Long-term capital gains earned on the sale of a residential house is exempted if the capital gains are invested in a new residential house within the time limit stipulated under the Income Tax Act ('the Act'). In this column, a couple of weeks back, the author had written about a case, (which was held favorable for the taxpayer) wherein the appellate authorities had held that as long as the taxpayer invests the money to buy a new residential house within the stipulated time, the exemption shall be available. It doesn't matter if, in the intervening period of time, the taxpayer invests the money in other instruments such as mutual funds to earn some profits/dividends before its reinvestment. But, what if the taxpayer actually utilise the entire capital gains for some other purpose and then takes a loan to purchase the house. Will the exemption be still allowed? Let's find out.
A taxpayer, engaged in the business of commission agency for car finance and other products, had in his return of income filed for the assessment year 2010-11, claimed capital gains of Rs 59.07 lakh as exempt u/s 54. During the course of assessment, the tax officer observed that the taxpayer had not invested the capital gains in purchasing the new residential unit. He had actually availed a home loan of Rs 82.50 lakh from a bank and invested only an amount of Rs 9.37 lakh out of the capital gains. The tax officer was of the view that the exemption claim made by the taxpayer was not in conformity with the spirit of provisions laid down in section 54 of the Act for a claim of deduction. Accordingly, he disallowed the sum of Rs 49.69 lakh and added the same to the assessed income of the taxpayer.
The first level appellate authority did not agree with the submissions made by the taxpayer and hence chose not to withdraw the additions made by the tax officer in the assessment order.
The taxpayer filed a further appeal before the Kolkatta Tax Tribunal. Before the Tribunal, the taxpayer relied on an earlier decision of the Punjab and Haryana High Court wherein it was held that the taxpayer 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 taxpayer itself should be utilised for the purchase of house property. The principal part of section 54 provides that the taxpayer has to purchase the new property for his own residence within the prescribed period from the date of transfer.
On the basis of the facts of the case, the Tribunal observed that it is an undisputed fact that the cost of the new property purchased is more than the capital gains as assessed by the tax officer. A part of the capital gains was utilised initially by the taxpayer for investment in the purchase of a new residential unit within the specified time. The taxpayer had sold his residential unit is 2009-10 and purchased the new flat on June 17, 2010, thereby making him entitled to claim exemption u/s 54 of the Act. The Tribunal relied on the High Court judgment referred by the taxpayer and held that merely because the taxpayer had availed a housing loan from the bank, it cannot be held as a disqualification for the claim of exemption u/s 54 when all other primary conditions were satisfied.
The Tribunal thus ruled in favor of the taxpayer and ordered for the deletion of additions made in the assessment order.
The writer is a Sebi registered investment adviser