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    Tax Consequences on Transfer of Residential House Property

    A person may sell his Residential House Property either to construct or acquire a new house property or due to shift of his residence from one place to another place. 

    1. Construct or Acquire New House Property, in this case he might be selling the existing residential property either to construct or purchase a new Residential House Property (or) he might have already started constructing or purchased and selling the existing property for paying back such dues. 
    1. Shift of residence from one place to another place, in this case he is selling the property to buy another property in the place where he is relocating. 

    In the above two cases, the said transaction shall be called as transfer of capital asset and would require the transferor to pay income tax. The article herein makes an effort to dwell upon the aspects of short term capital gain and computation thereof, long term capital gain, its computation and exemptions thereon. 

    Transfer of house property may earn capital gains, as described in the below chart:

    Short-term Capital Gain: 

    “Short-term capital gain” means capital gain arising from the transfer of a short-term capital asset [sec.2(42B) of Income Tax Act,1961]. 

    “Short-term capital asset” means a capital asset held by an Assessee for not more than 36 months immediately preceding the date of its transfer [sec. 2(42A) of Income Tax Act,1961]. 

    Computation of Short-term Capital Gain 

    1. Sale Consideration

     

    (Full value of consideration or Stamp value whichever is higher) 1

     

    1. Deduct the following:
      1. Expenditure incurred wholly and exclusively in connection with such transfer
      2. Cost of acquisition and
      3. Cost of improvement
    2. The balancing amount is capital gain

     

    For example, Mr. Krish purchases a house property for Rs. 50 lakhs on 1st May 2014. Further spends an amount of Rs. 10 lakhs for renovation on 1stApril, 2015.Mr. Krish transfers the residential house property for Rs. 65 lakhs on 31stApril 2015.(Stamp Value is Rs. 99 lakhs)

     

    Computation of Short-term capital gain:

     

    1.

    Sale Consideration

    99 lakhs

     

     

    2.Deduct

     

     

    a. Expenditure

    Nil

     

    b. Cost of acquisition

    (50 lakhs)

     

    c. Cost of improvement

    (10 lakhs)

    3.

    Short-term capital gain

    39 lakhs*

     

     

     

     

    *Rs. 39 lakhs is treated as income under the head ‘Income from Capital Gains’ for the F.Y:2015-16 and taxed as per the slab rates.

     

    Long-term Capital Gain:

     

    “Long-term capital gain” means capital gain arising from the transfer of a long-term capital asset [sec.

     

    2(29B) of Income Tax Act,1961].

     

    “Long-term capital asset” means a capital asset which is not a short-term capital asset [sec. 2(29A) of Income Tax Act,1961].

     

     

    1Sec. 50C of Income Tax Act, 1961 – where the consideration received or accruing as a result of the transfer by an Assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by stamp valuation authority then such value so adopted or assessed or assessable shall form the full value of consideration. 

    Computation of Long-term Capital Gain

     

    1. Sale Consideration

     

    (Full value of consideration or Stamp value whichever is higher)[Refer to footnote 1]

    1. Deduct the following:
      1. Expenditure incurred wholly and exclusively in connection with such transfer
      2. Indexed Cost of acquisition and
      3. Indexed Cost of improvement
      4. Exemptions under sec 54.
    2. The balancing amount is capital gain

     

    Exemptions to Capital gain arising from the transfer of residential house property:

     

    Section: 54 & 54F of Income Tax Act, 1961

     

    Applicability: Individual or HUF.

     

    Nature of Asset: The asset should be a residential house whereas income from such property is taxable under the head “INCOME FROM HOUSE PROPERTY” and it should belong- term capital asset.

     

    Conditions:

     

    1. The Assessee has purchased a residential house property within a period of 2years from the date of such transfer or within a period of 1year before the transfer or has constructed a

    residential house property within a period of 3years from date of such transfer. 2

     

    1. In case of compulsory acquisition, the above periods start from the date of receipt of compensation.

     

    • If the amount of capital gain is not utilised by the Assessee for purchase or construction of new residential house property before the due date for furnishing of return then it shall be deposited by the Assessee in CAPITAL GAIN ACCCOUNT SCHEME with specified banks(excluding rural banks).

     

    1. The new residential house property so constructed or purchased should not be transferred within 3years from date of its purchase or construction.

     

    1. If the new residential house property so constructed or purchased is transferred within 3years from date of its purchase or construction then the cost of acquisition to be considered for calculating capital gain will be reduced by the amount of long term capital gain exempted earlier under sec. 54 of Income Tax Act, 1961. [for further clarification, see the illustration below]

     

    For example, Krish transfers a residential house property in Agra for Rs. 25, 40,000 on 23rd April 2014, which was purchased by him on 20th April 1987, for Rs. 2, 90,000. On 16th June 2014, he purchases a house in Delhi for Rs. 12, 00,000 for the purpose of residence of his daughter. 

    2As per Finance Bill 2014, benefits under sec. 54 and 54F for investment in purchase or construction of residential property has been restricted to one property and the property in India.

     

     

     

    Computation:

     

     

     

    Sale proceeds

    25,40,000

     

     

    Less: Indexed cost of acquisition [Rs. 2,90,000*852/133]

    (18,57,744)

     

     

    Capital Gains

    6,82,256

     

     

    Less: Exemption under section 54

    (6,82,256)*

     

     

    Capital gains chargeable to tax for the assessment year 2015-16

    nil

     

     

    *Exemption under Sec. 54 can be availed to the extent of lower of Cost of new house property purchased or Capital gains from such transfer.

     

    In the above case, on 18th July 2015, Krish transfers the house property in Delhi for Rs. 16,90,000.

     

    Computation:

     

    Sale proceeds

    16,90,000

     

     

    Less: Cost of acquisition

    (5,17,744)*

     

     

    Short-term capital gain

    11,72,256

     

     

     

    *Since the house purchased on 16th June 2014 was sold before 3 years, cost of acquisition reduces by the amount so claimed as exemption under sec. 54 of Income Tax Act, 1961.

     

    Cost of acquisition is Rs. 5,17,744 [i.e., 12,00,000-6,82,256]

     

    FAQ’s:

     

    • Should the New Residential House Property purchased by availing sec.54 exemption need to be in the name of Assessee only?

     

    • No, New Residential House Property purchased by availing sec.54 exemptions need not be only in Assessee name. This was clarified in the Judgement given in the case of CIT v. Kamal Wahal [2013]on January 11, 2013 at High Court of Delhi.

     

    Facts of Case:

     

    The Assessee sold his joint property which gave rise to proportionate capital gains. He claimed deduction under Sec. 54F by investing sale proceeds in acquisition of vacant plot and purchase of a residential house property in the name of his wife.

     

    Taking a view that under Sec. 54F, investment in residential house should be in the Assessee’s name, the Assessing Officer denied deduction in respect of investment in residential house purchased by Assessee in his wife’s name.

     

    The Commissioner (Appeals) allowed the Assessee’s claim. The tribunal confirmed the order of Commissioner (Appeals), holding that Sec. 54F, being a beneficial provision enacted for encouraging investment in resident houses, should be liberally interpreted. 

    However, it is better to purchase in the name of Spouse and Minor Children only as there were 

    controversy judgements in few cases {Income Tax Officer v. Ganta Vijaya Lakshmi [2013] on July 22, 2013 at ITAT Visakhapatnam Bench}&{Assistant Commissioner of Income-tax v. Girish Dharod [2013] on July 4, 2013 at ITAT Hyderabad Bench ‘B’}

     

    • Whether New residential House Property so purchased claiming exemptions under sec. 54 can be transferred to another person out of love and affection within 3 years from the date of purchase of the said property?

     

    • Yes, the new house property purchased availing exemptions under Sec. 54 can be transferred out of love and affection within 3 years. This was clarified in the Judgement given in the case of Income Tax Officer v. Abdul Hameed Khan Mohammed [2015] on December 29, 2015 at ITAT Chennai Bench ‘B’.

     

    Facts of Case:

     

    The Assessee owned a residential property. He had sold the said property in April, 2010 and invested the sale proceeds in August, 2010 in another residential property. In November, 2010, he had settled the new property to his daughter out of love and affection. In the return filed for the Assessment Year 2011-12, the Assessee claimed exemption under Sec. 54 in respect of capital gains arising on sale of property. He submitted that the settlement in favour of the daughter was a gift falling under Sec. 47(iii) and was not taxable.

     

    The assessing officer held that the settlement did not cover under Sec. 54(i) or 54(ii) and accordingly denied exemption.

     

    The Commissioner (Appeals) allowed the claim of the Assessee for exemption under Sec. 54.

     

    Q: Whether exemption under Sec. 54F is allowed for Assessee though he was unable to get possession of Residential House Property?

     

    1. Yes, Section 54F relief cannot be denied to Assessee when he has invested entire sales consideration in purchase of residential house but he is unable to get possession of flat, which is under construction, due to fault of builder. This was clarified in the judgement made in case of Income Tax Officer v. Rajeev B. Shah [2016] on July 8, 2016 at ITAT Mumbai Bench ‘SMC’.

     

    Facts of Case:

     

    The Assessee has invested amount in purchase of residential house within the stipulated period prescribed u/s 54F of the Act. But, it is not in the Assessee's hand to get the flat completed or to get the flat registered in his name, because it was incomplete. The intention of the Assessee is very clear that he has invested almost the entire sale consideration of land in purchase of this residential flat. It is another issue that the flat could not be completed and the matter is pending before the Hon'ble Bombay High

    Court seeking relief by the Assessee by filing suit for direction to the Builder to complete the flat. It is impossible for the Assessee to complete other formalities, i.e., taking over possession for getting the flat registered in his name and this cannot be the reason for denying the claim of the Assessee for deduction u/s 54 of the Act. Thus, Assessee is allowed for deduction under Section 54F. 

    Q: Whether exemption under Sec. 54F is allowed for Assessee though he has filed Income Tax Return after the due date as per Sec. 139(1)?

     

    1. Yes, Assessee can claim relief under Section 54F although he has filed his Income Tax Return belatedly under Section 139(4), i.e., ‘extended due date’ subject to conditions as mentioned in the below Facts. This was clarified in the judgement made in case of Income Tax Officer v. G. Ramesh[2016] on June 22, 2016 at ITAT Chennai Bench ‘A’.

     

    Facts of Case:

     

    Assessee sold the properties situated at Nelankarai and Chenglepet and declared capital gains from these two properties at 77,15,927/. The Assessee claimed exemption u/s. 54F of the Act on investment in a flat for `68,82,120/and thereby declared net taxable capital gains at Rs. 8,33,807/-.

     

    The AO was of the opinion that the Assessee has filed the return of income not u/s.139(1) of the Act and it was filed belatedly u/s.139(4) of the Act, as such the Assessee is not entitled for exemption u/s. 54F of the Act.

     

    The AO in this case out rightly rejected the claim of Assessee that the Assessee is not utilized the capital gains on transfer of capital asset in investment in residential house as specified in section 54F(1) of the Act on the reason that the Assessee has not filed the return of income within due date in term of sec.139(1) of the Act. However, if Assessee wants claim of exemption from payment of income tax by retaining the cash, then the said amount is to be invested in the said account notified by Central Government on this behalf. If the intention is not to retain cash but to invest in construction or any purchase of the property and if such investment is made within the period stipulated therein i.e. Section 139(4), then section 54F(4) is not at all attracted and therefore, the contention that the Assessee has not deposited the amount in the bank account as stipulated and therefore, he is not entitled to the benefit even though he has invested the money in construction is also not correct.

     

    In view of the above, ITAT has inclined to remit the issue to the file of AO to examine the fulfilment of the conditions u/s. 54F of the Act through intermediary period that is from the date of sale of capital asset to the date of actual investment in residential house. Accordingly, the issue is remitted to the file of AO for fresh consideration after giving adequate opportunity of hearing to the Assessee.

     

    • Whether exemption under Sec. 54F is allowed for Assessee if he possesses one Residential House Property and another House Property for commercial Purpose?

     

    1. Yes, exemption u/s. 54F is allowed for Assessee although if he possess one Residential House Property and another Property which is used for Commercial Purpose. This was clarified in the judgement made in case of Commissioner of Income Tax v. I. Ifthiqar Ashiq[2016] on February 8, 2016 at High Court of Madras

     

    Facts of Case:

     

    Assessee had one residential house and one commercial flat in Chennai, from out of both of which, he was deriving income. He also had a land in which was sold and a house property was purchased. The Assessee sold a land owned by him at Neelankarai. The total sale consideration was Rs. 1,14,88,000. The Assessee claimed that the entire sale consideration was invested in the construction of a residential house at Kodaikanal. Therefore, he claimed exemption under section 54F.

     

    The Assessing Officer disallowed exemption under section 54F on ground that the case was covered by the proviso to section 54F(1). On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. On second appeal, the Tribunal allowed the appeal of the Assessee on the ground that section 22 uses only the expression 'building', without qualifying it with an adjective 'residential'. On appeal, the revenue contended that the Assessee's claim for deduction under section 54F could not be allowed as Assessee owned two properties on the date of transfer of original assets and income from two properties were chargeable to tax under the head 'income from house property'. It was further contended that the Assessee's case is hit by clauses (a)(i) and (b) of the proviso to section 54F.

     

    Under the substantive part of section 54F(1), the capital gain arising from the transfer of any long-term capital asset, not being a residential house, shall not be subjected to the taxation provisions, if the Assessee had within the period of one year before or two years after the date on which the took place, purchased a residential house. Alternatively, he should have constructed one residential house in India within a period of three years. If these transfer conditions are satisfied, the capital gain will be dealt with in accordance with clauses (a) and (b) of sub-section (1) of section 54F.

     

    In view of the above, the substantial question of law is answered in favour of the Assessee.

     

     

     

     

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