08/02/2018
The following is an email exchange between us and one of our readers. Since the subject matter is of interest to taxpayers in general, we are reproducing an edited version of the same. It is hoped that readers would find it useful in the course of their tax planning.
Q : I came across your in which the issue dealt with was whether the exemption u/s 54 was available in cases where more than a single house is sold and the resultant combined long-term capital gain is invested in purchasing or constructing one single residential property within the prescribed time limit of 2 years or 3 years as the case may be.
I wonder if the ruling still stands – whether multiple properties may be sold and the capital gain reinvested in a single property – any elaboration on the subject matter would be helpful
… K S
A : The issue is whether the exemption u/s 54 was available in cases where more than a single house is sold and the resultant combined long-term capital gain is invested in purchasing or constructing one single residential property within the prescribed time limit of 2 years or 3 years as the case may be.
Sec. 54 states, “… where… the capital gains arises from the transfer to 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’ …
Clearly, the Section itself has defined the expression ‘a residential property’ to mean buildings or lands appurtenant thereto. This expression is descriptive of the nature of the property and not the quantity.
Consequently, there is no bar on acquiring one residential house out of sale proceeds of two or more buildings or lands appurtenant thereto.
It has to be carefully noted that such a property need not necessarily be a residential house. The only restriction is that the income therefrom should be chargeable under the head ‘Income from house property’.
Now, this is very interesting. It has also to be more carefully noted that there is no requirement that the house has to be purchased in the name of the assessee only. The requirement is that the assessee must purchase a house. This was the observation made by ITAT Hyderabad Bench ‘A’ Circle-6(1) in 2012 in the case of N. Ram Kumar v ACIT. In this case, it was the assessee who had earned the capital gains and the house was purchased in the name of his minor daughter, this means that he could have purchased the house even in your or my name and claimed the benefit!!
The article under reference was written before the amendments brought about by the Finance (No. 2) Act, 2014 in Sec. 54 based on D. Anand Bassappa v ITO (2004) 91ITD53 (Bang) as well as P. C. Ramakrishna (2007) 108ITD251 (Chennai) as well as Prem Prakash Bhutani v CIT (2007) 110TTJ440 (Delhi) – but fortunately, the conclusions arrived have remained untouched.
All that the amendment inflicted by FA14 is that the assessee should purchase ‘one residential house in India’ for getting the exemption under Sec. 54 against capital gains arising out of transfer of buildings or appurtenant lands.
It is clear that if an assessee now sells one or two or any number of residential houses in any financial year, he can claim exemption by buying one residential house in India.
Now, take another case, which was raised by another of our valued readers Ms. Kumtakar [email protected] who presented this lacuna to us immediately after the recent Budget was presented to the Parliament. We are grateful to her for the same. May we blessed by many more such readers.
The assessee sells two residential houses, one for Rs. 15 lakh and another for Rs. 12 lakh during FY 15-16. The indexed cost of acquisition of the two houses, both of which bought in FY 84-85 is Rs.5 lakh and Rs. 3 lakh respectively. Thus he has earned capital gain of Rs. 10 lakh on the first house and Rs. 9 lakh on the second. The total capital gain earned is Rs. 19 lakh. He has purchased two different houses, at two different places in India for Rs. 17 lakh each in FY 15-16 itself.
Can he claim exemption on both the houses separately, by showing one house bought against each one sold? The Department can claim that his capital gains for the year FY 15-16 was Rs. 19 lakh and he can claim exemption against only one of the two houses he has purchased. What if he buys one house in FY 16-17 and another in FY 17-18? The answer still appears to be in the negative. He will be required to pay tax on the capital gain of Rs. 9 lakh earned on the second house
