Capital Gains – House property (For Beginners)


This is in continuation of my previous article on this topic.

There are various questions asked in respect of capital gains on house property. One of the question is whether we can purchase two houses for adjustment of capital gains. My answer is affirmative citing the following case.

April, 23rd 2009
CIT and Anr. vs D. Ananda Basappa

Citation 309 ITR 329

Topic Exemption: Capital gains – Purchase of a house, Purchase of two adjoining flats

The asessee on sale of his old residential house purchased two adjoining flats, which were continued to make a single residential unit. The purchase was made within specified time. He was entitled to exemption from capital gains tax.

Whenever a singular was used for a word, it was permissible to include the plural.

S.54 of the Income Tax Act 1961
S.13 of the General Clauses Act 1897

High Court of Karnataka

CIT and Anr. vs D. Ananda Basappa

Income-tax Appeal No. 113 of 2004

K. Sreedhar Rao and C.R. Kumaraswamy, JJ

20 October 2008

M. V. Seshachala for the Appellant
K.R. Prasad for the Respondent

JUDGMENT

The respondent-assessee is a Hindu undivided family. The assessee sold a residential house for Rs.2,12,50,000 in the year October, 1995. The assessee purchased two residential flats adjacent to each other from M/s. Ormonde Private Developers Ltd. The assessee has, however, taken two separate registered sale deeds in respect of the two flats situate side by side purchased on the same day. The vendor has certified that he has effected necessary modifications to the two flats to make it one residential apartment. The assessee sought for exemption under section 54 of the Income-tax Act.

The assessing authority gave exemption for capital gains to the extent of purchase of one residential flat. It was found in the inspection by the inspector that the residential flats were in occupation of two different tenants disclosing separate enjoyment. Therefore, it is held that section 54(1) of the Income-tax Act does not permit exemption for the purchasers for more than one residential premises. The Commissioner of Income-tax confirmed the order of the assessing authority. The Tribunal, in appeal set aside the order of the Commissioner of Income-tax and held that the purchase of the two flats made by the assessee has to be treated as one single residential unit and that the assessee is entitled for full exemption.

The following are the substantial questions of law framed for consideration:

“(a) Whether the Tribunal was correct in holding that out of the sale proceeds of the property bearing No. 9, Brunton Road, Bangalore, owned by the assessee he could invest the same in two residential flats bearing No. G-01 and G-02, and claim deduction in respect of both these flats in accordance with section 54 read with section 54F of the Act for the assessment year 1996-97?

(b) Whether the proviso to section 54F of the Act, as it stood prior to the amendment brought about by the Finance Act, 2000, can be read to mean that for the assessment year 1996-97 the assessee would be entitled to relief in respect, of more than one dwelling unit for the purpose of claiming exemption under the head ‘Capital Gains’?”

In the provision of section 54(1) of the Income-tax Act, the relevant portion is extracted herein for convenient reference:

“Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head ‘Income from house property’ (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased or has within a period of three years after that date constructed a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall.be dealt with in accordance with the following provisions of this section”, that is to say,-

A plain reading of the provision of section 54(1) of the Income-tax Act discloses that when an individual-assessee or Hindu undivided family-assessee sells a residential building or lands appurtenant thereto, he can invest capital gains for purchase of residential building to seek exemption of the capital gains tax. Section 13 of the General Clauses Act declares that whenever the singular is used for a word, it is permissible to include the plural.

The contention of the Revenue is that the phrase “a” residential house would mean one residential house and it does not appear to the correct understanding. The expression “a” residential house should be understood in a sense that building should be of residential in nature and “a” should not be understood to indicate a singular number. The combined reading of sections 54(1) and 54F of the Income-tax Act discloses that, a non residential building can be sold, the capital gain of which can be invested in a residential building to seek exemption of capital gain tax. However, the proviso to section 54 of the Income-tax Act, lays down that if the assessee has already one residential building, he is not entitled to exemption of capital gains tax, when he invests the capital gain in purchase of additional residential building.

When a Hindu undivided family’s residential house is sold, the capital gain should be invested for the purchase of only one residential house is an incorrect proposition. After all, the Hindu undivided family property is held by the members as joint tenants. The members keeping in view the future needs in event of separation, purchase more than one residential building, it cannot be said that the benefit of exemption is to be denied under section 54(1) of the Income-tax Act.

On facts, it is shown by the assessee that the apartments are situated side by side. The builder has also stated that he has effected modification of the flats to make it as one unit by opening the door in between two apartments. The fact that at the time when the inspector inspected the premises, the flats were occupied by two different tenants is not the ground to hold that the apartment is not a one residential unit. The fact that the assessee could have purchased both the flats in one single sale deed or could have narrated the purchase of two premises as one unit in the sale deed is not the ground to hold that the assessee had no intention to purchase the two flats as one unit.

For the reasons and discussion made above, the substantial questions of law are answered in favor of the assessee. The appeal is dismissed.

C. R. Venkata Ramani

(AICWA)

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5 thoughts on “Capital Gains – House property (For Beginners)

  1. Sir,

    I would like to seek your views to the following scenario:

    1) Bought a house in June 2000 for Rs. 11L including renovation and sold the house in Sept. 2010 for Rs. 30L. (Deposited 20L in Capital Gains Bond – fixed deposit with SBI – apologies, terminology might be wrong).

    2) Had a parcel of land from Sept. 94 bought for Rs. 1L and sold the same for Rs. 25L in March, 12.

    I assume CG is actually around : 15L for the first case and Rs. 21L for the second.

    Planning to buy a retreat house in Chennai near Mahabalipuram for Rs. 18L and can construct 600 sft for Rs. 8L over the next one year.

    My query :
    Can I club both the sale and buy the retreat house as a residential house under construction.
    Do I need to be aware of anything else to avoid Capital gains. Is this investment sufficient.
    If the CG is lower than deposited sum as is the first case, is it compulsory to use the whole sum deposited for purchase of a residential unit.
    Can I buy a plot separately with the additional sum from the two sales.

    looking forward to your advise.

    regards,
    Sanjay

    1. Dear sir,

      Only residential flat/houses qualify for capital gain adjustments and not plots. Just check your capital gains and you can go for one residential house to equal your capital gains within 3 years of sale for constructions. Consult one auditor for further details.

  2. as is understood one can buy only one property against sale of one property. in fact i too am in the situation as above and would request clarification.

    1. It is not one against one. The IT law says that at any time, the assessee should not own two houses in his name including the house /flat to be purchased. So if you don’t have any house after selling one house, then you can go in for two houses to avoid capital gain tax fulfilling other conditions.

      venkat

  3. Dear Venkata,

    I am in the process of selling my house since December 2010 and will be making capital gains profit. I have already initiated the purchase of another house even while the sale proceeds of the first are coming in as instalments. I need to hand over possession of my house in April 2011. I have three questions.

    1. I cannot get my new house registered till April. But have accepted a substantial amount from my earlier sale proceeds. Do I need to pay advance tax on this in March 2011?

    2. Can I buy two different properties to avoid LTCG tax. They may not be adjacent to each other as was the case that you described above.

    3. Also to take double advantage of saving LTCG tax can I invest in the 54EC bonds before March 31 and then in April or May 2011?

    Thank you
    Manoj

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