The capital gains tax provisions under the Income Tax Act are not very comprehensive, which often leaves taxpayers uncertain about their application. The lack of clarity often leads to ordinary taxpayers filing lawsuits when it comes to taxes on the sale and purchase of capital assets.
One of the controversial issues in capital gains tax is the exemption for investing sales proceeds in residential property.
Sections 54F of the Act allow someone to claim exemption from tax on long-term capital gains if the sales proceeds are used for the purchase/construction of a new house within the specified period.
The issue is whether the benefit under section 54F, which uses the expression “a dwelling house”, is to be strictly construed as applying to a single dwelling unit or whether it can be interpreted more broadly to include multiple dwelling units.
This article attempts to explore different scenarios and provide guidance based on case law and rulings.
Scenario 1: Purchase of two apartments at different ends in the same residential tower: Mrs. Kamla sold a piece of land and used the proceeds of the sale to purchase two apartments in the same tower. These flats were located in Block-A, on two different floors, and at two different ends. It was not possible to combine them and they could not be used as one housing unit.
Mrs. Kamla does not eligible for full exemption under Section 54F of the Act, and preferred to be entitled to exemption only for one of the two flats purchased by her. A private house under section 54F is not intended for multiple residential units and therefore an exemption is only possible for one of the apartments: – Delhi High Court in the case of Ms. Kamla v. Chief Commissioner of Income Tax (2024).
Scenario 2: Purchase of two adjacent apartments: Mr. Nakul purchased two adjacent apartments under two independent agreements. The builder originally got the plan approved as two separate units. To meet Mr Nakul’s demands, the plan was subsequently revised and also approved by MHADA. The revised plan clearly stated that the two apartments, although purchased independently by him, were to be used as one unit with one kitchen.
Mr. Nakul is eligible for exemption under section 54F. As long as the property was used by the taxpayer as a single unit, the conditions relevant for claiming deduction were fully satisfied and the exemption could not be denied under section 54F of the Income Tax Act: -. Mumbai Tribunal in the case of Nakul Aggarwal v ACIT (2024)
Scenario 3: Mrs. Geeta was the owner of the property consisting of the basement, ground floor, first floor and second floor. She entered into a partnership agreement with M/s Thapar Homes Ltd. to develop the property. The builder demolished the existing structure on the plot and developed, constructed and/or erected a building on his behalf consisting of a basement, ground floor, first floor, second floor and third floor with terrace. Ms Geeta was given two independent floors in addition to the cash amount under the agreement with the builder.
Mrs. Geeta is eligible for exemption under section 54F for investments in both floors. As long as the The curator acquires a buildingwhich for convenience can be constructed in such a way that it consists of several units which, if necessary, can be easily and independently used as a self-contained dwelling; the requirement of the portion must be assumed to have been satisfied. Held by the Hon’ble Delhi High Court in the case of Gita Duggal v. CIT (2013)
Scenario 4: D. Ananda, a HUFsold a residential house and bought two adjacent residential apartments under two different sales deeds. However, the seller of the apartments has stated that he has made the necessary adjustments to the two apartments to turn them into one residential apartment.
D. Ananda (HUF) is eligible for exemption under section 54F. After all, the Hindu undivided family property is owned by the members as joint tenants. Since the members purchase more than one residential building taking into account the future needs upon separation, it cannot be said that the benefit of exemption under Section 54(1) of the Income Tax Act should be denied. Hon’ble Karnataka High Court in the case of D Ananda Basappa v. CIT (2009)
Conclusion As the above scenarios show; every case was subject to litigation. The valuation officer was reluctant/unwilling to accept the intended purpose of investing in the various residential units.
The Department is of the general and consistent view that the exemption u/s.54F will be allowed only in respect of a dwelling unit consisting of one dwelling. It limits the exemption to a single dwelling unit and whether more than one such unit is part of a dwelling house or not is of no concern to the Department.
It can be concluded that the precise facts of each case determine the eligibility of claims under section 54F.
Disclaimer: The article is for educational purposes only.
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