Chartered Accountant
78 Points
Posted on 14 August 2009
Hi, Sriram, This is Hitesh, I am replying your query in a layman language. I hope u will be able to understand it . some where i had to use the statute language but is very minimal
(1) Subject to the provisions of sub-section (2), where in the case of an assessee being an individual, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house and the assessee has within a period of 1 year before or 2 years after the date on which the transfer took place purchased, or has within a period of 3 years after that date constructed, a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say, -
(i) If the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year;
(ii) If the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45
On a Plain reading it would look to you that Construction of the House should start after the sale of old house and it should complete within 3 years of sale. But There are many case laws which suggests that Date of start of construction is immaterial.
So My Reply would be,
ü You can very well claim the exemption u/s 54 of the income tax act for whole of the Capital gain i.e (Sales consideration - Expenses on sale – Indexed cost of acquisition of your old house) if the cost of your new house is more than the capital,
ü Please note that the New constructed house should not be sold (i.e apartment) before 3 years of your possession otherwise the exemption received earlier will gets reduced.
ü If at all you want to sell the new constructed house within 3 years of its possession then its cost will gets reduced by the capital gain exempted earlier.
ü For substantiating my view I am quoting some of the case laws which can help you in case u require,
ü 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 [1998] 150 CTR (All.) 128.
ü 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 [1987] 165 ITR 571 (Kar.).
ü Date of taking possessions 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 [1988] 173 ITR 397 (AP).
ü 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 [2000] 244 ITR 352 (Cal.).
CAclubindia
