Capital gain 54F

Tax queries 1320 views 4 replies

anand

officer

36 Points Joined April 2010

I was born and brought up in Cochin. For job, I moved to Chennai. In order to settle me down in Chennai, my mother (father died) sold house (the only property my family had) in Cochin. I purchased flat in Chennai in joint name, i.e my and mother during 1990. The balance mount (about 1/3) required to purchase flat in Chennai was managed by taking housing loan against my salary. After few years of my marriage, my mother wished to move back to Cochin as it was the native place and she wanted to keep touch with roots. Hence I purchased flat in Cochin in my wife’s name during year 2000. Total money was funded by me. My mother started staying in Cochin and also frequenting Chennai.

During 2005, I purchased agricultural land in Chennai for sum of Rs 10 lacs. This was in joint name, me and my wife. Total money was funded by me. It should be noted that although status of land is agricultural, but it is barren land. No farming activities were carried out before purchase and I also did not perform any agricultural activity. This land is not good for agricultural. I applied to the concern authorities to convert the status of agricultural to non agricultural during 2005, immediately after purchase. Due to the boom in IT the land price escalated to 70 lacs. I sold this land during 2009. At the time of transfer, the land was surrounded by housing societies, college infront of the land 400 flats complex was under construction and next area (about 50 acres) to my land was purchased by reputed developer. Please note that at the time of transfer, I did not receive any land status upgrade, it was still under status of agricultural.

I immediately (within 2 months from transfer) booked another flat in Chennai for 100 lacs. The total consideration 70 lacs were invested and 30 lacs is housing loan. As housing loan bank requires joint name, this new flat is on the name of me and my wife. I claimed capital gain exemption of 60 lacs under section 54F. Now I understand that person can not posses 2 residential houses at the date of transfer of land. I can not sell current Chennai house as it is occupied by me. My new flat will be ready during 2011. I can not sell Cochin flat as my mother is staying there. My questions are

1. The Cochin flat is on my wife’s name. Hence at the time of transfer of land, I was possessing only one residential house (note that 2/3 money for Cochin flat was financed by mother). Am I correct?

2. I understood that 2 residential houses condition is applicable within one city. My family 2 houses are in two different cities. Is this correct?

3. I am not investor and actual user. Once I get the possession of the new flat, I will sell current flat in Chennnai to clear of housing loan taken against the new flat. In that case 2 residential house conditions under section 54F should not be applicable. Correct?

4. The status of land as agricultural is questionable. How the land can be said as agricultural when it is surrounded by housing societies, IT offices and so on?

5. I believe that tax wise I am safe and will not have any tax liabilities. Corrct?

6. If there are any tax implications, then how much and how it can be avoided.

Replies (4)

praveen

Chartered Accountant

6971 Points Joined September 2007

Answer for your first question
: The cochin flat is in your wife's name. However you have already said that it was wholly finance by you. In tax not the legal ownership does not count. There is a concept of deemed ownership as well and with that information the IT department can hold you as the owner of the property.

anand

officer

36 Points Joined April 2010

Originally posted by : praveen
	Thanks Praveen for your reply. When I purchased Cochin flat that time my wife was working. But her income was not substantial (below taxable limit). Now she earns good money. She can pay entire flat purchase amount from her earning this year. My question is it possible to consider money paid for the flat during 2005 as loan given by me to her? Is their provision in IT act that husband can provide unsecured interest free loan to his wife whether she is working or not? The repayment what my wife will be doing is from her taxable income. Answer for your first question : The cochin flat is in your wife's name. However you have already said that it was wholly finance by you. In tax not the legal ownership does not count. There is a concept of deemed ownership as well and with that information the IT department can hold you as the owner of the property.

Chintan Shah

534 Points Joined October 2009

Dear Anand,

Please consider the following:

1. The provisions of deemed ownership have been given under Section 27 of the income tax act and the same apply to Section 22 to section 26 i.e. computation of income under the head ‘Income from house property’. Therefore the department cannot apply the provisions of Section 27 to Section 54F and deny the benefit of the exemption on the ground that the since the assessee’s wife is owning the house and since the assessee is the deemed owner the conditions under section 54F is not fulfilled.

Under the Benami Transaction (Prohibition) Act 1988 a Benami transaction has been defined as a transaction of transfer of property to one person the consideration for which has been paid by another person. Such transactions are prohibited by Section 3(1). Hence prima facie since the transaction between the transferor and your wife will be prohibited and you would be considered the actual owner.

However, Section 3 (2) of the Benami Transactions (Prohibition) Act 1988 places a rider to the prohibition placed u/s 3(1). It reads as under:

“(2) Nothing in sub-section (1) shall apply to the purchase of property by any person in the name of his wife or unmarried daughter and it shall be presumed, unless the contrary is proved, that the said property had been purchased for the benefit of the wife or the unmarried daughter”

Hence where the purchase is by a person in his wife’s name the provisions of Section 3 (1) are not applicable and thereby unless the contrary is proved the transactions would be considered for all purposes in its actual character. Therefore in your case your wife would be considered as the owner of the house. Therefore there is no violation of the condition as regards the number of residential housed as prescribed u/s 54F and thereby exemption cannot be denied.

2. All the houses owned by the assessee needs to be counted in order to verify the condition of number of houses u/s 54F. Even if you own only one flat in the city in which you are purchasing the new flat, but if you own another flat elsewhere you would be violating the conditions u/s 54F.

3. The condition of two houses has to be verified when the investment is made and when exemption u/s 54F is claimed. Hence when you get the possession of the flat the condition becomes irrelevant since it needs to be verified at the time of claiming the exemption.

4. Exemption u/s 54F is available to transfer of any long term capital asset apart from residential house property which is covered u/s 54. Hence the fact that the land is agricultural or non agricultural is irrelevant.

5. On the aforesaid set of facts, in my opinion there would be no chance of any addition or penalty even if your case is selected for scrutiny.

6. Your sixth question is solved…

Regards,

Chintan

anand

officer

36 Points Joined April 2010

Thanks Chintan for your reply. I am posting the same query as to Praveen.

When I purchased Cochin flat that time my wife was working. But her income was not substantial (below taxable limit). Now she earns good money. She can pay entire flat purchase amount from her earning this year. My question is it possible to consider money paid for the flat during 2005 as loan given by me to her? Is their provision in IT act that husband can provide unsecured interest free loan to his wife whether she is working or not? The repayment what my wife will be doing is from her taxable income.