Capital gain tax exemption

Tax queries 5463 views 9 replies

Mr. X on sale of  house property earned long term capital gain in FY 2008-2009 of Rs. 20 Lacks. He has deposited Rs. 20.5 Lacks in F.D in schedule bank capital gain tax account and claim exemption U/S 54 of Rs. 20 Lacs. in F.Y. 2008-2009.

During F.Y. 2009-2010 Mr. X has utilised out of the above depodit scheme (a) Rs. 16 Lacks for purchase of a house, and (b) Rs. 5 Lakhs (including interest of 0.50lacks on FD) purchase of land at other place and capital gain tax account closed in Feb.2010.

My question is

1) Can Mr. X by spending Rs. 4 Lacks as renovation of above second hand house purchase worth Rs. 16 lacks can save the tax on Rs. 4 lacks which arise on short utilisation of deposit for purchase building? or

2) Can Mr. X by spending amount of Rs 1.50 lacks by constructing one or two room on land purchase worth Rs. 5 lacks as above can save tax

3) Whether there is any alternative to save the tax in above situation ?

 

Replies (9)

Dear Bimal Sir,

First of all, Where assessee purchased more then 1 house, exemption can be claimed only in respect of 1 house.K.C. Kaushik v. P.B. Rane, ITO [1990] 84 CTR (Bom.) 62.

Further, yes 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 [1981] 132 ITR 150 (Cal.).

Interest earned on Capital gain account will be taxable under other souces,

Renavation option is feaseable in the present case

Dear Amir sir 

Thanks for your reply,

Till supreme court decides on the point of one house or more it will be unnecessary litigation

Below are some case laws in which purchase of two flats are considered as allowable exemption U/S 54

-Rattanchand Murerka v. jt. CIT (Relied upon the following decision- CIT v. Arvinda Reddy,120 ITR 46, SC and B.B.Sarkar v. CIT, 132 ITR 150 Cal.)

-D. Anand Basappa v. ITO (2005)92 TTJ 597 (Bang.)

Mr.Bimal

1)  Yes Mr.X is allowed to use the amount (arise from sale consideration of HP deposited in CG a/c) for renovation of the HP purchased...He can claim exemption u/s 54...

2) No Mr. X cannot claim exemption for purchase of land....therefore amount of Rs 1.50 forconstructing one or two room on land purchase worth Rs. 5 lacks cannot be claimed....

3) 54 EC - 54 F not possible therefore i think no possible alternative....

One more thing purchase of two flats is allowed only if the assessee is able to prove that there is some connection for two flats....or two family has one ration card...

I think the case also says the samething...i have not seen those cases...but will reply soon after seeing them....

Dear friends

For one house or any house litigation is due to word "a" residential house. However keep it aside and suggest for the following in continuation of above querry

The deposits of capital gain tax accounts has already been utilised i.e. 16 lacs in building and Rs 5 lacs in land.

1)  Can still Mr. X  by incurring Rs. 4 lacks for renovation from withdrowing from his other bank account can say that he has full fil the condition of section 54. i.e. the exemption claim in FY 08-09. (I think there should not be any problem) However If no, then when he should pay tax in F.Y. 09-10 or in FY 10-11.

2) If yes, by what time he should spent Rs. 4 lacs in renovation expenses. it should be in F.Y. 09-10 or can spent in FY 10-11 (Completion of two years) or FY 11-12 completion of three years.

Dear Bimal Sir,

In my opinion,

a) Purchase of 2 residential properties for benefit u/s 54 is possible only if units are adjecent units (having one wall common)

b) Renovation can not include furniture or house decoration, it has to be construction of fixtures or alteration of civil structures.

c) In such case it will become "construction" & hence to be completed within 3 years from the date of sale of original assets.

d) If no construction is done, then the financial year in which the period of 3 years from the date of sale of original assets expires, tax shall be payable

Dear Bimal Sir,

Friend Pranal has correctly mentioned the above things...........

But the concerns which u have raised above "that whether withdrawal from CGA a/c & utilizing it for purchase of Land(which we are supposing is not eligible for 54)" I think it may hamper the exemption because the whole purpose of earmarking the funds gets diluted once the funds are used for ineligible purposes"

Plz reply..............

Dear Bimal Sir,

As regards, sale consideration and investment in new asset is concerned 1 to 1 relationship is not expected otherwise law will not have allowed to invest even 1 year prior to sale.

But as regards utilisation from capital gain a/c proceeds & investment in new assets is concerned, plain reading of the provision  suggest such 1 to 1 relationship of proceeds withdrawn & amount utilised as rightly pointed out by Amir.

But, in my opinion if we consider the objective of Capital Gain A/c Scheme which is  "assurance to ITO for investment in residential property by assessee before filing of the return for the year for which CG has arise" & hence invest other proceeds ultimately to make up short fall of ineligible amounts from CGA a/c then exemption from capital gain a/c may still be allowed by ITO provided it is within time limit. The thrust being investment is ultimately made in residential property. But it may be at the mercy of ITO.  

Thank You Dear Amir sir and dear Prashant Sir,

You both have given a value addition to decide rather to guide my clients who has actually face such situation.

according to you what final decision I should give to client in the present situation.

I think if he spent even now in renovation in building purchase ( not  furniture or house decoration but alteration of civil structures) by the amount short i.e. app. 4 lacks,, if any querry raised by ITO then he can be convience.

Dear Bimal Sir,

i think exemption should be claimed in the prersent case by spending another Rs. 4 lakh on the House acquired..

In case ITO calls for examination then he can be explained that due to urgency of situation/funds, money was withdrawn from CGA A/c but utlimately the entire amount was spent on House Property............


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