EXEMPTION UNDER SECTION 54 AND 54F

Even amidst  the days when tax department is tightening its grip over the soft and easily bendable neck  of the taxpayer, there are still two sections which are most favorite sections  of the assesses in general and people in housing and reality sector in particular. Both section 54 and 54F have normally been liberally construed by our judiciary and are vital blood vessel of housing infrastructure of our economy and of course at the same time they are heart beat of chapter IV-E on Capital Gains Taxation.  Liberal Interpretation of Section 54 and 54F has been influenced by two important Rules of Interpretation.

A.      Beneficial Provisions of the law should be interpreted fairly, reasonably and liberally favoring the assesee so as to achieve the intended purpose

(Bajaj Tempo (SC) 196 ITR 188; UP Co-operative Fedration 176 ITR 435; South Arcot District Co-operative Marketing Society Ltd. 176 ITR 117 (SC) )

B.      When more than one view is possible, view favorable to assesee is to be adopted

(Vegetable Products (SC) 88 ITR 192; Poddar Cement (SC) 226 ITR 625;Shaan Finance(SC) 231 ITR 308)

 This write up is a modest attempt to deal with various aspects of these two sections which are practical application of above two rules of interpretation :

Multiple Houses

a)      Whether  exemption available for sale of more than one residential houses for

investment in one residential  house ?

Yes.  Ranjit  Vithal Dass 137 ITD 267

b)     Whether exemption is available for purchase of adjacent flats in same building?

Yes. D.  Ananda Basappa 180 Taxmann 4 (Kar.) Applying the ratio Karnataka High Court in K.G. Rukminiamma  48 DTR 377 also provided relief for allotment of more residential flats in same building allotted to owner by developer under Joint Development agreement out of eight flats being constructed by him. Further in this case Sushila M. Jhaveri 107 ITD 327 favouring revenue was disapproved.

Also held in Meher R. Surti 40 Taxmann.com 138 (Mum Tri.) that exemption is available for purchase of more than one house.

 However held in Mrs Gulshan Banoo R. Mukhi 83 ITD 649, exemption is not available for two flats on the different floors

c)      Whether exemption is available for multiple residential units within a residential house?

Yes.  Geeta Duggal 214 Taxman 51 (Delhi)

d)      Whether exemption u/s 54 is available for sale of two houses the proceeds whereof used for  purchase of two houses ?

Yes. Rajesh Keshav Pillai 44 SOT 617. Ravinder K. Mariwala 2003 86 ITD 35(Mum.)

Held in Krishan Gopal 2 SOT 628;K.C. Kaushik 185 ITR 499; M.Siva Parvati 129 TTJ  63(Vishakhapattnam) the assessee is entitled to deduction in respect of one of several houses of his choice and not for all houses at different locations.

e)      Whether exemption is available even if assesee executes different registration deeds for different portions of one property?

Yes. Smt. Sunita Aggarwal (2006) 284 ITR 20

f)       Whether capital gain of multiple years can be claimed against the same property?

Yes, if capital gain is lesser that cost of property. Smt Anagha Ajit Patnekar 9 SOT 685

g)      Whether exemption is available u/s 54F where assessee owns more than house, whether wholly or partly.

No. Apsara Bhavana Sai 40 taxmann.com 528 (ITAT-Hyd) where house held jointly with spouse; VKS Bawa 56 ITD 232 (Delhi) it was held that when an assessee has become owner of a share (fractional) in property bequeathed to her by her mother, by the time the assessee purchased another property, she could not claim exemption u/s. 54F of the Act.

Foreign connection

a)      Whether exemption is available for purchase of foreign house?

Yes. Mrs. Prema Shah 100 ITD 60 (Mum.);Vinay Mishra 30 Taxmann.com 341 (Bang-  

Trib.);Dr Girish M. Shah (ITA 3582/Mum/2009 dated 17-02-2010).

Leena J. Shah 6 SOT 721 (Ahd) denying exemption was disapproved in Vinay Mishra (supra)

b)      Whether non- resident is entitled to exemption.

Yes.

Exemption on Incomplete/Imperfect / Part-Purchase /Construction of flat/ building

I.                     FLAT Specific cases

a)      Whether exemption is available against tentative cost of construction to be paid in instalmments against just allotment of flat by DDA or co-operative society or other instiution?

Yes. Circular No. 471 dated 15-10-1986 and Circular No.  672 dated 16-12-1993.

b)     Whether exemption is available where payment of flat made, possession obtained but registered deed not executed?

Yes. Dr. Laxmi Chand Nagpal 78 Taxman 219 (Bom)

c)      Whether exemption is available if agreement for flat purchase entered in one year but entire investment paid over three years?

Yes. Smt. Bharti C Kothari 117 Taxman 538 (High Court held that it is immaterial whether assessee himself constructs the house or gets it constructed by third party.)

d)      Whether exemption is available for allotment of flat /building under Joint Development Agreement although no flat was purchased /constructed?

Yes. R. Gopi Nath HUF 42 DTR 127 (AT) Chhenai

II.                  Cases of Incomplete Payment or Possession or Registration

e)      Whether exemption is available for new asset registered in name of assesee for which payment not made ?

Yes. Exemption cannot be rejected for nonpayment Smt. Kanta Devi Saraf 254 ITR 317

f)       Whether exemption available where substantial payment made but possession of the building handed over by builder after stipulated period?

Yes.  R. L Sood  108 Taxman 227; P.K. Datta 10 SOT 66 (2006)

g)      Whether exemption is available in case of non registration?

Yes.  Balraj 254 ITR 22; Shazada Begum 173 ITR 397; Mysore Minerals 239 ITR 775

III.                Construction Specific Instances

h)      Whether exemption is available for purchase and construction?

Yes.  B.B. Sarkar 7 Taxman 239 (Cal)

i)        Whether exemption is available for extension of existing building ?

Yes, available for independent floor with toilet and kitchen -Ashok Kumar HUF 65 ITD 352 (Del.).  Held available for independent residential unit in PV Narsimhan 181 ITR 101; Vidya Prakash Talwar 132 ITR 661 (Delhi). Held not available for mere extension of old existing house in Pradeep Kumar 290 ITR 90; Mrs. Meera Jacob 313 ITR 411 (Ker.); T.N. Gopal 121 ITD 352.

j)        Whether exemption is available for renovation expenses after purchase to make the house habitable?

Yes. Saleem Fazelbhoy 9 SOT 601; Mrs. Sonia Gulati 115 Taxmann 232 (Mag)(Mum.)

The above decisions followed in recent case in Meher R. Surti 40 Taxmann.com 138 (Mum Tri.) on 4-09-2013,where in renovation expense on plastering and renovation of wires has held as eligible for exemption under 54F to make it habitable.

k)      Whether exemption is available for payment made to tenants for relinquishing  their tenancy rights besides consideration paid for acquiring residential house ?

No. Uday S. Kotak 96 ITD 177 (Mum). Also held in Meher R. Surti (supra) that no exemption u/s 54 id available for transfer of mere tenancy rights and S. 54 applies to transfer to house property only.    

l)        Whether exemption is available for demolition and reconstruction of old house ?

Yes. M. Vijaya Kumar 122 ITD 15 (Bang.)

IV.                Construction of new asset before Sale of Original Asset

m)   Whether exemption is available for construction of new house completed before transfer of original asset?

No. Raj Kumar Agarwala 95 TTJ 315 (Delhi)

n)      Whether exemption is available for construction of new house commenced before transfer of original asset but completed after transfer of original asset ?

Yes. J.R. Subramanya Bhat 165 ITR 571; H.K. Kapoor 234 ITR 753 (All.)

 Held in Chandru L. Raheja  27 ITD 551 (Bom.); Smt. Nimmagada Sri Devi 33 taxmann.com 306 (Hyd-Trib) only that part of investment in new house that was made out of sale proceeds received after transfer of old house would qualify for exemption.

V.                 OTHERS

o)      Whether exemption is available for Sale of Asset with defective /incomplete title ?

Yes. Because income is assessable under Capital Gains and not Income from other Sources

Rina B. Parwani 31 SOT 36(Pune)

p)      Whether exemption for purchase or construction is available against a house for which although land is held for more than 3 years but completion of construction is lesser than 3 years old ?

As per Vimal Chand Golecha 201 ITR 442 (Raj.), capital gain on land and building should be separately calculated. However burden of bifurcating and proving value of land is on assessee.

Citi Bank 261 ITR 570; Vimal Chand Golecha 201 ITR 442 (Raj.); Smt. Lakshmi B. Menon 132 Taxmann 197; C.R. Subramanium 242 ITR 342 (Kar.)

q)      Whether exemption is available u/s 54 F if new asset is sold within three years and proceeds are reinvested in another house within three years from sale of original asset ?

Yes. Sultana Nazir 21 taxmann.com 385 (Chhennai)

r)       Whether exemption is available if the assesee does not actually reside in the property?

Yes. A.R. Mattawan Pillai 219 ITR 696; Amit Gupta 6 SOT 403; SK Luthra 11 SOT 646; Mahavir Parsad Gupta 5 SOT 353; Muthu Zulakhia 245 ITR 800

Land Appurtenant to Building

a)      Whether exemption to be calculated on cost of land along with cost of building?

Yes. CBDT Circular No. 667 dtd. 18-10-1993

b)     Whether exemption available on cost of vacant land appurtenant even if no construction done on appurtenant land ?

Yes. Narender Mohan Uniyal 34 SOT 152 (Delhi).

c)      Whether exemption available on value of entire land appurtenant to building?

No. Smt Asha George ITA 114 of 2012 (Ker. HC)

CAPITAL GAIN ACCOUNT SCHEME

a)      Whether exemption is available for unutilized amount of Capital Gain Account Scheme in case of an individual who dies before expiry of stipulated period ?

Yes, his legal heir can not be taxed for unutlized amount.  Circular 538 dated 13-07-1989.

b)      Whether exemption is available for incomplete purchase/construction of house where amount of capital gain has been utilized within three years.

Yes. Smt Usha Vaid ITA /ASR/98/2011; Sardar Mal Kothari 302 ITR 286; Seeta Subramanium  59 ITD 94; Smt Ranjit Sandhu 133 TTJ 46(Chd-Trib.) ; Smt Shashi Varma 224 ITR 106 (MP); Sambandan Uday Kumar (Karnatka HC).

c)      Whether exemption is available for delayed investment with in extended period u/s 139(4) ?

Yes. Fatima Bai 32 DTR (Kar.) 243; Rajesh Kumar Jalan 157 Taxmann 398; Nipun Mehrotra  110 ITD 320 (Bang.)

Co/Joint  sharing of Land and/or Building

a)      Whether exemption is available for construction of house on land owned by some other person?

Yes . Smt Savita Rani 5 ITD 621 (AT) Delhi, where land belonged to father. P.R. Sheshadri 33 DTR 128 (2010)(Karnatka HC), where land belonged to assessee’s wife.

b)       Whether  exemption is available for buying share of co-owner of the property ?

Yes. ITO vs Varsha Thanawala ITA/Mum/6257/2002; TN Arvinda Reddy 120 ITR 46

            c) Whether exemption is available for purchase of part of house ?

Yes. Chandaben Magan lal 245 ITR 182; Narendra N Chauhan 261 ITR 185;Balvant Ram 122 Taxman 201(Ahd-Trib.)

c)      Whether exemption is available for purchase of house in name of wife ?

Yes. S. Vardrajan  33 TTJ 466 (Mad.); Ravinder Kumar Arora (27-9-2011)(Delhi HC) in ITA /1106/2011; Smt Armeda K. Bhaya 95 ITD 313(Mum); Jennifer Bhide 349 ITR 80 (Kar.);Kamal Wahal 214 Taxman 287(Delhi);V Natrajan 154 Taxmann 399 (Mad)(In this case  the assessee also showed the rental income in his return of Income).

d)      Whether exemption is available for joint purchase in name of assessee and bachelor dependant  son ?

Yes.  Gurnam Singh 327 ITR 278 (P&H)

e)      Whether exemption is available for purchase in name of son and/or  grandson ?

No. Jay Narayan 2009 306 ITR 335; Parkash 312 ITR 40 (Bom)

f)       Whether exemption is available for purchase of house in name of minor daughter ?

Yes. N. Ram Kumar 138 ITD 317(Hyd.)

g)      Whether exemption is available for purchase of house in name of married daughter ?

No. Ganta Vijya Lakshmi 37 Taxmann.com 263 (Vishakhapatnam-Trib)

h)      Whether exemption is available for joint purchase of property ?

Yes. Shekhar Sood 93 TTJ 909 (Asr.); Smt Saraswati Rama Nathan 116 ITD 234; Armeda K Bhaya (supra); Narinjan Singh Bajaj ITA/MUM/2040/2006

Purchase/ Construction from Funds under than Sale Proceeds of Original House

a)      Whether exemption available for purchase or construction of house from borrowed funds ?

Yes. H.K. kapoor 234 ITR 753 (All) ; M Vasudevan Chettiar 234 ITR 705 (Mad); Bombay Housing Corporation 81 ITD 545 (Mum); K.C. Gopalan 107 Taxman 591(Ker); Ajit Vaswanit 117 Taxman 123 (Del)(Mag.); Prema P. Shah 100 ITD 60; Ishwar Singh Chawla 130 TTJ 108 (Mum.); Muneer Khan 41 SOT 504 (2010)(Hyd). However in Milan Sharad Ruparel 27 SOT 61 contrary decision has been given and ITAT Mumbai has said that exemption is available to the extent of utilization of non borrowed funds only.

b)      Whether for  exemption investment in new asset may not be from Sale proceeds of original asset ?

Yes. R. Sri Niwasan 49 DTR 208 (Mad.)

Exemption for deemed  capital gain

Whether exemption is available for deemed short term capital gain u/s 50 for sale of long term depreciable asset ?

Yes available, if it is a Long Term Capital Asset . Assam Petroleum Industries 262 ITR 587 (Gau);ACE Builders 76 ITD 389 (Mum.); Weikfields Products 71 TTJ 518(Pune); Sandhaya Saxena 7 SOT 527.

Whether exemption is available for deemed long term capital gain for stamp value exceeding actual sale consideration u/s 50C?

Yes.  Gyan Chand Batra vs. ITO (2010) 133 TTJ 482 ; Raj Babbar ITA /6497/Mum/2011.

            From the above discussion it is evident that section 54 and 54F needs  some amendments with respect to defining precisely the due date of making investment and  bringing pre transfer construction at par with pre transfer purchase. Further in present scenario, when it takes a lot of time in getting necessary approvals for projects, the time limit for construction also needs re- consideration by law makers.