PERSONAL TAX: Home loan can get Section 54 benefit

A taxpayer filed her return of income for assessment year 2011-12 on September 30, 2011 and declared a total income of Rs 9.62 lakh. During the course of assessment proceedings, the tax officer found that the taxpayer had sold a flat, jointly held with others, during the relevant previous year and declared her share of capital gains at Rs 55.82 lakh in the return of income. However, she also claimed deduction u/s 54 of the Income Tax Act ('the Act') on account of the investment made of Rs 98.90 lakh towards purchase of a new flat.

The tax officer called for additional details in support of the claim for deduction. On examination of the same, he noted that the investment of Rs 98.90 lakh made for the purchase of the new home included a housing loan of Rs 50 lakh availed from a foreign bank. The tax officer sought an explanation from the taxpayer as to why the housing loan of Rs 50 lakh invested in the purchase of the new house should not be excluded from the deduction claimed u/s 54 of the Act. In her defence, the taxpayer argued that the housing loan amount was not actually utilised for the purchase of the new house, for which deduction was claimed. She submitted that while the new house was purchased vide agreement dated September 23, 2010, the housing loan of Rs 1 crore was sanctioned by the bank in the joint name of the taxpayer and other co-owners on January 21, 2011, while the amount as disbursed on February 2, 2011. The taxpayer submitted the copy of the bank's sanction letter and the bank account statement in support of the above. It was thus argued that by the time the home loan was disbursed, the consideration for the new house had already been duly paid. The taxpayer also provided a complete list of source of funds for the total purchase consideration paid, which included the payment from the sale proceeds of the original house property.

The tax officer was not convinced and rejected the taxpayer's claim. He reduced the housing loan component from the cost of the new house and allowed only the balance amount of Rs 48.90 lakh towards deduction u/s 54 of the Act. In view of the same, an addition of Rs 6.92 lakh was made in the assessment order towards additional long-term capital gains tax payable by the taxpayer.

At the first level of appeal the taxpayer put forth all arguments before the authority. In addition, the taxpayer argued that even if the home loan was utilised for the purchase of the new house, she cannot be disentitled from claiming the deduction u/s 54, as the only condition laid down in the said section is that the purchase of the new house has to be made within the prescribed period, irrespective of the sources of fund utilised in the purchase of the house. However, the appellate authority agreed with the tax officer's point-of-view.

When the matter came up before the tax tribunal, the authority agreed with the taxpayer's arguments and observed that if the tax officer's argument was to be held as valid, then the deduction section may be redundant especially where a taxpayer purchases a property one year before the date of sale of a house, in which case the taxpayer will never be able to utilise capital gains in purchase of the new house. The tribunal conclusively ruled in favour of the taxpayer.

The writer is a Sebi-registered investment adviser