Capital Gains Exemptions

Capital Gains Exemptions 1

Section : 54 Exemption Available to Individual and HUF In respect of LTCG on transfer of Residential House (Old asset) Income shall be Chargeable under the Head Income from House Property New Asset Residential House Purchased within 1 year before or 2 years after the date of transfer of old asset Constructed within 3 years of the transfer of old asset 2

Continued If CG > Cost of New Asset : Difference Taxable u/s 45 If CG < = Cost of New asset : Full Exemption If new asset sold within 3 years then the cost will be NIL or reduced by capital gain exempted earlier as the case may be Investment to be made in Capital Gain Account Scheme [Section 54(2)] 3

Section 54F Exemption Available to Individual and HUF In respect of LTCG on transfer of any asset other than a Residential House (Old Asset) New Asset Residential House Purchased within 1 year before or 2 years after the date of transfer of old asset Constructed within 3 years of the transfer of old asset 4

Continued If Cost of New Asset > = Net consideration : Full Exemption If Cost of New Asset < Net Consideration : Proportionate Exemption Proportionate = Exemption Cost of New Asset Net Sale Consideration * Capital Gain Investment to be made in Capital Gain Account Scheme [Section 54F(4)] 5

Exemption is not available If the assessee :Owns more than one residential house, on the date of transfer other than the new asset ; Purchases any residential house (other than the new residential house) within 1 year of transfer of Original Asset. Constructs any residential house (other than the new residential house) within 3 years of transfer of Original Asset. and income of such house is chargeable under Income from House Property If the assessee purchases / constructs any other residential house within 2 / 3 years from the date of transfer of original asset then the exemption allowed earlier shall be deemed to be the LTCG of the year in which such purchase / construction takes place. 6

Section 54 v/s Section 54F Available for Transfer of Residential House Capital Gains is to be invested No additional conditions In case of default, cost of new asset will be reduced for CG purpose Available for Transfer of any asset other then Residential House Net Consideration is to be invested Additional conditions (a) not own more than one house (b) should not purchase any other house within 1 year (c) should not construct any other house within 3 years In case of default, exemption granted earlier becomes LTCG of the year in which default takes place 7

Section 54EC Benefit available to all assesses Asset to be transferred is any Long Term Capital Asset Capital gains are to be invested Investment is to be made within 6 months of the date of transfer of the original asset Investment to be made in long term specified assets Long term specified assets for making investment under this section are Bonds issued by NHAI & RECL or any other bond as may be notified by the Central Government in this behalf. 8

Continued. W.e.f 03/07/2017 Investment in bonds of Power Finance Corporation will also qualify for exemption available u/s 54EC. If Investment >= CG : Full exemption If Investment < CG: Proportionate exemption W.e.f 01/04/2007 investment in a financial year can not exceed Rs. 50 Lakhs W.e.f 01/04/2015 the investment made by an assessee in the long term specified asset, out of capital gains arising from the transfer of one or more original asset or assets are transferred and in the subsequent financial year does not exceed Rs.50 Lakhs 9

Continued Bonds will have to be held for 3 years or more If bonds transferred / converted into money within 3 years : exemption granted earlier shall be deemed to be LTCG in the year of default Not permitted to take Loan against security of the Bonds No Deduction allowable for the same bonds u/s. 80C 10

Separate Limit in case of Clubbing Whether separate limit of Rs. 50 Lakhs is available to both the entities in case of clubbing? Father earns LTCG Rs. 70 Lakhs invests Rs. 50 Lakhs Minor son earns LTCG Rs. 60 Lakhs invests Rs. 50 Lakhs Whether exemption will be Rs. 1 Crore or Rs. 50 Lakhs? Father + Son (50 + 50 ) = 100 Lakhs 11

Continued Section 64(1A) Total Income and Such Income Section 2 (45) Total Income means total amount of income referred to in section 5, computed in the manner laid down in this Act In case of clubbing of income of minor child, deduction under section 54EC is to be allowed on minors income from LTCG separately and only net income is to be clubbed [DCIT vs Rajeev Goyal [2012] 22 taxmann. com 34 (Kol.-ITAT)] 12

Continued Where proceedings under Act for assessment of income of a minor child are required to be taken, minor child can be treated as an assessee under section 2(7) for purposes of section 54F. Benefit under section 54F cannot be denied to minor child on ground that father of minor child has a residential house at time of transfer of capital asset. [ACIT vs Madan Lal Bassi [2004] 88 ITD 557 (CHD.)] 13

Non-availability of Bonds at appropriate time Non-availability at the end of six months Both NHAI / REC not available One of the two available Impossibility of Performance CIT Vs. Cello Plast (2012) 76 DTR (Bom) 439. 14

Position of Brought Forward Losses LTCG for A.Y. 2014-15 Rs. 2 Crores - B/fd Long Term Capital Loss 1.75 Crores - Invested Rs 50 Lakhs Whether exemption available for Rs. 50 Lakhs (before set off ) or Rs. 25 Lakhs (after set off) Section 74 Brought Forward capital loss is to be adjusted against Assessable Capital Gains Judicial Decisions CIT Vs.Vijay M. Mahataney (2013) 92 DTR (Mad) 180 Tata Power Co. Ltd. Vs. Addl. CIT (2011) 47 SOT 470 (Mumbai) 15

Miscellaneous Joint Investment permissible DIT International Taxation Vs. Mrs. Jennifer Bhide (2012) 349 ITR 80 (Kar) Asst. CIT Vs. Vijay S. Shirodkar (2011) 48 SOT 8 (Mumbai) Date of Investment Vs. Date of allotment of Bonds - Hindustan Unilever Ltd. Vs. Dy. CIT (2010) 325 ITR 102 (Bom) Period of six months shall be counted from the end of the month in which original asset is transferred - Yahya E. Dhariwala Vs. Dy. CIT (2012) 49 SOT 458 (Mumbai) 16

Issues for Section 54 & 54F Investment in Multiple Houses : Capital Gains earned Investment made in Multiple Houses Whether only one will qualify or all will qualify Interpretation of a residential house Whether a means single unit or a means that house shall be residential in nature W.e.f 01/04/2015 a residential house has been replaced with one residential house 17

Case Laws on Multiple Houses ITO Vs. Ms. Sushila M. Jhaveri (2007) 107 ITD 321 (Mumbai)(SB) CIT Vs. Gita Duggal (2013) (257 CTR 208) (Del HC) CIT v. Syed Ali Adil (AP)(HC) (2013) 260 CTR 219 CIT vs. D.Ananda Basappa 309 ITR 329 (Kar.) CIT vs. K.G. Rukminiamma 331 ITR 211 (Kar.) ACIT v. Deepak S. Bheda (2012) 52 SOT 327 (Mum.)(Trib.) V.R. Karpaam (Smt.) v. ITO (2013) 143 ITD 126 (Chennai)(Trib.) Smt. Hemalatha Chandran v/s ITO (Chennai ITAT) 18

Multiple Houses Transferred Two Houses Transferred Total Investment made in one bigger house Whether both will qualify for exemption u/s. 54 or any one will qualify??? DCIT v. RanjitVithaldas (2012) 79 DTR 377 19

Continued Five Houses sold Five new purchased against each sale Rajesh Keshav Pillai Vs. ITO (2011) 44 SOT 617 (Mum) Exemption available for each set of sale and corresponding investment in new house Aggregate capital gain and aggregate investment not accepted following Special Bench in Sushila Jhaveri Contra D.Anand Bassapa etc Not cited 20

Both Exemptions for same asset Sale of Residential House and also Other Asset Total Investment in New House Both section 54 and 54F whether available for the investment in same asset - Whether mutually exclusive? Ravindra K. Mariwala Vs. ITO (2003) 86 ITD 35 (Mum). 21

What if Construction can not be completed in time? Beneficial provisions shall be liberally construed Bajaj Tempo Ltd.Vs. CIT (1992) 196 ITR 188 (SC) Broach District Co-operative Cotton Sales, Ginning & Pressing Society Ltd. vs. CIT (1989) 177 ITR 418 (SC) CIT vs. Straw Board Manufacturing Co. Ltd. (1989) 177 ITR 431 (SC) Substantial compliance Vs. Complete compliance CIT Vs. Saradarmal Kothari (2008) 302 ITR 286 (Mad) CIT Vs. Sambandam Udaykumar (2012) 251 CTR (Kar) 317 Smt. Pushpadevi Tibrewala Vs. ITO (2013) 58 SOT 41 (Hyd) 22

Whether Registration is a must? Purchase is different then legal ownership Supporting Decisions CIT Vs. Smt. Beena K. Jain (1996) 217 ITR 363 (Bom.) Balraj Vs. CIT (2002) 254 ITR 22 (Del.) CIT Vs. Ajitsingh Khajanchi (2008) 297 ITR 95 (MP) 23

Purchase in Joint names Assessee is first owner and family member is second owner Family member is first owner and assessee is second owner Assessee is first owner and some outsider is second owner Outsider is first owner and assessee is second owner 24

Continued. CIT Vs. Ravinderkumar Arora (2012) 342 ITR 38 (Del.) DIT International Taxation Vs. Mrs. Jennifer Bhide (2012) 349 ITR 80 (Kar) Dr. P. K. Vasanthi Rangarajan Vs. CIT (2012) 252 CTR (Mad) 336 25

Purchase in Others names Whether it can be said that the assessee has purchased the house? Late Mir Gulam Ali Khan Vs. CIT (1987) 165 ITR 228 (AP) Peculiar facts CIT Vs. V. Natarajan (2007) 287 ITR 271(Mad) In name of wife CIT Vs. Kamal Wahal (2013) 351 ITR 4 (Del.) In name of wife 26

Delay due to Late Receipt S. Gopal Reddy Vs. CIT (1990) 181 ITR 378 (AP) 54E Darapaneni Chenna Krishnayya (HUF) Vs. CIT (2007) 291 ITR 98 (AP). 54E CIT Vs. Late Janardhan Dass Through L/H Shyam Sunder (2008) 299 ITR 210 (All) 54B Prompt action would find favour with courts 27

Delay in receipt Section 54EC Illustration : ABC Private Limited Co. sold it s non current investments for Rs.500 lacs on Dec 29, 2016 and earned long term capital gains of Rs.50 lacs. Consideration of Rs.500 Lacs is received on 31.01.2017. The Company has deposited the amount of Rs.50 lacs in NHAI bonds on July25, 2017. Can the company take benefit of Rs.50 lacs under section 54EC? Chanchal Kumar Sircar Vs. ITO (2012) 50 SOT 289 (Kol) Mahesh Nemichandra Ganeshwade & Ors.Vs, ITO (2012) 147 TTJ (Pune) 488 CIT v. Janardhan Dass (2008) 299 ITR 210 (All.) Darapaneni Chenna Krishnayya (HUF) v. CIT (2007) 291 ITR 98 (AP) 28

Land Appurtenant to House Land which is integral part of the House Adjoining Land Vs.Appurtenant Land P. K. Lahiri Vs. CIT (2005) 275 ITR 17 (All) Land owned by wife Building by Husband Mrs. Sheela Bhagwandas Nichlani Vs. ITO (2014) 146 ITD 244 (Mum.) 29

Redevelopment Cases Whether Purchase Whether Construction or Neither? Surrender of flat for a consideration that new bigger and better flat will be constructed for him Jatinder Kumar Madan Vs. ITO (Order dated 25th April 2012 in ITA No. 6921/Mum/2010) ; ((2012) 32 CCH 059 MumTrib). Delay in completion of the project Liberal Interpretation 30

Issues / FAQ Q. 1 Whether the nexus between capital gain and amount of investment u/s 54 is necessary? Assessee is not required under the provision for section 54 to establish the nexus between the amount of capital gain and the cost of new asset. Assessee had initially utilized the sale proceeds on sale of its residential flat in commercial properties and, later on, he purchased two residential flats within a period specified in sub-section (2) of section 54. The Revenue s main dispute was that the sale proceeds were utilized for purchase of a commercial property and residential house was purchased out of the funds obtained from different sources, as such, the identity of heads has been changed. [Ishar Singh Chawla Vs. CIT 130 TTJ (Mum) (UO) 108 (2010) and Ajit Naswanit Vs. CIT 1127 Taxman 123 (Delhi) (Mag.) (2001)] 31

Q.2 Whether exemption under section 54 is allowable for addition of floor to the existing house from the sale proceeds of residential house sold? Assessee owned two residential houses. He sold one house and utilized its sale proceeds to construct first floor on his second house after demolishing old structure, in this case exemption will be allowable under section 54. [CIT vs P.V. Narsimhan [1989] 47 Taxman 89 (Mad.) However, in CIT v. V. Pradeep Kumar [2007] 290 ITR 90/ [2006] 153 Taxman 138 (Mad.), it was held that a mere extension of existing building would not give benefit to assessee under section 54F. Section 54F emphasizes construction of residential house and such construction must be real one and should not be a symbolic construction. Followed by ACIT vs T.N. Gopal [2009] 121 ITD 352 (Chennai-ITAT) (TM) 32

Q.3 Whether the expenditure to make a residential house habitable will be included in the cost of new asset? The words used about the amount spent on purchase of new asset are cost thereto and not price thereto. The cost includes purchase as well. Consequently, the words used signify that the amount of purchase will include other necessary expenditure in this behalf to make a residential house habitable and taken together that will be the cost of the new asset. The Tribunal had perused the items of the report of the architect. The residential house was in a state of general disrepair and was inhabitable. Consequently, the necessary repairs carried out to make the same habitable would constitute part of the cost of new house. [Gulshanbanoo R. Mukhi v. JCIT 83 ITD 649 (ITAT- Mum) (2002)] 33

Continued... Jt. CIT Vs. Smt. Armeda K. Bhaya (2005) 95 ITD 313 (Mum) Saleem Fazelbhoy Vs. DCIT (2007) 106 ITD 167 (Mum) inhabitable premises is not residential house Difference between expenses on making house habitable and expenses on renovation Srinivas R. Desai Vs. ACIT (2013) 155 TTJ (Ahd) 743 34

Q.4 Whether exemption under section 54F would be allowable where assessee is already a co-owner of another flat? The word own appearing in section 54F includes only such residential house which is fully and wholly owned by one person and not a residential house owned by more than one person. The assessee was already a co-owner of another flat. Being a co-owner, assessee was not the absolute owner of another residential flat, and exemption under section 54F could be denied on this ground. [ITO vs Rasiklal N. Satra [2006] 98 ITD 335 (Mum.-ITAT)] 35

Q.5 Whether property purchased in foreign country is also eligible for exemption? Section 54 does not exclude the right of the assessee to claim property purchased in a foreign country, if all other conditions laid down in the section are satisfied. Merely because the property acquired was in a foreign country, the exemption under section 54 cannot be denied.the new house may be in India or outside India. [Prema P. Shah Vs. ITO 101 TTJ 849 (Mum-ITAT)(2006)], Mr Vinay Mishra v ACIT (2012) (Trib ) ( Bang) However, in Leena J. Shah vs ACIT [2006] 6 SOT 721 (Ahd.-ITAT), it was held that the benefit under section 54F is not allowable for a residential house purchased/ constructed outside India. W.e.f 01/04/2015 exemption is not available if the residential house is purchased outside India 36

Q.6 Is there any requirement that the assessee should file the return before the due date under section 139(1) to claim exemption under section 54/54F? Where the assessee had fulfilled the condition for depositing the amount of capital gain in a specified bank account before the due date prescribed for furnishing the return of income under section 139(1),there is no requirement that the assessee should file return of income before the due date prescribed under section 139(1). [Esther Christopher Mascarenhas v. ITO 9 Taxmann.com 99 (Mum.-ITAT) (2011)] Merely because investment is made after due date of filing of return, section 54F exemption cannot be denied where investment is made prior to filing of return under section 139(4). [R.K.P. Elayarajan vs DCIT [2012] 23 taxmann.com 206 (Chennai-ITAT)] 37

Q.7 Whether cost of residential house includes the cost of plot? The cost of the plot together with cost of the building will be considered as cost of new asset provided the acquisition of the plot and also the construction thereon are completed within the period specified in these sections. [Circular no. 667, dated 18-10-1993] 38

Q.8 Whether for purpose of claiming exemption under section 54, possession of flat booked with builder had to be taken within the time period specified? If the assessee had made investment within period of three years, exemption under section 54 could not be denied for the reason that possession had not been taken. There may be delay in taking of possession because of many factors not under control of assessee, merely because of this exemption could not be denied. [Kishore H. Galaiyavs ITO [2012] 24 taxmann.com 11 (Mum.)] In CIT vs R.L Sood [2000] 108 Taxman 227 (Delhi), it was held that on payment of substantial amount in terms of purchase agreement within four days of sale of his old house, assessee acquired substantial domain over new residential flat within specified period, it could be said that assessee complied with requirements of section 54. Merely because builder failed to hand over possession of flat within specified period, assessee could be denied benefit of benevolent provision of section 54. CIT v/s Mrs Hilla J.B Wadia 216 ITR 376 (Bom) 39

When New house is purchased / constructed Purchase means to buy for a price or equivalent of price by payment in kind or adjustment towards a debt - CIT Vs.T. N.Arvinda Reddy (1979) 120 ITR 46 (SC) Domain and control over the property - CIT Vs. Mrs. Shahzada Begum (1988) 173 ITR 397 (AP) Payment of substantial portion of consideration and possession CIT Vs. Dr. Laxmichand Narpal Nagda (1995) 211 ITR 804 (Bom.) Purchase is not used in the sense of a legal transfer Ordinary meaning shall be followed 40

Q.9 Does exchange of old flat with a new flat under a development agreement amounts to construction of new flat for purpose of claiming deduction under section 54? Exchange of old flat with a new flat to be constructed by the builder under development agreement amounts to transfer under section 2(47) of the Income Tax Act, 1961. The acquisition of a new flat under a development agreement in exchange of the old flat amounts to construction of new flat. The provisions of section 54 are applicable and assessee is entitled to exemption if the new flat had been constructed within a period of 3 years from the date of transfer. [Jatinder Kumar Madan taxmann.com 316 (Mum.)] vs ITO [2012] 21 41

Q.10 Whether transfer of only interest in flats under construction could be treated as transfer of residential house? Where the assessee transferred only his interests in two flats under construction of which possession was not taken and was not fit for human habitation, such transfer could not be treated as transfer of residential house. Hence, the capital gain derived by the assessee related to a capital asset held by him for a period of more than 36 months and, therefore, the gain arising from the transfer of his rights in the said flats constituted long term capital gains. The assessee would, therefore, be entitled to grant of exemption under section 54 F. [Jagdish Chander Malhotra v ITO (1998) 64 ITD 251 (Del)] 42

Q.11 Whether the benefit under section 54EC and 54F can be taken simultaneously? Deduction under section 54EC cannot be denied on ground that assessee has availed exemption under section 54F also in respect of a part of capital gains. [ACIT vs Deepak S. Bheda[2012] 23 taxmann.com 159 (Mum.)] Example Mr. Karan has purchased a residential house in May 25, 2012 and sold the same in Dec 27, 2016 for Rs. 1000 lacs. Capital gain arising on sale of house amounted to Rs. 150 lacs. He claimed benefit of section 54 by constructing residential house of Rs.50 lacs and Deposited Rs.50 lac in RECL bonds on Mar, 30, 2017 and Rs.50 lacs again on June 1, 2017 claimed exemption of Rs.100 lacs under section 54EC. Can he claim exemption under both the sections i.e. 54 & 54EC? Whether he can claim the benefit of Rs.100/- lacs under section54ec? 43

Q.12 Whether the benefits u/s 54, 54F & 54EC are available from gains of depreciable capital asset? In CIT V. Assam Petroleum Industries Pvt. Ltd. 131 Taxman 699 (GAU.) [2003], it was held that, where a depreciable asset is held for more than 36 months before its transfer, then such depreciable capital asset is Long Term Capital Asset. However, according to section 50(1)&50(2), the gains or loss on depreciable capital asset shall always be short term. It was further held that benefit u/s 54,54F & 54EC which are available from gains of a LTCA shall be available from gains of Depreciable capital asset. CIT vs. ACE Builders Private Limited 2006 281 ITR 210 (Bom HC) 44

Illustration Mr. A has sold his office premises. The details are as under : Date of Purchase : 01.04.2012 Cost of Acquisition : Rs.30 lakhs WDV as on 01.04.2015 : Rs.21.87 lakhs Date of Sale : 01.06.2015 Sale Value : Rs.50 Lakhs Whether Mr. A can invest in residential house and claim benefit under section 54F? 45

Case Study - 1 Name of Assessee : Mr.A Date of Sale of residential flat : 25/03/2006 Capital Gain : 200 Lakhs Agreement to Purchase new flat with builder entered on 01/06/2006 for Rs 250 Lakhs.( Rs. 200 Lakhs paid before 30/06/2006) Agreement cancelled due to delay in project on account of builder on 20/03/2008 and refund received on 25/04/2008. Agreement for Rs225 Lakhs for purchase of another flat with different builder 28/02/2008. Possession to be given by Feb, 2009. Possession actually received on 25/03/2010. Payment made as under : 28/02/2008 : Rs.25,00,000 /20/03/2009 : Rs. 1,50,00,000 /25/03/2010 : Rs. 50,00,000/Whether Mr. A is eligible for deduction u/s 54. If yes, for what amount? 46

Case Study - II Mr A made capital gain of Rs.50 lakh on sale of Immovable Property in A.Y 2016-17. He made the following investments towards the purchase of a new residential property. Rs.20 Lakhs before 17/10/2016 [ Before the due date of filing of income u/s 139(1)] Rs.25 Lakhs on 30/11/2016 [ ROI filed on 01/12/2016] Rs.5 Lakhs in December, 2016 (Within time limit available u/s 139 (4) of the Act ] What is the amount of deduction available u/s 54? Anita Ajay Shad vs ITO (ITA No. 3154 (Ahd) of 2015 dt 18/09/2017) 47

Case Study - III Name of Assessee : Mr A Flat Purchased at Churchgate for Rs. 300 Lakhs Payment Details : Paid on Booking on 30/06/2009 : Rs. 60 Lakhs Payment made from 01/07/2009 to 31/12/2013 : Rs.150 Lakhs On possession on 28/02/2017 : Rs 90 Lakhs Flat Sold at Borivali in Jan, 2016 for Rs. 125 Lakhs Capital Gain Rs. 50 Lakhs Whether Mr. A is eligible for the exemption u/s 54? 48

THANK YOU 49