Jigar M. Patel
International Tax Attorney
Under Section 54 of the Income-tax Act, a taxpayer being an individual or HUF can avail exemption in respect of capital gains arising on transfer of a residential house held for a period of more than 24 months, if such gains are invested either for purchase or construction of another residential house within a stipulated time period. The time period prescribed in respect of purchase is within one year before or 2 years after and in case of construction within 3 years from the date of transfer.
It needs to be noted that such investment is required to be made in one residential house in India and it is not necessary that such house should be self-occupied. However, in a case where the amount of long-term capital gain does not exceed Rs. two crores, the taxpayer can utilize such gains for purchase or construction of even two residential houses. This option is a one-time benefit and once exercised cannot be availed of in future.
Liberal Judicial Interpretations
Some liberal judicial interpretations of Courts and Tribunals in relation to the provisions of Section 54 which can be usefully relied upon are briefly analyzed hereunder:
- Part Purchase, Part Construction – ‘B. Sarkar vs. CIT’ 132 ITR 150 (Cal.) – Where the taxpayer utilized his capital gains, partly for purchase of a new house and partly for further construction on the same, the Court held that Section 54 contemplates fulfillment of two alternate conditions, viz. purchase or construction, but, where both are fulfilled within the time stipulated, the taxpayer would also be entitled to the relief.
- Construction commenced prior to sale – ‘CIT vs. J. R. Subramanya Bhat’ 165 ITR 571 (Kar.) – In this case the Court held that construction of the new house property may be commenced even before the transfer of the old house property, since the material condition is that construction must be completed within three years from the date of transfer.
- Residential House need not be New House – ‘CIT vs. Chandanben Maganlal’ 245 ITR 182 (Guj.) – The Gujarat High Court has held that the benefit of exemption can be availed even in a case where the taxpayer purchased the same house in which he was earlier residing and such house is shown as the new house acquired by him.
- Consideration paid but possession delayed – ‘PCIT vs. Dilip Ranjrekar’ 101 taxmann.com 114 (Kar.) – Where the taxpayer had invested his capital gains within the prescribed period but the builder had delayed the possession, exemption under Section 54 could not be denied.
- No requirement for usage of same funds – ‘ITO vs. KC Gopalan’ 107 Taxman 591 (Ker.) – Where the taxpayer had deposited the sale consideration in bank FD and undertook construction via housing loan, the Court held that there was no provision in the statute that the same fund received on sale should be utilized for the cost of new asset.
- Purchase of a Part of Property which was sold – ‘CIT vs. Phiroze H. Patch’ 205 ITR 377 (Bom.) – In this very interesting decision, the court held that exemption can also be availed in a case where the seller decides to purchase a part of the property, which he had sold.
