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Capital Gains Exemptions

125/11/2017 CA M B SANGHVI

Section : 54

Exemption Available to Individual and HUF

In respect of LTCG on transfer of ResidentialHouse (Old asset)

Income shall be Chargeable under the HeadIncome from House Property

New Asset – Residential House

Purchased within 1 year before or 2 years afterthe date of transfer of old asset

Constructed within 3 years of the transfer ofold asset

CA M B SANGHVI 225/11/2017

Continued …

If CG > Cost of New Asset : Difference Taxableu/s 45

If CG < = Cost of New asset : Full Exemption

If new asset sold within 3 years – then the costwill be NIL or reduced by capital gain exemptedearlier as the case may be

Investment to be made in Capital Gain AccountScheme [Section 54(2)]

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Section 54F

Exemption Available to Individual and HUF

In respect of LTCG on transfer of any assetother than a Residential House (Old Asset)

New Asset – Residential House

Purchased within 1 year before or 2 years afterthe date of transfer of old asset

Constructed within 3 years of the transfer ofold asset


Continued…

If Cost of New Asset > = Net consideration :Full Exemption

If Cost of New Asset < Net Consideration :Proportionate Exemption

Proportionate = Cost of New AssetExemption Net Sale Consideration * Capital Gain

Investment to be made in Capital Gain AccountScheme [Section 54F(4)]


Exemption is not available If the assessee :- Owns more than one residential house, on the date of

transfer other than the new asset ;

Purchases any residential house (other than the newresidential house) within 1 year of transfer of Original Asset.

Constructs any residential house (other than the newresidential house) within 3 years of transfer of OriginalAsset.

and income of such house is chargeable under “ Income fromHouse Property” If the assessee purchases / constructs any other residential

house within 2 / 3 years from the date of transfer of originalasset then the exemption allowed earlier shall be deemed tobe the LTCG of the year in which such purchase /construction takes place.


Section 54 v/s Section 54F

Available for Transfer of Residential House

Capital Gains is to be invested

No additional conditions

In case of default, cost of new asset will be reduced for CG purpose

Available for Transfer of any asset other then Residential House

Net Consideration is to be invested

Additional conditions

(a) not own more than one house (b) should not purchase any other house within 1 year (c) should not construct any other house within 3 years

In case of default, exemption granted earlier becomes LTCG of the year in which default takes place


Section 54EC Benefit available to all assesses

Asset to be transferred is any Long TermCapital Asset

Capital gains are to be invested

Investment is to be made within 6 months ofthe date of transfer of the original asset

Investment to be made in long term specifiedassets

Long term specified assets for makinginvestment under this section are Bonds issuedby NHAI & RECL or any other bond as may benotified by the Central Government in thisbehalf.


Continued ….

W.e.f 03/07/2017 Investment in bonds ofPower Finance Corporation will also qualify forexemption available u/s 54EC.

If Investment >= CG : Full exemption

If Investment < CG: Proportionate exemption

W.e.f 01/04/2007 investment in a financial yearcan not exceed Rs. 50 Lakhs

W.e.f 01/04/2015 the investment made by anassessee in the long term specified asset, out ofcapital gains arising from the transfer of one ormore original asset or assets are transferredand in the subsequent financial year does notexceed Rs.50 Lakhs

CA M B SANGHVI 925/11/2017

Continued …

Bonds will have to be held for 3 years ormore

If bonds transferred / converted intomoney within 3 years : exemption grantedearlier shall be deemed to be LTCG inthe year of default

Not permitted to take Loan againstsecurity of the Bonds

No Deduction allowable for the samebonds u/s. 80C

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Separate Limit in case of Clubbing

Whether separate limit of Rs. 50 Lakhs isavailable to both the entities in case ofclubbing ?

Father earns LTCG – Rs. 70 Lakhs –invests Rs. 50 Lakhs

Minor son earns LTCG – Rs. 60 Lakhs –invests Rs. 50 Lakhs

Whether exemption will be Rs. 1 Croreor Rs. 50 Lakhs?

Father + Son (50 + 50 ) = 100 Lakhs

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Continued … Section 64(1A) – “Total Income” and “Such

Income” Section 2 (45) – Total Income means total

amount of income referred to in section 5,computed in the manner laid down in thisAct

In case of clubbing of income of minor child, deduction under section 54EC is to be allowed on minors’ income from LTCG separately and only net income is to be clubbed [DCIT vs Rajeev Goyal [2012] 22 taxmann. com 34 (Kol.-ITAT)]

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Continued …

Where proceedings under Act for assessmentof income of a minor child are required to betaken, minor child can be treated as an assesseeunder section 2(7) for purposes of section 54F.Benefit under section 54F cannot be denied tominor child on ground that father of minorchild has a residential house at time of transferof capital asset. [ACIT vs Madan Lal Bassi[2004] 88 ITD 557 (CHD.)]

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Non-availability of Bonds at appropriate time

Non-availability at the end of six months

Both NHAI / REC not available

One of the two available

Impossibility of Performance

CIT Vs. Cello Plast (2012) 76 DTR (Bom) 439.

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Position of Brought Forward Losses

LTCG for A.Y. 2014-15 – Rs. 2 Crores - B/fd LongTerm Capital Loss – 1.75 Crores - Invested Rs 50Lakhs

Whether exemption available for Rs. 50 Lakhs(before set off ) or Rs. 25 Lakhs (after set off)

Section 74 – Brought Forward capital loss is to beadjusted against Assessable Capital Gains

Judicial Decisions◦ CITVs.Vijay M. Mahataney (2013) 92 DTR (Mad) 180◦ Tata Power Co. Ltd. Vs. Addl. CIT (2011) 47 SOT 470

(Mumbai)

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Miscellaneous Joint Investment permissible ◦ DIT International Taxation Vs. Mrs. Jennifer Bhide

(2012) 349 ITR 80 (Kar)◦ Asst. CIT Vs. Vijay S. Shirodkar (2011) 48 SOT 8

(Mumbai)

Date of Investment Vs. Date of allotment ofBonds - Hindustan Unilever Ltd. Vs. Dy. CIT (2010)325 ITR 102 (Bom)

Period of six months shall be counted from theend of the month in which original asset istransferred - Yahya E. Dhariwala Vs. Dy. CIT (2012)49 SOT 458 (Mumbai)

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Issues for Section 54 & 54F

Investment in Multiple Houses : Capital Gains earned Investment made in Multiple Houses Whether only one will qualify or all will

qualify Interpretation of “a residential house” Whether “a” means single unit or “a” means

that house shall be “residential” in nature W.e.f 01/04/2015 “ a residential house” has

been replaced with “one residential house ’’

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Case Laws on Multiple Houses

ITO Vs. Ms. Sushila M. Jhaveri (2007) 107 ITD 321(Mumbai)(SB)

CITVs. Gita Duggal (2013) (257 CTR 208) (Del HC)

CIT v. Syed Ali Adil (AP)(HC) (2013) 260 CTR 219

CIT vs. D.Ananda Basappa 309 ITR 329 (Kar.)

CIT vs. K.G. Rukminiamma 331 ITR 211 (Kar.)

ACIT v. Deepak S. Bheda (2012) 52 SOT 327(Mum.)(Trib.)

V.R. Karpaam (Smt.) v. ITO (2013) 143 ITD 126(Chennai)(Trib.)

Smt. Hemalatha Chandran v/s ITO (Chennai ITAT)

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Multiple Houses Transferred

Two Houses Transferred

Total Investment made in one bigger house

Whether both will qualify for exemption u/s. 54 or any one will qualify ???

DCIT v. RanjitVithaldas (2012) 79 DTR 377

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Continued … Five Houses sold – Five new purchased against

each sale

Rajesh Keshav Pillai Vs. ITO (2011) 44 SOT 617(Mum)◦ Exemption available for each set of sale and

corresponding investment in new house

◦ Aggregate capital gain and aggregate investment notaccepted following Special Bench in Sushila Jhaveri –Contra D.Anand Bassapa etc – Not cited

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Both Exemptions for same asset

Sale of Residential House and also OtherAsset

Total Investment in New House

Both section 54 and 54F whetheravailable for the investment in same asset- Whether mutually exclusive ?

Ravindra K. Mariwala Vs. ITO (2003) 86 ITD35 (Mum).

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What if Construction can not be completed in time ? Beneficial provisions shall be liberally construed◦ Bajaj Tempo Ltd.Vs. CIT (1992) 196 ITR 188 (SC)

◦ Broach District Co-operative Cotton Sales, Ginning &Pressing Society Ltd. vs. CIT (1989) 177 ITR 418 (SC)

◦ CIT vs. Straw Board Manufacturing Co. Ltd. (1989) 177ITR 431 (SC)

Substantial complianceVs. Complete compliance◦ CITVs. Saradarmal Kothari (2008) 302 ITR 286 (Mad)

◦ CITVs. Sambandam Udaykumar (2012) 251 CTR (Kar) 317

◦ Smt. Pushpadevi Tibrewala Vs. ITO (2013) 58 SOT 41 (Hyd)

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Whether Registration is a must ?

Purchase is different then legal ownership

Supporting Decisions

◦ CIT Vs. Smt. Beena K. Jain (1996) 217 ITR 363(Bom.)

◦ Balraj Vs. CIT (2002) 254 ITR 22 (Del.)

◦ CIT Vs. Ajitsingh Khajanchi (2008) 297 ITR 95(MP)

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Purchase in Joint names

Assessee is first owner and familymember is second owner

Family member is first owner andassessee is second owner

Assessee is first owner and someoutsider is second owner

Outsider is first owner and assessee issecond owner

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Continued ….

CIT Vs. Ravinderkumar Arora (2012) 342 ITR38 (Del.)

DIT International Taxation Vs. Mrs. JenniferBhide (2012) 349 ITR 80 (Kar)

Dr. P. K. Vasanthi Rangarajan Vs. CIT (2012)252 CTR (Mad) 336

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Purchase in Others’ names

Whether it can be said that “the assessee”has purchased the house ?

Late Mir Gulam Ali Khan Vs. CIT (1987) 165ITR 228 (AP) – Peculiar facts

CIT Vs. V. Natarajan (2007) 287 ITR271(Mad) – In name of wife

CIT Vs. Kamal Wahal (2013) 351 ITR 4(Del.) – In name of wife

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Delay due to Late Receipt

S. Gopal Reddy Vs. CIT (1990) 181 ITR 378(AP) – 54E

Darapaneni Chenna Krishnayya (HUF) Vs.CIT (2007) 291 ITR 98 (AP). – 54E

CIT Vs. Late Janardhan Dass Through L/HShyam Sunder (2008) 299 ITR 210 (All) –54B

Prompt action would find favour withcourts

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Delay in receipt – Section 54EC Illustration :ABC Private Limited Co. sold it’s non current

investments for Rs.500 lacs on Dec 29, 2016 and earnedlong term capital gains of Rs.50 lacs. Consideration ofRs.500 Lacs is received on 31.01.2017. The Company hasdeposited the amount of Rs.50 lacs in NHAI bonds onJuly25, 2017. Can the company take benefit of Rs.50 lacsunder section 54EC?

Chanchal Kumar SircarVs. ITO (2012) 50 SOT 289 (Kol)

Mahesh Nemichandra Ganeshwade & Ors. Vs, ITO (2012) 147 TTJ (Pune) 488

CIT v. Janardhan Dass (2008) 299 ITR 210 (All.)

Darapaneni Chenna Krishnayya (HUF) v. CIT (2007) 291 ITR 98 (AP)

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Land Appurtenant to House

Land which is integral part of the House

Adjoining LandVs.Appurtenant Land

◦ P. K. Lahiri Vs. CIT (2005) 275 ITR 17 (All)

Land owned by wife – Building by Husband

◦ Mrs. Sheela Bhagwandas Nichlani Vs. ITO (2014) 146ITD 244 (Mum.)

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Redevelopment Cases

Whether Purchase – Whether Constructionor Neither ?

Surrender of flat for a consideration thatnew bigger and better flat will beconstructed for him

Jatinder Kumar Madan Vs. ITO (Order dated25th April 2012 in ITA No. 6921/Mum/2010) ;((2012) 32 CCH 059 MumTrib).

Delay in completion of the project – LiberalInterpretation

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Issues / FAQ Q. 1 Whether the nexus between capital gain and

amount of investment u/s 54 is necessary? Assessee is not required under the provision for

section 54 to establish the nexus between theamount of capital gain and the cost of new asset.

Assessee had initially utilized the sale proceeds onsale of its residential flat in commercial propertiesand, later on, he purchased two residential flatswithin a period specified in sub-section (2) ofsection 54. The Revenue’s main dispute was that thesale proceeds were utilized for purchase of acommercial property and residential house waspurchased out of the funds obtained from differentsources, as such, the identity of heads has beenchanged.

[Ishar Singh Chawla Vs. CIT 130 TTJ (Mum)(UO) 108 (2010) and Ajit Naswanit Vs. CIT1127Taxman 123 (Delhi) (Mag.) (2001)]

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Q.2 Whether exemption under section 54 isallowable for addition of floor to the existinghouse from the sale proceeds ofresidential house sold?

Assessee owned two residential houses. He soldone house and utilized its sale proceeds toconstruct first floor on his second house afterdemolishing old structure, in this case exemptionwill be allowable under section 54. [CIT vs P.V.Narsimhan [1989] 47Taxman 89 (Mad.)

However, in CIT v. V. Pradeep Kumar [2007]290 ITR 90/ [2006] 153 Taxman 138 (Mad.), itwas held that a mere extension of existing buildingwould not give benefit to assessee under section54F. Section 54F emphasizes construction ofresidential house and such construction must bereal one and should not be a symbolic construction.Followed by ACIT vs T.N. Gopal [2009] 121ITD 352 (Chennai-ITAT) (TM)

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Q.3 Whether the expenditure to make aresidential house habitable will beincluded in the cost of new asset?

• The words used about the amount spent onpurchase of new asset are ‘cost thereto’ and not‘price thereto’. The cost includes purchase aswell.

• Consequently, the words used signify that theamount of purchase will include other necessaryexpenditure in this behalf to make a residentialhouse habitable and taken together that will bethe cost of the new asset. The Tribunal hadperused the items of the report of the architect.The residential house was in a state of generaldisrepair and was inhabitable. Consequently, thenecessary repairs carried out to make the samehabitable would constitute part of the cost of newhouse. [Gulshanbanoo R. Mukhi v. JCIT 83ITD 649 (ITAT- Mum) (2002)]

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Continued ...

• Jt. CIT Vs. Smt. Armeda K. Bhaya (2005) 95 ITD313 (Mum)

• Saleem Fazelbhoy Vs. DCIT (2007) 106 ITD 167(Mum)

• inhabitable premises is not residential house

• Difference between expenses on makinghouse habitable and expenses on renovation

• Srinivas R. Desai Vs. ACIT (2013) 155 TTJ (Ahd)743

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Q.4 Whether exemption under section 54F

would be allowable where assessee is already a co-owner of another flat?

The word ‘own’ appearing in section 54Fincludes only such residential house which isfully and wholly owned by one person and nota residential house owned by more than oneperson. The assessee was already a co-owner ofanother flat. Being a co-owner, assessee was notthe absolute owner of another residential flat,and exemption under section 54F could bedenied on this ground. [ITO vs Rasiklal N.Satra [2006] 98 ITD 335 (Mum.-ITAT)]

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Q.5 Whether property purchased in foreigncountry is also eligible for exemption ?

Section 54 does not exclude the right of the assesseeto claim property purchased in a foreign country, if allother conditions laid down in the section are satisfied.Merely because the property acquired was in a foreigncountry, the exemption under section 54 cannot bedenied.The new house may be in India oroutside India. [Prema P. Shah Vs. ITO 101 TTJ 849(Mum-ITAT)(2006)], Mr Vinay Mishra v ACIT(2012) (Trib ) ( Bang)

However, in Leena J. Shah vs ACIT [2006] 6 SOT721 (Ahd.-ITAT), it was held that the benefit undersection 54F is not allowable for a residential housepurchased/ constructed outside India.

W.e.f 01/04/2015 exemption is not available if theresidential house is purchased outside India

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Q.6 Is there any requirement that the assesseeshould file the return before the due dateunder section 139(1) to claim exemptionunder section 54/54F?

Where the assessee had fulfilled the condition fordepositing the amount of capital gain in a specifiedbank account before the due date prescribed forfurnishing the return of income under section139(1),there is no requirement that the assesseeshould file return of income before the duedate prescribed under section 139(1). [EstherChristopher Mascarenhas v. ITO 9Taxmann.com 99 (Mum.-ITAT) (2011)]

Merely because investment is made after due dateof filing of return, section 54F exemption cannot bedenied where investment is made prior to filing ofreturn under section 139(4). [R.K.P. Elayarajanvs DCIT [2012] 23 taxmann.com 206(Chennai-ITAT)]

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Q.7 Whether cost of residential house

includes the cost of plot?

The cost of the plot together with cost

of the building will be considered as costof new asset provided the acquisition of theplot and also the construction thereon arecompleted within the period specified inthese sections.

[Circular no. 667, dated 18-10-1993]

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Q.8 Whether for purpose of claiming exemptionunder section 54, possession of flat bookedwith builder had to be taken within the timeperiod specified?

If the assessee had made investment within periodof three years, exemption under section 54 couldnot be denied for the reason that possession hadnot been taken. There may be delay in taking ofpossession because of many factors not under controlof assessee, merely because of this exemption couldnot be denied. [Kishore H. Galaiyavs ITO [2012]24 taxmann.com 11 (Mum.)]

In CIT vs R.L Sood [2000] 108 Taxman 227(Delhi), it was held that on payment of substantialamount in terms of purchase agreement within fourdays of sale of his old house, assessee acquiredsubstantial domain over new residential flat withinspecified period, it could be said that assessee compliedwith requirements of section 54. Merely because builderfailed to hand over possession of flat within specifiedperiod, assessee could be denied benefit of benevolentprovision of section 54.

CIT v/s Mrs Hilla J.B Wadia 216 ITR 376 (Bom)25/11/2017 CA M B SANGHVI 39

When New house is purchased / constructed

Purchase means to buy for a price or equivalent of priceby payment in kind or adjustment towards a debt - CITVs.T. N.Arvinda Reddy (1979) 120 ITR 46 (SC)

Domain and control over the property - CIT Vs. Mrs.Shahzada Begum (1988) 173 ITR 397 (AP) – Payment ofsubstantial portion of consideration and possession

CIT Vs. Dr. Laxmichand Narpal Nagda (1995) 211 ITR 804(Bom.) – Purchase is not used in the sense of a legaltransfer – Ordinary meaning shall be followed

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Q.9 Does exchange of old flat with a new flat under a development agreement amounts to construction of new flat for purpose of claiming deduction under section 54?

Exchange of old flat with a new flat to beconstructed by the builder under developmentagreement amounts to transfer under section 2(47)of the Income Tax Act, 1961. The acquisition of anew flat under a development agreement inexchange of the old flat amounts to construction ofnew flat. The provisions of section 54 are applicableand assessee is entitled to exemption if the new flathad been constructed within a period of 3 yearsfrom the date of transfer.

[Jatinder Kumar Madan vs ITO [2012] 21taxmann.com 316 (Mum.)]

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Q.10 Whether transfer of only interest in flatsunder construction could be treated astransfer of residential house ?

• Where the assessee transferred only hisinterests in two flats under construction of whichpossession was not taken and was not fit forhuman habitation, such transfer could not betreated as transfer of residential house. Hence,the capital gain derived by the assessee related to acapital asset held by him for a period of more than36 months and, therefore, the gain arising from thetransfer of his rights in the said flats constitutedlong term capital gains. The assessee would,therefore, be entitled to grant of exemption undersection 54 F.

• [Jagdish Chander Malhotra v ITO (1998) 64 ITD251 (Del)]

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Q.11 Whether the benefit under section 54EC and54F can be taken simultaneously?

• Deduction under section 54EC cannot be deniedon ground that assessee has availed exemptionunder section 54F also in respect of a part of capitalgains. [ACIT vs Deepak S. Bheda[2012] 23taxmann.com 159 (Mum.)]

• Example

Mr. Karan has purchased a residential house in May25, 2012 and sold the same in Dec 27, 2016 for Rs.1000 lacs. Capital gain arising on sale of houseamounted to Rs. 150 lacs. He claimed benefit ofsection 54 by constructing residential house ofRs.50 lacs and Deposited Rs.50 lac in RECL bondson Mar, 30, 2017 and Rs.50 lacs again on June1, 2017 claimed exemption of Rs.100 lacs undersection 54EC. Can he claim exemption under boththe sections i.e. 54 & 54EC? Whether he canclaim the benefit of Rs.100/- lacs undersection54EC?

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Q.12 Whether the benefits u/s 54, 54F & 54ECare available from gains of depreciablecapital asset ?

In CIT V. Assam Petroleum Industries Pvt. Ltd. 131Taxman 699 (GAU.) [2003], it was held that, wherea depreciable asset is held for more than 36 monthsbefore its transfer, then such depreciable capitalasset is Long Term Capital Asset. However,according to section 50(1)&50(2), the gains or losson depreciable capital asset shall always be shortterm.

It was further held that benefit u/s 54,54F & 54ECwhich are available from gains of a LTCA shall beavailable from gains of Depreciable capital asset.

CIT vs. ACE Builders Private Limited 2006 281 ITR210 (Bom HC)

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Illustration

Mr. A has sold his office premises. The details areas under :

Date of Purchase : 01.04.2012

Cost of Acquisition : Rs.30 lakhs

WDV as on 01.04.2015 : Rs.21.87 lakhs

Date of Sale : 01.06.2015

SaleValue : Rs.50 Lakhs

Whether Mr. A can invest in residential house andclaim benefit under section 54F?

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Case Study - 1• Name of Assessee : Mr.A

• Date of Sale of residential flat : 25/03/2006

• Capital Gain : 200 Lakhs

• Agreement to Purchase new flat with builder entered on01/06/2006 for Rs 250 Lakhs .( Rs. 200 Lakhs paid before30/06/2006)

• Agreement cancelled due to delay in project on account ofbuilder on 20/03/2008 and refund received on 25/04/2008.

• Agreement for Rs225 Lakhs for purchase of another flat withdifferent builder 28/02/2008 . Possession to be given by Feb,2009. Possession actually received on 25/03/2010. Paymentmade as under :

28/02/2008 : Rs.25,00,000 /-

20/03/2009 : Rs. 1,50,00,000 /-

25/03/2010 : Rs. 50,00,000/-

• Whether Mr. A is eligible for deduction u/s 54. If yes , forwhat amount ?

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Case Study - II

Mr A made capital gain of Rs.50 lakh on sale ofImmovable Property in A.Y 2016-17. He made thefollowing investments towards the purchase of a newresidential property.

Rs.20 Lakhs before 17/10/2016 [ Before the due date offiling of income u/s 139(1)]

Rs.25 Lakhs on 30/11/2016 [ ROI filed on 01/12/2016]

Rs.5 Lakhs in December, 2016 (Within time limitavailable u/s 139 (4) of the Act ]

What is the amount of deduction available u/s 54 ?

Anita Ajay Shad vs ITO (ITA No. 3154 (Ahd) of 2015 dt18/09/2017)

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Case Study - III

• Name of Assessee : Mr A

• Flat Purchased at Churchgate for Rs. 300 Lakhs

• Payment Details :

• Paid on Booking on 30/06/2009 : Rs. 60 Lakhs

• Payment made from 01/07/2009 to 31/12/2013 : Rs.150 Lakhs

• On possession on 28/02/2017 : Rs 90 Lakhs

• Flat Sold at Borivali in Jan, 2016 for Rs. 125 Lakhs

• Capital Gain Rs. 50 Lakhs

• Whether Mr. A is eligible for the exemption u/s 54 ?

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THANK YOU

4925/11/2017 CA M B SANGHVI

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