A recent decision of the Gujarat High Court in Harsutrai J. Raval vs. CIT, 255 ITR 315 (Guj), lays down certain vital aspects of claim of exemption from capital gains under section 54 of the Income-tax Act, 1961 ("the Act").
Under section 54 of the Act, an individual or a Hindu Undivided Family is allowed to reinvest long term capital gains arising from the sale of residential house ("the original asset") for purchase or construction of another residential house("the new asset"). The purchase of the new asset could be one year before or two years after the sale of the original asset and the construction could be within three years of sale of the original asset. The capital gain is required to be reinvested. If only a part of the capital gain is reinvested, only pro-rata exemption is made available.
With effect from 1.4.1988 there is a requirement that, if the capital gain or any part thereof has not been used for purchase or construction of a new house before the due date for furnishing the return of income under section 139, it is required to be deposited in a special deposit account under the Capital Gains Account Scheme ("CGAS").
These provisions were being interpreted in the Gujarat case, supra, except that the requirement of deposit under the CGAS was not existing at that time.
The facts are that the original residential house property of the assessee was sold by him on March, 16, 1979, for Rs.71,000 and he had earned long-term capital gain of Rs.19,018 thereon. He had then purchased a house on March 23, 1979 for Rs.45,000 and had claimed that the capital gain of Rs.19,018 was not taxable in the AY 1980-81 . He had filed a copy of the sale deed of the original asset as well as the purchase deed of the new property. The Income-tax Officer accepted the claim and the capital gain of Rs.19,018 was treated as exempt from tax in the AY 1980-81.
The assessee spent Rs.9,650 on the house purchased on March 23, 1979, and sold it on May 14, 1980, for Rs.55,000 showing a short-term capital gain of Rs.350/- in his return for the assessment year 1981-82. The assessee had in the meantime completed construction of another property on May 25,1980 which he was occupying after having sold on May 14,1980 the property which was purchased by