Doubt in capital gains, Income Tax

[Siva Rama]

Doubt in capital gains

A super senior citizen assesee is having a residential property (Place A). That property is about to be sold on Mar 2017. The long term capital gain on sale of property is worked out to ₹ 40 lakhs (Sales proceeds 50- Indexed cost of acquisition 10) if sold on Mar 2017.

Advance for the sales received on May 2016. ₹ 40 lakhs.

The son of assesee has booked a flat (Place B). Total value is ₹ 40 lakhs. The flat is under construction. Super Senior father assessee gave out of advance received (Place A) on May 2016 ₹ 30 lakhs to son and son handed over to builder as advance for flat (Place B). The sale agreement is between builder and son of assessee.

Since the father is getting capital gains of ₹ 40 lakhs from sale of his property at Place A, he wish to get exemption under section 54 by purchasing another property.

The son has agreed to enable father to register the flat (place B) in the name of father. Father will handover balance ₹ 10 lakhs to son and son will handover to builder on Mar end 2017. On Mar end 2017 (i.e after the sale of property in place A), the sale deed registration will be executed between Builder and father.

Will the father get section 54 exemption?

Reasons for doubt

1. If new property is purchased, exemption under section 54 can be obtained if a new residential property is purchased within one year before or 2 year after the date of transfer.

If new property is constructed, exemption under section 54 can be obtained if it is constructed within 3 years from the date of transfer.

Here the flat is under-construction. Will it be treated as construction or purchase?

Advance for new property was paid before transfer, but it is within one year before the date of transfer.

1. Final sale deed will be registered between builder and father. But agreement for sale was executed between builder and son. It is the father who financed the acquisition of new flat. But it was first transferred to son’s bank account and then it is transferred to builder by son.

1. In ITO Ward -2 Gurgaon v Dr Smita Swarup , 2014 (6) TMI 559 - ITAT DELHI
   Assessment year : 2007-08, the Delhi Tribunal has dismissed the appeal filed by revenue.

In that case, the assessee sold the property in FY 2006-07 (AY 2007-08) date 19.10.2006.

For Section 54 exemption, the assessse is eligible to purchase a property within one year before the transfer (i.e. from 19.10.2005 to 19.10.2006) or within two year after the date of transfer (i.e. from 19.10.2006 to 19.10.2008).

Or the assessse is eligible to construct a property within 3 years from the date of transfer (i.e. 19.10.2006 to 19.10.2009)

The assessee entered into agreement on 7.11.2004 with the builder. As per terms of agreement , the payment was linked to construction. So it is construction.

Builder gave letter of possession on 15.10.2007

Finally handed over possession on 29.01.2008

Flat registererd on 05.05.2008

The agreement between Builder and Assessee was “payment linked to construction”. i.e. same as the case mentioned by me.

Delhi Tribunal said. Even though some advances were made before 19.10.2005, exemption under section 54 cannot be fully denied. Delhi Tribunal however supported the view of CIT(A), in excluding the payments made before 19.10.2005. Allowed the payments between 19.10.2005 to 19.10.2008.

It is said that in the agreement the payment is linked to construction. So if it is construction why the Delhi tribunal only disallowed payments made before 19.10.2005. Actually they should have disallowed the payments done before 19.10.2006 (Transfer date). Why here construction is treated as purchase.