Are you planning to purchase or construct a new house? However, not sure about how and when to invest your capital gains arising out of selling multiple assets for claiming tax benefits? Here’s some good news for you. The Income Tax Appellate Tribunal (ITAT) Delhi has allowed multiple-year exemption u/s 54F for an under construction house.
Capital gain transactions, in fact, usually result into huge tax impacts and are many a time a matter of dispute between the taxpayer and tax authorities. Section 54F of the IT Act allows an exemption on capital gain from sale of any property other than a residential house. This exemption is subject to certain conditions which are:
1. Assessee should invest the net sale proceeds of the property in purchase of a new house.
2. New property should be purchased within a period of 2 years or constructed within period of 3 years from the date of sale of original asset.
3. Taxpayer should not own more than one house on the date of transfer, other than the one bought for claiming exemption under this section.
4. He should not purchase within 1 year or construct within 3 years any other residential house other than the one bought for claiming exemption under this section.
“Because of these conditions, many times the dispute arises on the eligibility of a particular claim made by the taxpayer. Recently one similar dispute came for adjudication before the Delhi bench of the Income Tax Appellate Tribunal (ITAT). The major dispute in this case was regarding whether the taxpayer can claim the 54F exemption for under construction in more than one year for the same house,” says Chetan Chandak, Head of Tax Research, H&R Block India.
In this case the assessee, Mohinder Kumar Jain, sold five different properties (plots and commercial shop) and invested the long-term capital gains (LTCGs) in construction of a residential house at Mehendi Farm, New Delhi. He claimed an exemption of Rs 1.59 crore under section 54F in his tax returns for A.Y. 2010-11.
“The concerned Assessing Officer (A.O.) disputed this claim on the ground that an exemption of Rs 47.84 lakh was claimed in A.Y. 2009-10 by Mr. Jain under section 54F for construction of the same house. The A.O. disputed the claim on the ground that on the date of sale of these five properties, Mr. Jain was owning more than one residential house. One at Vasant Vihar and another one at Mehendi Farms which was property under construction. Therefore, the AO disallowed the exemption u/s. 54F stating that stipulated conditions of the exemption are violated,” informs Chandak.
Aggrieved by this the assessee filed an appeal with the commissioner appeals. Considering the rival submission given (by assessee and the tax department) the commissioner appeal allowed the taxpayer’s claim on the ground that even if it is accepted that the appellant was having one residential house at Vasant Vihar, Delhi, the appellant was not owning any other house other than the new asset at Mehendi Farms, New Delhi, on the date of transfer of the original assets.
“The CIT-Appeal also observed that there is no bar in section 54F for claiming deduction second time or third time for the same property till the time cost of the property is within the capital gain arisen to the appellant. In the instant case, total capital gain arisen to the appellant in all the three years 2009-10 to 2011-12 was less than the cost of construction of the residential property at Mehendi Farms, New Delhi. As such the appellant is eligible for the deduction u/s 54F of the Income Tax Act and the AO was directed to delete the impugned addition of Rs 1.59 cr,” says Chandak.
Aggrieved by the CIT-Appeals order, the AO filed a further appeal with the ITAT-Delhi on the grounds that the assessee had already availed deduction under section 54F of the Act for investment in construction of the property at Mehandi Farms, which constituted another residential property and therefore, the assessee cannot be allowed deduction under section 54F of the Act for investment in construction of the same residential property.
According to Chandak, in this case the ITAT held that considering the facts and circumstances of the case, the assessee is entitled for deduction under section 54F of the Act because the house property at 9, Mehandi Farms was under construction during the year and it cannot be considered as another residential house owned by the assessee. Therefore, the assessee owned only one residential house at Vasant Vihar, New Delhi. And the fact that the assessee has accepted the disallowance of Rs 86 lakh under section 54F of the Act for assessment year 2010-11 has no bearing on the allowability of the claim for concerned assessment year.
This decision will now benefit many taxpayers as a lot of them sell more than one asset (i.e. plots, shares, gold, etc.) spreading over multiple years to buy a bigger dream home. “Now with this ruling, they will have more clarity as to the fact that they can claim the exemption of the capital gain from sale of different properties over multiple years for the purchase/construction of the same house,” says Chandak.