All about Capital Gain exemption under section 54 & 54 F and its applicability under various circumstances:-
If an individual transfers any long term capital asset and plans to reinvest the sale proceeds in a new residential house property then he is eligible to claim exemption u/s 54 and 54F to reduce his tax liability.
Still there are many doubts and confusion abouts its applicablity under various circumstances, conditions, etc.
The same are dealt herewith with case laws:-
1) Date of purchase of New House- For the purpose of section 54, the date of agreement to purchase should be taken as the date of purchase and the date of registration of sale deed for purchase is not relevant - CIT v. R.L. Sood 108 Taxman 227/245 ITR 727 (Delhi).
2) No Restriction on location of the New House Property - An interesting thing to note about both the Exemptions u/s 54 & 54F are that there are no restrictions in regard to the location of the new house property. There are no provisions in both the sections which say that the new house property should be located in India. Thus if an individual or an HUF sells any Long term capital asset to purchase a new house property outside India, he can still claim exemption u/s 54 (sale of a residential house property) and u/s 54F (sale of any long term capital asset other than a residential house property.
3) Exemption is independent of the Residential Status - Both the above sections restrict the exemption to an individual or an HUF. But the sections do not decline the exemption on the basis of the residential status. Thus an NRI, residing outside India and having foreign income, can also claim exemption u/s 54 and 54F on the sale proceeds arising from the sale of any long term capital asset in India.
4) Purchase need not necessarily be on ‘cash and carry’ basis - The word ‘purchase’ in section 54 must be interpreted in its ordinary meaning, as buying for a price or equivalent of price by payment in kind or adjustment towards an old debt or for other monetary consideration. There is no stress in the section on ‘cash and carry’. Thus, where the eldest brother in a coparcenary comprising four brothers sold his own house and acquired the common house from his three brothers who executed release deeds for a consideration, there was a ‘purchase’ by the eldest brother of the share of each of the brothers for a price - CIT v. T.N. Aravinda Reddy  1 Taxman 40 (AP)/120 ITR 46 (SC).
5) Purchase’ does not mean that the new house must be registered in assessee’s name - For the purpose of attracting the provisions of section 54, it is not necessary that the assessee should become the owner of the property purchased. The word ‘purchase’ occurring in section 54(1) has to be given its common meaning, viz., buy for a price or equivalent of price by payment in kind or adjustment towards a debt or for other monetary consideration. Therefore, for the purpose of applicability of section 54, registration of the document is not imperative - Balraj v. CIT  123 Taxman 290/254 ITR 22 (Delhi).
6) Holding of legal title within prescribed time is not a pre-condition - Taking into consideration the letter as well as the spirit of section 54 and the word ‘towards’ used before the word ‘purchase’ in section 54(2), it seems that the word ‘purchase’ is not used in the sense of legal transfer and therefore, the holding of a legal title within a period of one year is not a condition precedent for attracting section 54 - CIT v. Dr. Laxmichand Narpal Nagda  211 ITR 804 (Bom.).
7) Date of taking possession relevant for computing time-limit - Date of taking over possession of property purchased, and not the date of registration of sale in favour of the assessee, is relevant for computing the prescribed time-limit - CIT v. Mrs. Shahzada Begum  173 ITR 397 (AP).
8) Purchase of portion of self-occupied house is also eligible for exemption- Section 54 nowhere states that a residential house which is purchased by the assessee so as to avail the exemption should not be the one in which the assessee was residing. One cannot argue that assessee is not entitled to exemption under section 54 merely because the assessee was residing in the house which was purchased by him.Thus, where the assessee sold a house property owned by her and out of the sale proceeds purchased 15 per cent share in another house property owned by her husband and son, exemption was allowable even though the assessee was residing in the said house prior to purchase, and continued to reside in the same house after purchase - CIT v. Chandanben Maganlal  120 Taxman 38 (Guj.).
9) Purchase of two flats converted into one residential unit - The contention that the phrase ‘a residential house’ in section 54 would mean one residential house does not appear to be the correct understanding. The expression ‘a residential house’ should be understood in a sense that building should be of residential in nature and ‘a’ should not be understood to indicate a singular number. When a Hindu undivided family’s residential house is sold, to say that the capital gain should be invested for the purchase of only one residential house is an incorrect proposition. After all, the Hindu undivided family property is held by the members as joint tenants. If the members keeping in view the future needs in event of separation, purchase more than one residential building, it cannot be said that the benefit of exemption is to be denied under section 54(1). Where assessee HUF purchased two residential flats adjacent to each other on same day by two separate registered deeds and vendor had certified that he had effected necessary modifications to two flats to make them one residential apartment, assessee’s claim for exemption could not be denied on ground that section 54(1) does not permit exemption for purchasers for more than one residential premises - CIT v. D. Ananda Basappa 180 Taxman 4/309 ITR 329 (Kar.).
11) Whether benefit of exemption is available to Firm - A firm is not entitled to exemption under section 54 - CIT v. K. Gangiah Chetty & Sons  214 ITR 548 (Mad.).
When the partners used the property prior to the dissolution of the firm for their residence, it must be held that they were owners of the property and they were using the property in their own right for the purpose of residence - CIT v. M.K. Chandrakanth  125 Taxman 932/258 ITR 14 (Mad.).
12) Exemption is allowable in full even if house is partly purchased and partly constructed - The main purpose of the statute is to give relief for the acquisition of a new residential house. In that context, it does not really matter whether the new residential house is partly constructed or partly purchased - B.B. Sarkar v. CIT  132 ITR 150 (Cal.).
13) Exemption is allowable even if a share in new property is purchased - When the Act enables an assessee to get exemption from payment of tax in respect of purchase or construction of a residential house, purchase or construction of a portion of the house should also enable the assessee to claim the exemption. It is possible that a person may not be in a position to purchase the whole residential house at a time and in the circumstances an assessee might purchase a portion of the house or some interest in the house. Thus, where the assessee sold a house and from the sale proceeds purchased 15 per cent undivided share in a house property from her husband and her son, and she was earlier residing in that house, exemption under section 54 can be allowed - CIT v. Chandanben Maganlal  245 ITR 182 (Guj.).
14) Whether Refund can be Claimed - He can also claim refund if he has paid taxes on the capital gains arising on sale of long term capital asset by claiming exemption u/s 54 and 54F while filing the income tax return. After making the re-investment in a new residential house property outside India he can still claim exemption by filing his return within the due date.
15) Construction cannot precede sale of old house - To claim exemption under section 54, the construction of the new house should be within two years after the transfer of the existing house. The exemption is not available where the new construction is made before the transfer or sale of the existing house - Smt. Shantaben P. Gandhi v. CIT  129 ITR 218 (Guj.).
Exemption on capital gains could not be refused to the assessee simply on the ground that the construction of the new house had begun before the sale of the old house - CIT v. H.K. Kapoor  150 CTR (All.) 128.
The date of commencement of the construction of the new house is not material. To get the benefit of section 54, the assessee must have constructed the new house within the prescribed period from the date of sale of the old house - CIT v. J.R. Subramanya Bhat  165 ITR 571 (Kar.).
16) Where property is owned by more than one person - The other Co-owners release their share or interest in the property in favour of one of the Co-owner, it will be deemed that the property has been purchased by the release. Such release also fulfill the condition under sec 54 as to purchase. - CIT v. T.N. Aravinda Reddy  120 ITR 46/2 Taxman 541 (SC)
17) Flats purchased under Self financing scheme - As per CBDT Circular No. 471, dated 15-10-1986, cases of allotment of flats under the self-financing scheme of the Delhi Development Authority shall be treated as cases of construction for the purpose of capital gains and therefore, investment of capital gain in purchase of DDA Flat in the form of first instalment of price of flat within two years of sale of original property would entitle assessee to claim exemption in respect of capital gain even though construction of flat was not complete in two years - Smt. Shashi Varma v. CIT  224 ITR 106 (MP)/CIT v. Smt. Brinda Kumari  114 Taxman 266 (Delhi).
Assessee need not necessarily himself construct new house - The purpose behind the exemption under section 54(1) is that if any assessee sells his residential house and purchases a new house against the sale consideration, the capital gains arising out of the sale of the earlier house should not be taxed. Whether the assessee himself constructs the house or he gets it constructed by a contractor or a third party does not make any difference. The basic requirement for the purpose of relief under section 54(1) is that the assessee should invest the sale proceeds in the construction of a residential house, which has been constructed for the assessee. Thus, where the assessee sold a flat, and within two years entered into an agreement for the purchase of a new flat which was under construction, and paid the amounts in instalments within three years of the sale of the earlier flat, exemption is admissible - CIT v. Smt. Bharati C. Kothari  244 ITR 352 (Cal.).
18) Computation of deduction - Where investment in new house has not taken place in the year of transfer of old house, capital gains can be taxed only in the year in which time limits for making such investment expire - The application of the special provisions contained in clauses (i) and (ii) of section 54(1) does not depend on any election by the assessee and operates in all cases falling within section 54(1). The provisions of section 54(1) will prevail over the deeming fiction of section 45 which treats capital gain as the deemed income of the previous year. Therefore, the assessee cannot be subjected to pay income-tax on his capital gain until the expiry of the outer limit of one year or two years as the case may be, at the end of which alone it could be possible to compute difference between the amount of capital gain and the cost of the new asset and it is at this stage that the question of charging such difference under section 45 as income of the previous year can arise. It would be in consonance with section 54(1) if, instead of charging capital gain to income-tax in the previous year in which transfer of original asset took place, the ITO waits till the outer period of one year or two years as the case may be is over when he can work out the difference for charging it as income of the previous year, unless there is a communication on record that the event of such purchase or construction is not to take place or that it has already taken place during the assessment proceedings. If there is such a communication on record, the ITO can make the necessary adjustments and bring the capital gain to tax in the year of transfer of original asset itself without waiting for the expiry of the prescribed time limits of one year or two years. In such cases also, if the assessee purchases a new asset within one year or constructs a new asset within two years, the ITO is bound to amend the order of assessment so as to exclude the amount of capital gain not chargeable to tax under section 54(1) as laid down in section 155(8) - Harsutrai J. Raval v. CIT  122 Taxman 165/255 ITR 315 (Guj.).
19) Capital gains account scheme - For transfer of deposit under Capital Gains Accounts Scheme, 1988 from Account ‘B’ to Account ‘A’, clearance of Assessing Officer is not required - Sadula Janardhan (HUF) v.State Bank of Hyderabad  286 ITR 291 (AP).
CA Vinay Parmar