Section 54 of Income tax Act

This query is : Resolved

Ashwin sharma B.S (Querist)
Follow

29 June 2009 Eg: Mr X sold a residential flat on march 2008 for 10 lacs. out of the sale proceeds rs 2lacs was used to pay loan of another residential property purchased on November 2006. whether he can claim benefit under section 54 of the income tax act for Rs 2 lacs paid??

vinod kumar lalwani

vinod kumar lalwani (Expert)
Follow

29 June 2009 Dear

the dedutions which an assesse can claim form sale consideration is given u/s 48. out of which one is cost of acquisition and cost of transfer of the house sold out.

so loan related to another house property can not be claimed as deduction u/s 54.

Ratan Sharma

Ratan Sharma (Expert)
Follow

29 June 2009 Hi
As the property is purchased before april 2007 , you are not entitled to get benefit u/s. 54. The relevant date is the date of purchase and not of payment.

Ashwin sharma B.S

Ashwin sharma B.S (Querist)
Follow

29 June 2009 Sir

CIT Vs T.N.Arvinda Reddy [1979] 120 ITR 46 (SC) held that puchase 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. Based on this can Mr. X claim deduction under Section 54.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
Follow

23 July 2025 This is a nuanced question involving Section 54 of the Income Tax Act, interpretation of the word “purchase,” and the timing of purchase/payment for claiming exemption on capital gains.

🧾 Scenario Recap:
Mr. X sold a residential flat in March 2008 for ₹10 lakhs.

He used ₹2 lakhs from the sale proceeds to repay a housing loan on another residential property purchased in Nov 2006.

Question: Can he claim Section 54 exemption for ₹2 lakhs paid toward the loan of the Nov 2006 house?

🔍 Legal Framework of Section 54:
Under Section 54, the exemption is allowed if:

The capital gains are invested in purchasing a residential house within 1 year before or 2 years after the date of transfer, or

The capital gains are used to construct a house within 3 years from the date of transfer.

In Mr. X’s case:

Sale date: March 2008

Purchase of new house: Nov 2006 → This is more than 1 year before the sale

Loan repayment: After March 2008 (post-sale)

✅ Key Case Law – CIT v. T.N. Aravinda Reddy (1979) 120 ITR 46 (SC):
This case held that:

“The word ‘purchase’ in Section 54 should not be narrowly construed. It includes payments made in kind, or by way of debt adjustment, not just by cash on the spot.”

✅ Implication: If the house was purchased within the time limits prescribed, then even adjustment of capital gain against outstanding loan could be accepted as “investment.”

But…

❌ Limitation in Mr. X’s Case:
The property was purchased in Nov 2006, and the sale was in March 2008.

The purchase is ~16 months before the sale, i.e., outside the “1-year backward” window specified under Section 54.

🔴 Conclusion: No exemption under Section 54 can be claimed since the purchase of the new residential property exceeds the permissible 1-year window.

The mode of payment (loan repayment) is not the problem—the issue is timing.

📌 Final Conclusion:
Point Status
Is repayment of housing loan eligible under 54? ✅ Yes, if it relates to a property purchased within the prescribed time limit
Is Mr. X’s Nov 2006 purchase eligible (1 year before sale in Mar 2008)? ❌ No, it's too early
Can he claim exemption for ₹2 lakhs used for loan repayment? ❌ Not under Section 54 due to timing mismatch, despite SC ruling

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now