Income Tax Exemption under Section 54: When you can get it – ITAT order

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Updated: November 20, 2019 9:03:00 AM

Exemption under Section 54 of Income Tax Act: A person can claim exemption under Section 54 of the Income Tax Act on purchase of a house for his residence from funds other than capital gain

Exemption under Section 54 of Income Tax Act. Check when you can claim exemption under Section 54 of Income Tax Act.

Exemption under Section 54 of Income Tax Act: A person can claim exemption under Section 54 of the Income Tax Act on purchase of a house for his residence from funds other than capital gain. Also, the sale proceeds need not be used for the purchase of new asset before the end of the time limit provided by Section 54, according to a recent judgment of the Cochin Bench of Income Tax Appellate Tribunal (ITAT). The judgment dated 5th November 2019 came in the case of a person (assessee) who had sold his house for Rs 2.6 crore on April 12, 2012. He held 50 per cent share in the house. The assessee had purchased the residential property for Rs 85,30,475, six months back on September 9, 2011.

In his ITR for AY 2013-14, the person claimed exemption under Section 54 of the Income Tax Act on the house purchased in 2011. However, the Assessing Officer denied exemption, saying the person had made the purchase using other funds than capital gain and the sale proceeds were not used for purchasing new asset.

The assessee appealed against the Assessing Officer before the first appellate authority Commissioner of Income Tax (Appeal). However, the appeal was dismissed by CIT(A), which relied on CIT v. V.R. Desai (2011) judgement of Kerala High Court. In this case, the assessee did not deposit the sale proceeds of the house, on which capital gains were made, within the prescribed time limit. Hence, the High Court held that the assessee was not entitled to claim of deduction under Section 54F of Income Tax Act, the tribunal said.

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The assessee then moved the Income Tax Appellate Tribunal (ITAT). The Tribunal made the following observations about Section 54 of the Income Tax Act:

  • Section 54 of the I.T.Act does not prohibit the assessee to raise funds or borrow money for investment in the house property.
  • The section 54 of the I.T.Act does not specifically state that claiming exemption, the entire investment should be from capital gains or no other funds be used for purchase of new asset.
  • The only condition imposed u/s 54 is that investment should be made prior to one year or within two years of transfer of the property from which capital gain is earned.

The Tribunal noted that the judgement relied upon by CIT(A) didn’t apply to the facts of the current case. It further said that the issue in the current case was decided in favour of the assessee by Kerala High Court in ITO v. K.C.Gopalan.

Where Section 54 of Income Tax Act applies

Section 54 makes a person eligible for exemption when he sells a residential property and purchases a new one under certain conditions. The HC had observed in K.C.Gopalan verdict: “The assessee has to construct or purchase a house property for his own residence in order to get the benefit of section 54. The wording of the section itself would make it clear that the law does not insist that the sale consideration obtained by the assessee itself should be utilised for the purchase of house property. The main part of section 54 provides that the assessee has to purchase a house property for the purpose of his own residence within a period of one year before or after the date on which the transfer of his property took place or he should have constructed a house property within a period of two years after the date of transfer. Clauses (i) and (ii) of section 54 would also make it clear that no provision is made by the statute that the assessee should utilise the amount which he obtained by way of sale consideration for the purpose of meeting the cost of the new asset.”

In view of the above HC decision, the Tribunal held that the assessee was entitled to claim deduction under Section 54 of the Income Tax Act.

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New provisions under Section 54

Following provisions were added to Section 54 by Finance Act of 2019:

Provided that where the amount of the capital gain does not exceed two crore rupees, the assessee may, at his option, purchase or construct two residential houses in India, and where such option has been exercised,—

(a) the provisions of this sub-section shall have effect as if for the words “one residential house in India”, the words “two residential houses in India” had been substituted;

(b) any reference in this sub-section and sub-section (2) to “new asset” shall be construed as a reference to the two residential houses in India:

Provided further that where during any assessment year, the assessee has exercised the option referred to in the first proviso, he shall not be subsequently entitled to exercise the option for the same or any other assessment year.

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