1. When a residential property held for more than three years is sold and capital gains are reinvested in acquiring another property;
2. When any other long term capital asset is sold and the capital gains are invested in the purchase of a residential property.
To secure capital gains tax exemption in both cases, a few common conditions have to be complied with. The most important condition is that the new property in which the capital gains are invested should be acquired within two years from the date of sale of the asset, or the new residential property must be constructed within a period of three years from the date of sale of the asset which has resulted in capital gains.
The other common condition is that the capital gains in respect of which the exemption is sought should be kept deposited in a special capital gains account with a nationalised bank until the amount is utilised for the purchase or construction of the residential property. The third common condition is that the new residential property should not be transferred for a period of three years.
Difficulties have been experienced by taxpayers in complying with the main condition that the new residential property should be acquired within two years or constructed within three years, from the date of sale of the long term capital asset in order to avail of the exemption under section 54 or 54-F as the case may be.
In most cases taxpayers go in for purchase of residential houses which are under construction by builders who, at the time of booking the property, promise the moon and agree to stick to the delivery which would suit the taxpayer for claiming the exemption within the two or three year period as the case may be.
However, only too often this commitment is breached which puts the taxpayer in a quandary because if the house is not acquired or constructed within the two or three year time period, the benefit of capital gains tax exemption would be denied.
Perhaps the best solution to ensure availing of the exemption under section 54 or 54-F is to acquire the new residential property in an existing co-operative society. In such cases, the possession of the property would be assured though the documents of title may take time for registration.
A more or less similar issue was decided by the Gujarat High Court in C.I.T. v Anilaben Upendra Shah (262 I.T.R. 657). The facts in this case were that on September 6, 1979, by depositing a sum of Rs 5,000 which included entrance fees of Rs 55 and share capital of Rs 250, the assessee had become a member of a co-operative housing society. A flat was allotted to her by the society in November 1979. The total cost of the flat after excluding the loan amounting to Rs 30,000 came to Rs 67,757.
Possession of the flat was however delivered by the said society to the assessee only in October 1981. Thereafter, the assessee entered into an agreement to sell the flat on October 8, 1982, and in performance of such contract the assessee sold the same on December 4, 1982, for Rs 1,40,000. The Assessing Officer subjected an amount of Rs. 42,243 to tax as short-term capital gains.
The Commissioner (Appeals) held that the date of acquisition of the flat was the date of the agreement and not the date of occupation of the flat and directed the Assessing Officer to treat the capital gains as long term and grant deduction under section 80-T of the Act to the assessee. The Tribunal confirmed the view of the Commissioner (Appeals).
On a reference, the Gujarat High Court observed that the assessee had held the shares and allotment of the flat in the co-operative housing society for a period of more than 36 months. Accordingly, the capital gain in question was rightly held by the Tribunal to be long-term in nature. Therefore, the assessee was entitled to the benefit of deduction under section 80-T.
The member of a co-operative housing society only owns the shares in that society. A member of a co-operative housing society to whom a flat or land is allotted cannot transfer such land or flat without selling the shares held by him.
Hence, when the question comes up for consideration as to which is the relevant date while computing the capital gains tax in case of transfer of shares by a person who is a member in a co-operative housing society, the relevant date would be the date on which the incoming member acquires the shares in the co-operative housing society and the date on which the outgoing member had sold his shares in the said co-operative housing society.
While the aforesaid decision pertained to the question of claiming deduction under old section 80-T in respect of long term capital gains arising on sale of a residential property, the principle set out in the judgment would equally apply while deciding the question of exemption under section 54 or 54-F.
If possession of the residential property is taken later in a co-operative housing society though the agreement with the builder was entered into more than three years earlier, the property would still be treated as long term and therefore the exemption for the capital gains can be claimed.
Conversely, if from the date of sale of the old asset, a period of less than two years or three years, as the case may be, has elapsed for taking possession of the new residential property, the condition under section 54 or 54-F would be deemed to be complied with though the final documents of ownership may yet have to be executed.
In conclusion, it may be pointed out that it is a well-settled principle of interpretation that for claiming an exemption, benefit or deduction, the conditions laid down in the respective provision should strictly be complied with.
The author is Advocate, Supreme Court