Exemption of profit on sale of house

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: Section 54 of the Income Tax Act, 1961 is a very useful exemption for sheltering capital gains made by an individual or a Hindu Undivided Family when a residential property is sold. The profits computed after indexing the cost of acquisition has to be ploughed back in purchasing another residential property within a period of two years or constructing a new residential house within a period of three years from the date of sale of the old property.

If a new house is purchased as soon as the old one is sold, or at least before the filing of the return for the assessment year relevant to the financial year in which the sale has been effected, the condition of reinvesting the capital gains would stand satisfied. However, if the new house is to be purchased after the date of filing the return, the profits have to be deposited in a special Capital Gains Tax Account with a nationalised bank. An interesting point has arisen where the profit is invested not before the due date of filing the return which is July 31 of each assessment year but the investment is made before the due date for filing a belated return under section 139(4) of the Act.

In CIT v Rajesh Kumar Jalan (286 ITR 274) the assessing officer vide his assessment order rejected the assesssee's claim for exemption under section 54 of the Income Tax Act, 1961, for the reason that the assesssee had not complied with the provisions of section 54(2) by not depositing the unappropriated amount of capital gain in the Capital Gains Deposit Scheme, 1988, within the stipulated time of furnishing the return of income-tax under section 139(1) of the Act.

The CIT (Appeals) held that the assessee could utilise only Rs 14,43,254 up to August 31, 1996, towards the purchase of the property because the balance amount of capital gains of Rs 15,29,794 was not deposited in a separate capital gains account with the bank. The Income-tax Appellate Tribunal held that section 54 of the Act being a beneficial provision should be construed liberally to advance the object of giving benefit to the assessee.