Mukesh Patel.in
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HOUSING GAIN EXEMPTION!

Tribunals have held that capital gains from multiple houses and of multiple years can also enjoy complete tax holiday!

Section 54 and 54F of the Income-tax Act provide for an exemption in respect of long term capital gains (LTCG), where subject to fulfillment of prescribed conditions, a taxpayer makes investment either in the purchase or construction of a residential house.

   RELIEF FOR MULTIPLE HOUSES

In the case of ‘Rajesh Keshav Pillai vs. ITO’ (2011) 44 SOT 617 (Mum.), the taxpayer sold two separate flats and earned long-term capital gains. The taxpayer bought two different flats and claimed that the long-term capital gain was exempt under Section 54. The first appellate authority following the judgement of the Special Bench in ‘ITO vs. Sushila M. Jhaveri’ (2007) 107 ITD 327 (SB) held that the benefit of Section 54 was available in respect of only one flat and not two flats.

On appeal, the Tribunal held that 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 the taxpayer 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 taxpayer.        

    A similar issue also arose before the Mumbai Tribunal in the case of ‘DCIT vs. Ranjit Vithaldas’ (2012) 23 taxmann.com 226 (Mum.), wherein the ITAT held that exemption under Section 54 should be available in case capital gain arising from sale of more than one residential houses is invested in one residential house. The provisions of Section 54 apply to transfer of any number of residential houses by the taxpayer provided the capital gain arising therefrom is invested in a residential house. The exemption under Section 54 is available if capital gain arising from transfer of a residential house is invested in a new residential house within the prescribed time limit. Thus, there is an inbuilt restriction that capital gain arising from the sale of one residential house cannot be invested in more than one residential house.

 The Tribunal went on to hold that, however, there is no restriction that capital gain arising from sale of more than one residential house cannot be invested in one residential house. In case capital gain arising from sale of more than one residential house is invested in one residential house, the condition that capital gain from sale of a residential house should be invested in a new residential house gets fulfilled in each case individually because the capital gain arising from sale of each residential house has been invested is a residential house. Therefore, even if, two flats are sold in two different years and the capital gain arising from the sale of both the flats is invested in one residential house, exemption under section 54 will be available in case of sale of each flat provided the time limit of construction or purchase of the new residential house is fulfilled in case of each flat sold.

GAINS OF MULTIPLE YEARS

    An interesting situation arose for the consideration of the Mumbai Bench of the Income-tax Appellate Tribunal in the case of ‘Smt. Anagha Ajit Patnekar vs. ITO’ (2006) 9 SOT 685 (Mum.) During Assessment Year 1997-98, the taxpayer had earned capital gain on account of sale of shares and claimed deduction under Section 54F in respect of capital gain utilized for purchase of residential flat in the one year preceding the sale of shares. The Assessing Officer argued that in the earlier Assessment Years 1995-96 and 1996-97, similar capital gain had arisen to the taxpayer in respect of sale of shares for which he had sought exemption under Section 54F in respect of purchase of the same residential flat and hence he could not claim exemption in respect of same residential flat in Assessment Year 1997-98.

The Mumbai Bench of the ITAT held that there is no bar in Section 54F for claiming deduction second time or third time for the same property, if the capital gain which has arisen in the case of the taxpayer is within the cost of the property. In the instant case, the total capital gain in all the three Assessment Years 1995-96 to 1997-98 was less than the total cost of the residential flat. Further, from the language of Section 54F it is clear that the Legislature has provided leverage to the taxpayer for claiming exemption under Section 54F, by allowing him to invest in the purchase of residential property within one year prior or within two years after the date of transfer. In all the assessment years, these conditions were satisfied. Therefore, until the cost of purchase of the residential property is exhausted by the amount of capital gain claimed to be invested, exemption under Section 54F cannot be denied.

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