EXEMPTION U/s 54 I.T ACT,1961, Income Tax

[puneet virmani]

"A" SOLD RESIDENTIAL HOUSE (PURCHSED BY HIM IN 1974) FOR Rs.1 Cr IN AUG 2011, IN SEPT,2011 HE PURCHSED ANOTHER RESIDENTIAL FLAT FOR 1.20 CR IN NAME OF SELF "A", HIS WIFE "B" AND TWO MAJOR SONS"C &D".. HE /HIS WIFE DOES NOT HOLD ANY OTHER RESIDENTIAL FLAT/ HOUSE.OUT OF THE SALE PROCEEDS OF Rs.1 CR. HE MADE GIFT OF Rs.75 LACS TO HIS ELDER SON. AND GOT HOUSING LOAN FOR Rs.85 LACS TO PURCHASE A NEW REIDENTIAL HOUSE. WHETHER "A" IS ENTITLE TO CLAIM EXEMPTION U/S 54 OF THE  Income Tax Act. AS THERE ARE CERTAIN RULINGS THAT EXEMPTION IS AVAILABLE EVEN IF BORROWED FUNDS ARE UTILISED TO PURCHASE A NEW RESIDENTIAL HOUSE AS OTHER CONDITIONS MENTIONED U/S 54 ARE BEING SATISFIED.

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[KRISHNAN SURYANARAYANAN]

1.The Mumbai Bench of Income-tax Appellate Tribunal  in the case of Milan Sharad Ruparel vs. Assistant Commissioner of Income-tax  (2008 (10) TMI 250 - ITAT BOMBAY-G)= (2009)-27-SOT-61(Mum) has held that if the assessee utilizes sale proceeds emanating out of sale of property for other purpose and purchases new property out of borrowed funds then he is not entitled to exemption under the Act. Of course there is a later decision of the Hyderabad Bench of Income-tax Appellate Tribunal in the case of Muneer Khan Vs.ITO (2010 (8) TMI 752 - ITAT HYDERABA) = [2010] 30 (Hyd. - ITAT) to the effect that for claiming benefit of exemption under the Act it is not necessary that same funds from sale of old residential house should be used in purchase of new residential house but the facts were different in the Hyderabad case.

 From the order of the Tribunal in Sharad Ruparel vs. Assistant Commissioner of Income-tax (2009)-27-SOT-61(Mum)

 Para. 8. The learned Departmental Representative further commended upon the orders of the Tribunal and judgment of the Kerala High Court and has submitted that in those cases, it has been held that it is not necessary that the same sale proceeds of the capital assets shall be used to purchase the residential house. But, the equivalent funds should be available with the assessee to purchase the residential house. The learned Departmental Representative further submitted that in the instant case, the sale proceeds were admittedly appropriated by the assessee for different purposes and the assessee did not have any funds to purchase the property. The property was purchased out of the borrowed funds and not from the sale proceeds of the shares earlier sold. In these circumstances, it is not proper to say that the assessee is entitled for exemption under section 54F of the Act.

 Para.16. In the case of Dr. P.S. Pasricha (supra), the Tribunal have examined the issue whether assessee is required to invest the same receipt which were received out of the sale proceeds. The Tribunal has held that the requirement of section 54 is that the assessee should acquire a residential house within a specified period and it is not necessary that same funds must be utilized for purchase of another residential house. The requirement of law is that the assessee should purchase residential house within a specified period and source of funds is quite irrelevant. These observations of the Tribunal are in the light of the specific facts of the case in which the assessee had sold the flat for a consideration of Rs. 1,40,00,000 and after claiming deduction for expenses and the cost of acquisition, the long-term capital gain was worked out at Rs. 1,24,02,738. After the sale of the above property, the assessee has acquired the commercial property for a total consideration of Rs. 125.28 lakhs and gave it on rent and out of the other funds, the assessee has purchased two residential flats on which deduction under section 54(1) was claimed. In the light of these facts, the Tribunal has correctly made the observation that it is not necessary that same sale proceeds should be invested in acquiring a residential house, if the assessee had other surplus funds that can be invested.

 2.However the Mumbai Bench of ITAT in a later decision in  the case of Ishar Singh Chawla vs. Deputy Commissioner of Income-tax [2010] 130 TTJ 108(MUM.)(UO) has held that” nowhere it has been mentioned in section 54 that same funds must be utilized for purchase of another residential house. requirement of law is that, assessee should purchase residential house within specified period and source of funds is quite irrelevant”

Relevant Extract from the order-

Section 54 of the Income-tax Act, 1961 – Capital gains – Profit on sale of property used for residential house

Nowhere it has been mentioned in section 54 that same funds must be utilized for purchase of another residential house. requirement of law is that, assessee should purchase residential house within specified period and source of funds is quite irrelevant

[Assessment Year : 2006-07] [In favour of assessee]

Ishar Singh Chawla v. Dy. CIT [2010] 130 TTJ (Mum.)(UO) 108

The assessee claimed to have invested capital in the purchase of a residential house and claimed exemption of the same under Section 54. The Assessing Officer observed that the assessee had acquired a new residential house with the help of borrowed funds from PNB. However, the funds received on transfer of property were not used to clear the loan liability availed of for acquiring the new residential house as the loan with PNB was still continuing in the subsequent years and the assessee was claiming interest on borrowed funds as a deduction from his income. According to the Assessing Officer, Section 54 (1) was not applicable in the case of the assessee.

Held that the assessee had initially utilized the sale proceeds on sale of its residential flat in commercial properties and, later on, he purchased two residential flats within a period specified in sub-section (2) of section 54. The Revenue’s main dispute was that the sale proceeds were utilized for purchase of a commercial property and residential house was purchased out of the funds obtained from different sources, as such, the identity of heads has been changed. There was not much force in this argument as the requirement of section 54. is that the assessee should acquire a residential house within the period of one year before or two years after the date on which transfer took place. Nowhere, it has been mentioned in section 54. that the same funds must be utilized for the purchase of another residential house. The requirement of the law is that, the assessee should purchase a residential house within the specified period and source of funds is quite irrelevant.

Since the assessee had purchased the residential house before the due date of filing of the return of income, its claim was not hit by sub-section (2) of section 54..

Thus, the assessee is entitled to deduction under section 54 (1)

The Tribunal in this case relied on the same decisions which were distinguished  by the Tribunal in deciding the case in Ruparel vs. Assistant Commissioner of Income-tax (2009)-27-SOT-61(Mum).

3. COMMISSIONER OF INCOME TAX vs. R. SRINIVASAN

 (2010) 45 DTR (Mad) 208-Decision dated 12-04-2010

Capital gains—Exemption under sec. 54F—Investment out of sale proceeds of original asset—AO rejected the claim of exemption on the ground that the investment in the new asset i.e., house property was not made  from the sale consideration of the original asset—Not justified—Ssec. 54F provides option to the assessee to invest even within a period of one year before the date on which the transfer takes place—There is no such pre-condition imposed by the provision to the  effect that the property is to be  purchased by the assessee out of consideration received on account of transfer of the capital asset—sec. 54F is clear, unambiguous and plain—Sec. 54F encourages investment in residential house and the same is required to be interpreted in such a manner as not to nullify the object—Assessee having purchased the house within a period of one year before the sale of capital asset, was entitled to the relief under sec. 54F—No substantial question of law arises

Circular referred to

 Circular No. 346, dt. 30th March, 1992

 S.K- As provisions of  54F are similar so far as investing in a house 1 year prior to date of transfer is concerned this decision can be taken advantage of even in respect of issues arising under section 54.

 Based on the above  you may accordingly take a decision.