As per Section 54 of the Income-Tax Act, you can claim tax exemption on long-term capital gain on sale of jewellery, securities, etc., if you invest such capital gains in residential house property. However, after making investment in residential house you cannot transfer such residential house within three years of purchase. An interesting issue arose before the Tribunal over allowing such exemption when the taxpayer had demolished the residential house within three years of purchase for constructing a shopping complex.
In this case, the assessee had long-term capital gains which was invested in a residential house to claim tax exemption under Section 54F. The assessee had obtained permission for demolition of the house and for construction of shopping complex on the land. The claim of the assesse under Section 54F was denied by the assessing officer.
The Commissioner of Income Tax (Appeals) held that the appellant’s intention was to buy and demolish an old house and construct a new shopping complex, but not a residential abode. The assessee argued that the provisions of Section 54 only specify that the new residential house should not be transferred within three years of its purchase but it does not specify a situation where new residential house is demolished.
On further appeal, the Income Tax Appelate Tribunal (ITAT) observed that the construction must be a real one. It should not be a symbolic construction. The intention of the legislation was not for destruction of residential building but for promoting the construction of residential units. Further, it added that Parliament in its wisdom had enacted Section 54F in the Finance Act, 1982 with a view to encourage housing construction. It was rightly held by the ITAT that the purpose of Section 54F was to encourage housing construction. If the benefit of Section 54 is extended where the new residential building is demolished without constructing another residential building, then the purpose of the Act would be defeated. The burden is on the assessee to prove that he had actually constructed a new residential house for the purpose of exemption under Section 54F.
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You should be careful while claiming the tax exemption from long-term capital gains for investment in residential house. Tax authorities would scrutinise the purpose of demolition for examining the exemption claim. If the purpose of the demolition is to construct a commercial space then tax authorities would deny the exemption. However, there may be many instances for demolition of house which would not impact exemption under Section 54 like demolition for constructing multi-storey building or to change the layout of the house.
– Maneet Puri
The writer is DGM R&D, Taxmann