PERSONAL TAX: Pay LTCG tax if new flat buy goes in vain

A taxpayer sold his residential flat in Ahmedabad in the financial year 2008-09 for Rs 13.50 lakh. This flat was acquired in FY 1995-96 for Rs 4.01 lakh. In his return of income, the taxpayer claimed exemption u/s 54 of the Income Tax Act ('the Act') on account of his purchase of a property in a scheme of residential flats ('the said scheme') as available then.

During the scrutiny proceedings, the tax officer did not allow the exemption u/s 54 of the Act, as the taxpayer failed to produce the purchase deed of the new property. The first appellate authority, too, confirmed the tax officer's view and denied any relief to the tax payer.

When the case came up for hearing at the tax Tribunal, the taxpayer contended that he had made payments of more than Rs 29 lakh to the developer, under the said scheme. The receipts for payments made through account payee cheques, towards flat number A/304, were submitted before the Tribunal. The taxpayer claimed that the said scheme is covered by the Tax department's circular number 471 of 1986 and 672 of 1993. In the former circular, the department had clarified that cases of allotment of flats under the self-financing scheme of Delhi Development Authority (DDA) should be treated as cases of construction for the purposes of Section 54 and 54F of the Act. Subsequently, on various other representations received, the Department held that in case of allotment of flats / houses by co-operative societies and other institutions, whose schemes of allotment and construction are similar to those of the DDA, as referred to in the above circular; such cases may also be treated as construction for the purposes of Section 54 and 54F of the Act.

At a later stage, the developer failed to construct the flats and ultimately the money was returned to the taxpayer in the assessment year (AY) 2011-12. The taxpayer contended before the Tribunal that the subsequent development at the developer's end may disentitle him for claiming exemption u/s 54, but in such the long-term capital gains, claimed exempt earlier, should be treated as taxable income in the hands of the taxpayer in the year in which the money was returned. The tax officer contended that in light of the refund of money, as the taxpayer had eventually failed to fulfil the conditions of Section 54; the exemption should not be allowed in the first year itself.

The Tribunal, on the basis of both arguments, observed that there is no dispute about taxability in the given situation; the year of taxability is the row. The Tribunal observed that the taxpayer has fulfilled conditions as given in Section 54, during AY 2009-10, by virtue of booking the flat in the said scheme; which qualifies as a self-financing scheme as referred to under the above referred circulars of the tax Department. In view of the same, the taxpayer's claim for exemption u/s 54 was duly allowed.

While the provisions of the Act empowers the tax officer to withdraw the exemption in the first year itself, in view of the fact that the tax payer had himself offered the capital gains to tax in AY 2011-12; the Tribunal ruled in favour of the taxpayer.

The writer is a Sebi-registered investment advisor