Introduction
As we are aware, section 54 of the Income Tax Act, 1961 provides exemption to the assessee from long term capital gains accruing to the assessee on account of transfer of a capital asset which is a residential house property subject to conditions prescribed therein. It is worth noting that from AY 20-21 onwards, section 54 exemption is available in respect of investment of capital gains in two residential units provided the amount of capital gains does not exceed Rs. 2 crore and it is a one time offer to the assessee.
While we are aware of these provisions and have been advising our clients on numerous occasions on how to avail section 54 benefit and also the calculation of the same. Yet we come across a few issues which attract our attention and curiosity and for which we quite often look for answers. These issues often leave us stumped with all hands up!!
Let’s have a look into some of those interesting issues and try to find out the answers from the perspective of judicial interpretations:
Issue no 1
Whether benefit of exemption u/s 54/54F is available in case the new asset is used for business/profession?
The Mumbai Bench of the ITAT held in the case of S K Luthra Vs ITO (2007) 11 SOT 646 (Mum.) that once the residential house property has been purchased with the stipulated time, the assessee is entitled for exemption u/s 54F irrespective of subsequent use of the property which is irrelevant. In this case the assessee purchased new asset and obtained exemption u/s 54F but subsequently used it for coaching classes and later let out the same to a company for business purpose.
Remarks
The judgment looks appropriate as in the opinion of the author, the subsequent use of the asset is irrelevant in as much as the section does not mandate that the new asset must have been used for residential purpose only.
Issue no 2
Whether after purchase of residential house, expenditure incurred on making the house habitable would also qualify for deduction u/s 54/54F
Mumbai Bench of ITAT in the case of Saleem Fazelbhoy Vs DCIT (2006) 9 SOT 601 (Mumbai) held that expenditure incurred in making the house habitable will also qualify for exemption u/s 54/54F as unless a house purchased is fit enough for living, it cannot be said to be a residential. However no exemption is allowable if expenditure is incurred to make the house comfortable as there is a difference between ‘habitable’ and ‘comfortable’.
Issue no 3
Whether agreement to sell amounts to sale of immovable property entitling the assessee for claiming exemption u/s 54F
Agreement to sell does not amount to sale of immovable property and thus, where assessee failed to prove sale of residential property by execution of sale deed there was no capital gain and consequently assessee’s claim for deduction u/s 54F was to be rejected. Held by Allahabad HC in the case of Smt. Shobha Jain Vs CIT [2016] taxmann.com 223
Issue no 4
Whether exemption u/s 54/54F is available to the assessee if the new asset is purchased in the joint name together with some family member such as father, mother, daughter or wife?
It is to be appreciated that there is no definite answer to this question as there are conflicting judgments. In a number of cases such as CIT Vs Kamal Wahal, CIT Vs Ravindra Arora, DIT Vs Jenifer Bhide, CIT Vs Laxmi narayan, CIT Vs Gurnam Singh etc. it has been held that where entire consideration has been paid by the assessee himself, he is entitled to full exemption u/s 54 even if property has been purchased in joint name with other family member.
However, a contrary view was expressed by the Bombay HC in the case of Prakash Vs ITO [2008] 173 taxmann 311 wherein the HC denied benefit of exemption where property was acquired in joint names.
Issue no 5
Whether assessee HUF transfers a residential house property held in its name and capital gain is invested in purchasing another house property in the name of one of its members and not the HUF itself, whether HUF can claim deduction u/s 54
The honorable Gujrat HC in the case of PCIT Vs Vaidya Panalalmanilal HUF [2018] 98 taxmann.com (Guj.) held that the deduction u/s 54 is still available to the assessee HUF.
Issue no 6
Assessee owns one residential house property in his name and is the co-owner of another house property along with his wife, derives capital gain and invested the same in purchasing another house, whether he can claim deduction u/s 54F
The Mumbai bench of ITAT held in the case of ITO Vs Rasiklal N. Satra that the word ‘owns’ in section 54F means absolute ownership and not merely co-owner. Therefore the assessee will be said to be owner of one house only and in such circumstances deduction u/s 54F is held to be allowable.
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