Continuing with our series of articles on the subject of capital gains, this week we shall examine the two most important capital gains tax exemption offering sections – Sec. 54 & Sec. 54F.
Taxpayers would know that Sec. 54 gives exemption to an individual or HUF on LTCG arising from transfer of an LT asset, being buildings and lands appurtenant thereto, and being a residential house, self-occupied or not, provided the assessee has purchased within 1 year before or 2 years after the date of sale or has constructed within 3 years after that date, a residential house. If only a part of the capital gain is used, the exemption would be pro-rata.
In the current scenario, this requirement of construction being completed within 3 years has become too tight. Recognising this fact, the recent Finance Act 2016 by amending Sec. 24 has raised the requirement of the construction being completed within 3 years to 5 years, only for the exemption on interest payable on housing finance. Corresponding amendments have not been inserted for Sec. 54 and Sec. 54F. Hopefully, the corrective action will be taken by the next Budget.
Three points are worthy of careful note —
1.There is no time limit for commencement of construction though for completion, the limit is before expiry of 3 years from the transfer date of the original asset — 165ITR571 (Kar.) CIT v J. R. Subramanya Bhat, (1987). Hence, all costs incurred on the construction, irrespective of when, can be claimed as acquisition cost.
Exemption is available on purchase of new property made within 1 year before the sale of the old house. But for construction, the exemption is not available if the construction is completed even by a day before the sale of the old house. Illogical!
The assessee need not apply the amount from the sale proceeds for purchasing another residential house — Lalit Marda v ACIT [2008] 23SOT250 (Kol). For instance, he can take a loan to purchase or construct and use the sale proceeds any which way.
Though the stipulations of Sec. 54F are similar to those of Sec. 54, there are 3 differences —
It requires reinvestment of the net consideration (sale value less expenses) whereas Sec. 54 is content with reinvestment of only the amount of capital gains.
It is applicable if the assessee is not an owner of more than one residential house, other than the new asset, on the date when he earns long-term capital gains. Sec. 54 has no such stipulation.
The 3rd difference, though crucial, is not comprehended by many. In the case of Sec. 54, the assessee is required not to sell the newly-acquired property within 3 years from the date of its purchase or construction. If this condition is not satisfied, the cost of the new asset is to be reduced by the amount of LTCG exempted from tax on the original asset and the difference between its sale price and such reduced cost will be chargeable as STCG of the year in which the new asset is sold.
In the case of Sec. 54F, the assessee is also required not to sell the new property within 3 years. Additionally, he should not purchase within 1 year or construct within 3 years another residential house. We strongly feel that the period ‘1 year’ is a mistake and should read as ‘2 year’ for consistency of Provision a(ii) of Sub-section (1) with Sub-section (2) and also with Sec. 54.
Where the new asset is transferred within 3 years from the date of its purchase or its construction, the amount of capital gain not charged u/s 45 shall be deemed to be LTCG of the previous year in which such new asset is transferred.
Where the assessee purchases, within 2 years or constructs, within 3 years after the date of the transfer of the original asset, any residential house other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged u/s 45 shall be deemed to be the LTCG of the previous year in which such residential house is purchased or constructed.
Quite confusing! The wisdom of imposing different punishments for the same offence is not comprehensible. This creates confusion galore. The different figures of ‘1 year’ and ‘2 years’ appearing in these provisions are possibly a result of this confusion.
Crossing Time Limit
The concession gets withdrawn if the period of 2 or 3 years crosses even marginally. There are many decisions which condones delays under various situations —
Kishore H Galaiya v ITO[2012] 24taxmann.com11 (Mum Trib) As long as the assessee has invested the requisite amount in construction of new residential house within 3 years from the date of transfer, but the taking of the possession was delayed because of default of the builder and other factors not under the control of the assessee the exemption cannot be denied.
This very case has also dealt with two other important issues —
a) Assessee had not deposited the required amount in GCAS due to ignorance of law. He had kept the amount in the SB account which was utilised towards the construction of flat. This being only a technical default, the exemption cannot be denied.
b) Tax Return is required to be filed before 31st July but it can be extended to 31st March of the FY in some certain situations. The exemption cannot be denied if the amount has been deposited in CGAS within the extended period u/s 139(4).
Shashi Verma v CIT 152CTR227(NB) 1999 —At present it is not easy to construct a house within this stipulated period, especially under government schemes. Therefore, if substantial investment is made in the construction, then it should be deemed that sufficient steps have been taken to satisfy the requirements of Sec. 54.
16taxmann.com210 (Chd – ITAT) [2011] —Sec. 54F does not prescribe completion of construction and its thrust is on investment of net consideration received on sale of original asset and start of construction of a new residential house. V. A. Tharabai v DCIT [2012]19taxman.com276 (Che-Trib) — Assessee could not construct residential house within 3 years because owners of the land filed a petition for injunction on which civil court ordered status quo. It was held that the amount spent by assessee in purchasing land be allowed for deduction.
The authors may be contacted at wonderlandconsultants@yahoo.com
