Section 54 of the Income Tax Act (‘the Act’) provides exemption of capital gains resulting from the sale of a house property, if the same is invested in purchasing a house property within two years from the date of sale. Further, the exemption can also be claimed if the resulting capital gains is invested in the construction of a house property; provided the construction is completed within three years from the date of sale.

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In one of the recent cases that came up before the Chandigarh Tax Tribunal, the tax payer had sold her flat in Mumbai for Rs 5.2 crore on September 17, 2012 and had claimed the resulting capital gains of Rs 2.97 crore as exempt under Section 54 vide her investment in another flat in Mumbai for Rs 3 crore. During assessment proceedings, on verification of the purchase deed by the tax officer, it was observed that the purchase agreement was signed on September 11, 2014; and that the possession of the flat was to be handed over on or before August 2016. The tax officer concluded the taxpayer had only purchased the right to purchase the flat, which was proposed to be given after four years from the date of transfer. As these violated the conditions prescribed under section 54 of the Act; the tax officer disallowed the exemption claimed.

At the first level of appeal; the taxpayer argued and took support of various judicial precedents where it has been held that if the taxpayer invests capital gains in a house which is under construction and the possession is delayed for no fault of the taxpayer, then the exemption cannot be denied. The first-level appellate authority, however, did not agree to the above as the decisions relied upon by the taxpayer were in relation to exemption claims made u/s 54F of the Act. He further observed that as the purchase agreement was signed after almost one year from the due date of filing returns for the year in which the property was sold; it was required that the taxpayer deposit the capital gains amount in the specified capital gains account as prescribed by sub-section (2) of Section 54. In the current case, the taxpayer had simply invested the money in bank Fixed Deposits. The appellate authority denied the taxpayer’s claim for exemption on both these grounds.

When the case came up for hearing with the Honorable Tax Tribunal, it was observed that in various precedents, tax tribunals and high courts have taken liberal construction of the exemption provision of section 54 and 54F, which is to promote purchase and construction of residential houses. Relying on various high court decisions, the tribunal held that as the agreement for the purchase of the flat has been made and the entire amount of capital gains is paid within three years from the date of sale; the basic requirement for claiming relief under Section 54 has been fulfilled and, hence, allowed the exemption claim.

With regard to the second ground of non-deposit of money in capital gains account scheme before filing of returns, the tribunal observed that in their view, this provision was enacted as an enabling provision to gather the real intention of the tax payer; who intends to claim the benefit of exemption of Section 54 by investing the amount in purchase/ construction of a house. While the primary goal of Section 54 is to promote housing, the procedural and enabling provisions of sub-section (2) cannot be strictly interpreted to impose strict limitations on the taxpayer and deny him the benefit, if defaulted. Therefore, the tribunal held that as the tax payer has been able to prove during assessment proceedings, that she has already invested the capital gains for purchase of a new home; the exemption cannot be denied.  

The author is the founder of Arvind Rao & Associates, Mumbai.