The Mumbai ITAT (Income Tax Appellate Tribunal) has recently held that if someone has made the entire investment for the purchase of a new house, he is entitled to get the full benefit of the income tax exemptions, even if the property has been purchased in the name of a close relative.
Under the existing provisions of the Section 54 of the Income Tax Act, if a taxpayer earns any income by way of Long Term Capital Gain on sale of a residential property, he can claim it exempt by re-investing the amount of capital gain in purchase of another residential house. The law provisions require the seller to reinvest the gain amount within the stipulated time and there is no specific requirement that he himself should be the legal owner of the reinvested property.
However, “many times it is seen that the taxpayers end up purchasing the new property in the name of their close relatives (children, spouse, parents, brother, sister, etc.) either out of emotional consideration or as a matter of Luck (Shagun) or for the sake of convenience only. For example, an NRI seller who is staying outside India and cannot come to India just for the execution of legal documents of the property may purchase it in the name of his relative. Though in this case the property has not been purchased in the name of the taxpayer himself, but he is making all the payments for the purchase of the property, meaning he has reinvested the gains as per Section 54,” says Chetan Chandak, Head of Tax Research, H&R Block India.
As held by the Karnataka High Court in the case of DIT v Mrs. Jennifer Bhide (2011), the entire Section 54 does not expressly provides that to claim the exemption under the said section the new property should be purchased or the construction of the property should be in the name of the taxpayer only. What the section requires is the reinvestment of the capital gain. Therefore, “if the assessee has reinvested the gain amount within the time allowed, that is a sufficient compliance of the law and he should be allowed the deduction. However, unfortunately, many times this has been challenged by a few income tax officers. But once again the Mumbai ITAT in the Jitendra V Faria v. Income-tax Officer, 18 (2) (1), Mumbai upheld assessee’s claim where he has claimed 54 exemption for a property purchased in the joint name with his brother,” informs Chandak.
In this case the assessee businessman filed tax return showing capital gains on sale of residential property which he owned jointly with his wife. As per the tax return filed, 50% of the total sell value to the tune of Rs 51,27,500 was allocated to the assessee and post indexation capital gains came to Rs 43,01,665. The assessee re-invested this gain amount in a new residential house. With stamp duty and registration, the total cost of the new property was Rs 42,65,856 and he paid a tax of Rs 7,376 on the balance gain of Rs 35,809.
During the course of assessment, the AO observed that the new property purchased was in the name of two persons, namely the assessee and his brother Shri Kunal Velji Faira, and therefore he concluded that the exemption claimed by the assessee should be restricted to 50% of the reinvestment amount. The assessee tried to convince the AO by way of written submission that the name of the assessee’s brother was included just for the sake of convenience and the entire amount was paid by the assessee only. But AO did not agree with assessee’s contention and restricted exemption u/s. 54 to Rs 21,32,929, i.e., 50% of the cost of the new flat.
Aggrieved by this the assessee filed an appeal before CIT (A). But surprisingly CIT (A) directed the AO to tax the entire capital gains on sale of property in the hands of assessee as against 50% assessed by the AO. Therefore, the assessee filed a further appeal before Mumbai ITAT. The Tribunal considered rival contentions and carefully gone through the orders of the lower authorities.
After confirming the facts as stated above, the ITAT provided the desired relief and observed that though the name of the assessee’s brother was added in the Agreement of new property so purchased, it was just for the sake of convenience only. In fact, “the entire investment for the purchase of new property along with stamp duty and registration charges were paid by the assessee and he is the real owner of the property. Therefore, under the facts and circumstances of the case, there is no justification for restricting the benefit to 50% of investment in the new house. It further held that even the CIT(A) was also not justified in directing the AO to tax the entire capital gain on sale of old property in the hands of assessee when 50% of the old house was owned by his wife and she had paid capital gain separately for her share of the house,” says Chandak.