was not correct. (A. Y. 2005-06).

- Chetan Vithal Tupe v. ACIT (2011) 64 DTR 218 / 47 SOT 1 (Pune)(Trib.)

101

•

Whether Expenditure on laying tiles, white-washing, electrical rewiring, and wood work be included in post COA .

Tribunal held that expenses relating to advocate fee and brokerage of property would be included in cost of acquisition. Expenditure incurred by assessee on laying tiles, white washing, electrical rewiring, and wood work after acquisition of property could not be treated as part of acquisition cost. (A. Y. 2008 09).

- S. Sudha (Smt) v. ACIT (2011) 48 SOT 335 / 10 ITR 206 (Chennai)(Trib.)

102

Investment in residential house (S. 2(47), 45, 50C).

Assessee transferred her 1/3 share in land which was sold vide agreement dated 28-12-2000, for a total consideration of Rs. 24.10

lakhs to original purchaser in part performance of contract.

Possession was handed over on 28-12-2000. Subsequently on request of the purchaser conveyance deed was entered in to in favour of nominee during previous year 2005-06. Assessee purchased a residential flat for a total consideration of Rs 23.50

Lakhs vide agreement for sale dated 23-3-2001 and possession of said property was delivered to assessee on 27-4-2001, it means that long term capital gain arising out of sale of land was invested in residential house, therefore exemption under section 54F would be allowable. (A. Y. 2005-06).

- Rajshree Bihani (Smt.) v. ITO (2011) 48 SOT 594 (Kol.)(Trib.)

103

Deposit in savings bank account.

Where the assessee had deposited sale proceeds in normal savings account as against scheme specified by Central Government through notification in official Gazette as per section 54F(4), it violated provisions of section 54F(4), hence, not eligible for exemption.

(A. Y. 1996-97).

- Thakorlal Harkishandas Intwala v. ITO (2011) 43 SOT 347 / 140 TTJ 21 (Ahd.)(Trib.)

104

Capital gains-Property used for residence Exemption-Exchange of old flat for new one under a development agreement, amounts to construction for claiming deduction u/s 54.(S.45 )

Acquisition of new flat under a development agreement in exchange of old flat amounts to construction of new flat for purpose of claiming deduction u/s 54. (A.Y.2006-07)

Jatinder Kumar Madan v. ITO (2012) 51 SOT 583 (Mum.) (Trib.)

105

Capital gains-Investment in residential house- Exemption Transfer- Transfer is complete when possession was handed over-As the investment made by assessee within period of one year prior or date of transfer , the assessee is entitled to deduction under section 54F.(S. 2 (47) )

The assessee has sold the property at Chennai and the sale agreement was originally entered in to on 27-8-1996 and clearance from appropriate authority was obtained on 8-10-1996 , subsequently the agreement was restated and conveyance was done on 25-11-1999. The assessee once again approached the appropriate authority on 11-02-2000 for clearance and obtained and the possession was given on 28-11-2009 . All these facts were disclosed in the original assessment which was completed under section 143 (3) read with 147 the claim was allowed only for purchase at the stage of assessment. On appeal the Commissioner (Appeals) considering the various judicial pronouncement applicable to section 54 and 54F allowed the claim for both the purchases and construction of property at Bangalore. Subsequently, notice under section 263 was issued which was withdrawn.

106

A fresh notice under section 148 was issued on the ground that the assessee had furnished the wrong date of transfer since the provision was complied with only on 21-2-2000, deduction under section 54 / 54F was wrongly claimed hence to be withdrawn .On appeal the Commissioner (Appeals) allowed the appeal of assessee on reassessment as well as on merits following the ratio of Bombay High Court Judgment in Chaturbuj Dwarakadas Kapadia v.CIT ( 2003) 260 ITR 491 (Bom) . Revenue filed an appeal before the Tribunal , as there was difference of opinion the matter was referred to third member . The Tribunal held that since the possession was handed over to buyer on 28-11 1999 against receipt of consideration of transaction, it could be said that transfer of property had taken place on 28-11-1999 satisfying the requirement of section 2 (47).

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The Tribunal also held that latest NOC issued by appropriate authority on 21-2-2000- could not be considered in isolation of first NOC issued on 8-10-1996 as it was revision of first NOC, therefore NOC issued on 21-2 2000 relates back to first NOC issued on 8-10-1996 and as such reinforced facts of transfer of property on 28-11-1999, when the possession was handed over to buyer .

Accordingly the investment made by assessee on 9-12-1998 in residential property was well within period of one year prior to transfer i.e. 28-11-1999 for availing deduction under section 54F .Accordingly the issue was decided in favour of assessee. (A.Y.2007-08)

ACIT v. P. R. Chockalingam (2012) 135 ITD 75/ 70 DTR 138 / 146 TTJ 44/17 ITR 617 (TM ) (Chennai)(Trib.)

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Whether Amount paid to contractor is to be considered as cost of acquisition.

Amounts paid for completion of flat purchased in semi finished condition, pursuant to a tripartite agreement entered by the assessee with the contractors and the builder form part of cost of new house even though such agreement was entered prior to agreement for purchase of house. On the facts all expenditure incurred prior to taking over possession has to be considered as part of cost.(A.Y. 2006-07)

Nirupama K. Shah v. ITO - 419 (2012) 43B. BCAJ P. 31 (Jan 2012)(Mum.)(Trib.)

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Applicability of section 54F in case of clubbing of income u/s. 64

Where assessee invested consideration received from sale of shares in purchase of residential house property, exemption under section 54F could not be denied to it on ground that flat was registered in name of assessee’s minor daughter. (A.Y. 2008‐09)

N. Ram Kumar v. ACIT (2012) 138 ITD 317 (Hyd.)(Trib.)

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Whether 54/54F available under Direct Taxes Code Bill, 2010

– The rollover benefit available under section 54 along with other rollover provisions in the Income tax Act, 1961 is proposed to be covered under section 55 of the Direct Taxes Code Bill, 2010.

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Issues - Section 54F

Whether in view of provisions of sub-section (4) of section 54F read with sub-section (1) of section 54F, deemed cost of new asset is an amount which has already been utilized by assessee for purchase or construction of new asset plus amount deposited as per requirements of sub-section (4) of section 54F ?

Facts

Assessee sold a plot of land on 5-2-2005 - Out of sale consideration, he invested a sum of Rs. 19.30 lakhs in purchase of a flat on 19-2-2005 and further deposited a sum of Rs. 16 lakhs in a bank on 1-3-2005 under Capital Gains Account Scheme.

He claimed exemption under section 54F on amount invested in purchase of flat and also on amount deposited in bank under Capital Gains Account Scheme Assessing Officer denied exemption under section 54F on amount deposited in bank on plea that assessee had also acquired a new flat.

Whether in instant case amount deposited by assessee in capital Gains Account Scheme was also a deemed cost of new asset (Flat)?

Judgment

Held, yes - Assessee was entitled to exemption under section 54F on amount deposited in bank under Capital Gains Account Scheme

[2011] 16 taxmann.com 127 (Delhi) Assistant Commissioner of Income-tax, Circle, Noida v. Vikas Singh*

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Issues - Section 54F Facts

Assessee sold a piece of land for Rs. 81 lacs - Assessee invested Rs. 75 lacs in purchase of residential house on which exemption of long-term capital gains under section 54F to extent of Rs. 73.94 lacs was allowed - Subsequently, assessee sold latter house and again purchased another residential house for Rs.

70.80 lacs - Assessing Officer opined that long-term capital gains of Rs. 73.94

lacs which was allowed as exemption was to be withdrawn - After allowing setting off of capital loss of Rs. 25 lakhs on sale of second property being amount of difference between sale consideration and amount shown in sale deed he brought balance amount of Rs. 48.74 lacs to tax Whether since assessee invested sale proceeds of second house again in purchase of new residential house within period of two years, assessee was eligible for exemption?

Judgment

-Held, yes [in favour of assessee]

[2012] 21 taxmann.com 385 (Chennai) ACIT, Circle XV, Chennai v.Ms. Sultana Nazir

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Issues 54F

Section 271(1)(c), read with sections 54 & 54F, of the Income-tax Act, 1961 – Penalty - For concealment of income - Assessee earned long term capital gain on sale of a property - He invested a part of sale consideration in a residential house and declared balance for tax - Assessee claimed deduction under section 54F Assessing Officer observed that in order to claim deduction under section 54F assessee should have invested entire sale consideration - According to assessee, due to clerical mistake of his counsel, exemption was wrongly claimed following method of section 54 - Assessee filed revised return offering excess deduction claimed to tax Assessing Officer, however, passed a penalty order - Whether since assessee had brought on record complete facts regarding calculation of deduction while misunderstanding provisions of sections 54 and 54F, explanation offered by him was to be considered as bona fide and, consequently, impugned penalty order was to be set aside

Held, yes [In favour of assessee] [2012] 26 taxmann.com 256 (Agra) IN THE ITAT AGRA BENCH - Sarv Prakash Kapoor v.Deputy Commissioner of Income-tax-4(1), Agra*

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CAPITAL GAINS ACCOUNTS SCHEME

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• The account under Capital Gains Accounts Scheme cannot be opened in all the branches and with all the banks. The government has identified the following 28 banks to accept the deposit under Capital Gains Accounts Scheme 1988.

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• These banks are: State Bank of India, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra, State Bank of Travancore, Central Bank of India, Bank of India, Punjab National Bank, Bank of Baroda, UCO Bank, Canara Bank, United Bank of India, Dena Bank, Syndicate Bank, Union Bank of India, Allahabad Bank, & Vijaya Bank.

Indian Bank, Bank of Maharashtra , Indian Overseas Bank, Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab & Sind Bank 117

• All branches of these banks except the rural branches are authorized to receive the deposit and maintain account under Capital Gains Accounts Scheme, 1988. Other than the above, no other bank is authorized to accept the deposit under Capital Gains Accounts Scheme.

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• In terms of the Capital Gains Accounts Scheme, 1988 there are two types of deposit accounts and the tax payers can choose any one of the account which he likes. The first account is known as Deposit Account A, wherein the deposit shall be in the form of saving deposit, while the deposit in Deposit Account B will be in the form of term deposit with an option available to the assessee to keep the deposit either as cumulative or noncumulative deposit.

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• Whenever the tax payer is interested to open an account in terms of Capital Gains Accounts Scheme, the depositor shall make an application in Form No A and exercise the option whether the amount is to be deposited in Account A or in Account B. It is also possible for the assessee to deposit the money in both the accounts.

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• In case of deposit under Account A, the bank shall issue a bank passbook to the depositor, where all the amounts branch of the same bank.

of deposits, withdrawals together with interest due shall be entered. In the case of deposit under Account B, the bank shall issue a deposit receipt in which will be mentioned the principal amount of deposit, the date of deposit and the date of maturity of the deposit. It is possible to transfer the deposit account from one branch of a bank to another 121

What are Forms C and D?

• Similarly, it is possible to convert the deposit Account B to the deposit Account A. As and when the money is required to be withdrawn for the purposes of making payment for the residential property, the assessee shall apply in form No C.

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• After receiving the application the bank shall permit the withdrawal of the amount. It may also be noted here that where the amount of withdrawal exceeds Rs 25,000, the bank will make the payment by way of crossed demand draft drawn in favour of the person to whom the depositor intends to make the payment.

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• Tax payers should also note that other than the initial withdrawal later on when the withdrawals are made by the tax payers, they shall furnish in Form No D in duplicate, the details regarding the manner and the extent of utilizing of the amount in respect of the immediately preceding withdrawal. The bank after receiving two copies of Form D from the accountholder will retain one copy and return the other copy to the tax payer.

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• The scheme further provides that the amount which has been withdrawn should be utilized for purchase or construction of the property within 60 days from the date of such withdrawal. The facility of nomination is also available to the deposit holder by filling up Form No E.

125

• Finally, when the property has been purchased or the construction has been completed and now the tax payer desires to close his Capital Gains Account Scheme then he shall make an application with the approval of the assessing officer. The application for closure of the account will be in Form G.

126

• Whenever you are contemplating to make a deposit in respect of Capital Gains Account Scheme, either by way of a savings account or a fixed deposit account, then please remember that you do not open the normal savings bank account or a normal saving bank deposit but specifically fill up No A and then make the deposit with the concerned bank under the Capital Gains Accounts Scheme.

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• Opening a bank account for Capital Gains Account Scheme • Once the deposit is made by you either in the savings account or in the fixed deposit account, please ensure that it is clearly mentioned in the account opened that it is for Capital Gains Account Scheme. A large number of tax payers commit the mistake of just opening a bank account with a bank to save capital gains and later on use the money for buying or constructing the residential property.

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• • But please do remember that the income tax law very specifically provides that the money which has not been used for buying or constructing a residential property, such money should be kept exclusively under Capital Gains Accounts Scheme under a separate bank account in terms of Capital Gains Accounts Scheme.

Also do remember that the deposits in these accounts can be made in one lump sum or in installment.

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Taxability of unutilised deposit under the Capital Gains Accounts Scheme, 1988 in the hands of the legal heirs of the assessee

Board clarified that the said amount cannot be

taxed in the hands of the deceased. The unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them.

Circular : No. 743, dated 6-5-1996.

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Thank You

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