Tax Planning Series 2.2 : Capital Gain (Exemption u/s 54F: LTCG invested in residential house)





DEDUCTION IN RESPECT OF LONG TERM CAPITAL GAIN INVESTED IN RESIDENTIAL HOUSE (SECTION 54F)

1.       Provisions of section 54F in brief
If an individual or a HUF having LTCG arising out of sale of capital asset other than a residential house invests in the purchase or construction of a residential house, then, he/it is eligible for a deduction of
             Amount invested
=           ________________    X  LTCG
  
             Net consideration
where net consideration = full value of consideration – cost of transfer.
The time available for investment and the method to be followed for investment after the due date for filing of return of income are the same as mentioned for section 54
In this case, however, cost of the new asset is not changed. But the assessee should not own more than one residential house other than the residential house in which he has invested as on the date of transfer and also, he should not purchase/construct any other residential house for a period of 1/3 years, respectively, from the date of transfer. In case he owns more than one residential house as on the date of transfer he is not eligible for this deduction. In case he purchases/constructs a house within 2/3 years from the date of transfer after getting this deduction, the amount allowed as deduction would be taxed as capital gains in the year of such purchase/construction.
If the new asset is transferred within 3 years of its purchase or construction the deduction given earlier from LTCG would be charged as LTCG in the year of such transfer.
2.       Long term capital gain invested in residential house
For individual and HUF assessees who transfer any long term capital asset this provision viz. section 54F is a boon. Transfer of any long term capital asset and resultant long term capital gain which is chargeable to tax could go out of the tax net if the assessee makes investment of the entire net sale consideration, in acquisition or construction of a residential house.
The scope and application of this section is discussed in this Chapter.
3.       Conditions for deduction
Exemption under section 54F can be claimed where the following conditions are fulfilled :
The assessee is an individual or a HUF.
The asset transferred is a long-term capital asset other than a residential house.
The assessee has, within one year before or two years after the date of transfer purchased, or has within three years after the date of transfer constructed, a residential house. (One residential house in India with effect from 1-4-2015)
On the date of transfer of the original asset, the assessee does not own more than one residential house. In other words, on the date of transfer of the original asset, the assessee may own one house apart from the new house.
The assessee does not purchase any residential house, other than the new house within one year after the date of transfer or construct any residential house, other than the new house within three years after the date of transfer.
The capital gain not utilised in the purchase or construction of the new asset before furnishing the return of income is deposited in an account under the Capital Gains Accounts Scheme before the due date for furnishing the return of income under section 139(1) and proof of such deposit is furnished along with the return of income.
In Nipun Mehrota v. Asstt. CIT [2008] 110 ITD 520 (Bang. – Trib.) the assessee had long term capital gain. He paid the amount for purchase of flat to the builder and claimed exemption under section 54F for the acquisition of building within 2 years after the date of transfer of long term capital asset. The Assessing Officer disallowed the exemption under section 54F on the ground that the assessee had not deposited the unutilized sum in the capital gain account before the due date mentioned in section 139(1). The Tribunal held that the assessee is eligible for exemption under section 54F even though the amount was not deposited in the capital gain account before the due date mentioned in section 139(1) and the sale consideration was applied towards acquisition of residential building to avail exemption under section 54F. Following the judgment in the case of CIT v. Rajesh Kumar Jalan [2006] 157 Taxman 398 (Gau.) it was held that there is no specific condition that the unutilized sale consideration must be deposited before the ‘due date’ prescribed under section 139(1) and the reference in section 54F(4) is on section 139 which includes the date for filing the return under section 139(4) also. The Tribunal while following the judgment of Gauhati High Court did not consider Delhi Tribunal decision in the case of Taranbir Singh Sawhney v. Dy.CIT [2006] 5 SOT 417 (Delhi – Trib.) with a simple observation that the benefit of the decision of the Gauhati High Court was not available to the Delhi Bench while it decided the case.
4.       Amendment of section 54F by Finance (No. 2) Act, 2014, w.e.f. assessment year 2015-16
The Finance (No. 2) Act, 2014 has amended sub-section (1) so as to provide that the exemption is available if the investment is made in purchase or construction of one residential house situated in India. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year 2015-16 and subsequent years.
  
5.       Net consideration
By ‘net consideration’ is meant the full value of the consideration received or accruing as a result of transfer of the capital asset as reduced by “any expenditure incurred wholly and exclusively in connection with such transfer”. Expenditure in connection with transfer could include broker’s commission, lawyer’s fees, etc.
  
6.       Purchase/construction of second residential house
If the assessee purchases, within the period of 1 year after the date of transfer of the original asset, or constructs, within the period of 3 years after such date, any residential house, the income from which is chargeable under the head ‘Income from house property’, other than the new asset, the amount of capital gains arising from the transfer of the original asset not charged under the head ‘Capital gains’ on the basis of the cost of such new asset under section 54F, will be deemed to be income chargeable under the head ‘Capital gains’ relating to long-term capital assets of the previous year in which the residential house is purchased or constructed.
In other words, if an assessee who has claimed exemption under section 54F on sale of a capital asset and purchased/constructed a residential house with the proceeds, purchases/constructs another residential house within the specified time period, the amount exempted earlier under section 54F will be chargeable to tax as long-term capital gains of the previous year in which the second residential house is purchased/constructed.

The benefit of considering the indexed cost of acquisition and indexed cost of improvement are available in computing such long-term capital gains.

Aravind owned a piece of land with superstructure. The land with superstructure was sold for ` 20 lakhs to ABC Ltd. as per agreement of sale dated 8-12-2007. As per the said agreement ` 25,000 was paid on its execution and ` 75,000 on 30-12-2007. ` 4.50 lakhs was payable by 31-3-2008 and the balance thereafter in 5 monthly instalments of ` 2.50 lakhs each and the last instalment of ` 2 lakhs. Under the agreement, the conveyance deed is to be executed within 36 months from the date of agreement. At what point in time will the capital gain arise? Will section 54F apply if a flat is purchased in October 2008 out of the sale proceeds?
Section 2(47)(v) includes within the definition of “transfer” any transaction involving the allowing the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act. In the instant case, therefore, only if possession of the property has been handed over to ABC Ltd. before 31-3-2008 in pursuance of the agreement of sale, the transfer is complete and the capital gains will be liable to tax in the assessment year 2008-09. Where the possession is not given and the vendee as no legal possession over the property till the full payment is made and document is executed, the capital gain would not arise.
If the capital asset sold was not a residential house and the transferor purchased a residential flat within a period of one year before or two years after the date of sale, he would be entitled to claim the relief provided in section 54F.
7.       Date of purchase of new house

The relevant date for the purposes of section 54F is when the assessee paid the full consideration amount on the flat becoming ready for occupation and obtained possession of the flat, and not the date of registration of the agreement to purchase. [CIT v. Smt. Beena K. Jain [1994] 75 Taxman 145 (Bom.)].
8.       Sale of second vacant land and investment in second dwelling unit

In Abdul Gaffar v. ITO [2006] 285 ITR 203(Kar.) the assessee sold a second vacant site and claimed exemption by making investment of the sale proceeds in a second dwelling house. The court held if the assessee had applied the proceeds from the sale of second vacant site in the development of first residential house, the claim could be allowed. But putting up a second dwelling house from the second site would disentitle the assessee from claiming relief under section 54F of the Act. As regards the constitutional validity of the statutory provision being vague and discriminative, was dismissed by the court.
9.       Exemption for minor

In Asstt. CIT v. Madan Lal Bassi [2004] 88 ITD 557 (Chd. – Trib.), it was held that a minor transferring a long term capital asset could claim the benefit of section 54F even though the parent with whose income the minor’s income is clubbed may have more than one residential house. It was held that whenever the income of wife or of a minor child was added in the hands of the assessee separate computation of income was directed to be made by different High Courts. In other words, classification made for the purpose of computation of income is to be kept in mind and before the income is added it is to be computed by taking into account the various exemptions. The Tribunal held that the minor child must be treated as an assessee under section 2(7) of the Act for the purpose of allowing exemption under section 54F. In respect of minor’s income exemptions under sections 54 to 54H have to be allowed separately and only the resultant income is liable for clubbing 
10.   No deduction for extension of house

In CIT v. V. Pradeep Kumar [2006] 153 Taxman 138 (Mad.) it was held that the exemption under section 54F is not allowable where the existing house is extended. Construction by way of extension would not mean construction of residential house contemplated in section 54F.
11.   Transfer of new residential house

Where the new residential house which has been purchased/constructed (in respect of which exemption under section 54F has been claimed) is transferred within a period of 3 years from the date of its purchase/construction, the amount exempted (deducted) earlier under section 54F will be deemed to be long-term capital gains chargeable to tax in the previous year in which the transfer is effected.
12.   Whether deduction is available if new house purchased in joint names of assessee and his wife?
In CIT v. Ravinder Kumar Arora [2011] 15 taxmann.com 307 (Delhi), it was held that while section 54F mandates that the house should be purchased by the assessee, it does not stipulate that the house should be purchased in the name of the assessee only. Therefore, deduction can neither by denied nor restricted to 50% where assessee purchases new house jointly in the name of his wife. Merely because he has included the name of his wife and the property purchased in the joint names would not make any difference. Such a conduct has to be, rather, encouraged which gives empowerment to women. There are various schemes floated by the Government itself permitting joint ownership with wife.
13.   Capital Gains Accounts Scheme
Some of the important aspects of the Capital Gains Accounts Scheme (CGA Scheme) are discussed as under :
Deposit office – The account under the CGA Scheme can be opened in any ‘Deposit Office’. By ‘Deposit Office’ is meant any of the following :
any branch/branch office of the State Bank of India (SBI),
any branch/branch office of a subsidiary bank of the SBI,
any branch/branch office of a nationalised bank authorised by the Central Government by notification in the Official Gazette.

Who can deposit : Any person who is eligible for exemption under section 54, 54B, 54D, 54F or 54G can open an account under the CGA Scheme and make a deposit thereunder.
Types of deposits : There are two types of deposits namely, (i) ‘Deposit Account A’ which is in the form of a ‘savings deposit’ and under which withdrawals can be made from time to time by the depositor, and (ii) ‘Deposit Account B’ which is in the form of a ‘term deposit’ which can, at the option of the depositor, be cumulative or non-cumulative, and under which in the normal course withdrawals can only be made on expiry of the term of deposit. A person who has opened a ‘Deposit Account B’ would normally have to open a ‘Deposit Account A’ as well, for credit of interest, transfer of matured amounts, transfer of amounts for purposes of premature withdrawal, etc.
The deposits in the account may be made either in one lump-sum or in instalments at any time on or before the due date for furnishing the return of income under section 139(1).
Number of accountsIt appears that a separate account has to be opened in respect of exemption claimed under each section because paragraph 5 of the Scheme states that, “a depositor intending to avail of the benefit under more than one section of the Act………shall make separate applications in the same manner, for opening account or accounts under each of such sections”.
Date of deposit: Where a deposit is made by cheque or draft and the cheque or draft is realised on presentation, the effective date of deposit for the purpose of claiming exemption will be the date on which the cheque or draft is received by the deposit office along with the application for opening the account or making the subsequent deposit.
Interest: Interest will be paid/credited at the rate specified by the RBI from time to time.
In the case of a non-cumulative term deposit interest will be paid every quarter. In the case of a cumulative term deposit the interest will be computed by compounding at quarterly rests.
Withdrawal – Amounts may be withdrawn (even prematurely in case of term deposits) in accordance with the provisions contained in paragraph 9 of the Scheme.
In Harsutrai J. Raval v. CIT [2002] 122 Taxman 165 (Guj.) it was held that the amount in the capital gain account to the extent unutilized is taxable as income of the previous year in which the period of 3 years from the date of transfer expires. Also, the assessee is eligible to withdraw the amount for other purposes from the CGS account only after the expiry of the specified time period viz. two years or three years or as the case may be, after the date of transfer of original asset.
In Sadula Janardhan (HUF) v. State Bank of Hyderabad [2006] 286 ITR 291 (AP) the assessee had deposited in Capital Gains Account Scheme. It was held in term deposit viz. Account B as per scheme. The assessee wanted the amount to be transferred to the savings account kept under the same scheme known as Account A. The bank refused to transfer the money from Account B to Account A on the ground that the assessee must obtain the approval of the Assessing Officer. The bank contended that transfer from Account B to Account A is permissible only after closure of Account B which required clearance from Assessing Officer in Form No.G. The court held that transfer of money from one account to another is not closure of account and paragraph 7 of the Capital Gains Account Scheme, 1988 deals with transfer and conversion of the account. Accordingly, the court directed the bank to release i.e. transfer funds from Account B to Account A of the assessee.
Utilisation of amount withdrawnThe amount withdawn is to be utilised for the purposes specified in sub-section (1) of the section in relation to which the deposit has been made. For instance, if a deposit is made under section 54F(4) it can be withdrawn for the purposes specified in section 54F(1) i.e., for meeting any cost/expense in relation to purchase/construction of the new residential house.
The amount withdrawn is to be utilised within 60 days from the date of withdrawal and any unutilised amount is to be re-deposited in ‘Deposit Account A’ immediately thereafter.
Creation of charge : – The amount standing to the credit of a depositor in any account under the CGA Scheme cannot be placed or offered by him as security for any loan or guarantee and cannot be charged or alienated in any manner whatsoever.
Death of depositorThe unutilised deposit amount under the Capital Gains Account Scheme, 1988 in the hands of an individual who dies before the expiry of the stipulated period cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of the legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them – [Circular No. 743, dated 6-5-1996 ]
Failure to utilise amount deposited under CGA Scheme – The amount deposited in an account under the Capital Gains Accounts Scheme has to be utilised, in the case of purchase of a new residential house, within two years after the date on which the transfer of any long term capital asset, and in the case of construction of a new residential house, within three years after the date on which the transfer of the long term capital asset took place.
If the amount deposited under the CGA Scheme is not utilised in full within the time specified for the purchase/construction of the new residential house, then the unutilised amount will be chargeable to tax under the head ‘Capital gains’ as the income of the previous year in which the period of three years from the date of the transfer of the old long term capital asset expires.
Even where the assessee intends to utilise the amount deposited under the CGA Scheme for the purchase of a new residential house but fails to make such purchase, the unutilised amount is only taxable as the income of the previous year in which the period of three years from the date of the transfer of the old long term capital asset expires. The assessee will then be entitled to withdraw such unutilised amount in accordance with the CGA Scheme.
ILLUSTRATION : 1. Balu purchased jewellery on 1-4-2001 for Rs. 5,00,000. On 5-5-2007 he sold the jewellery for  Rs. 15,00,000. By the due date for filing the return of income for assessment year 2008-09 (31-7-2008) he utilised Rs. 1,00,000 in the construction of a new residential house and on 15-3-2008 he deposited Rs.11,00,000 in an account under the Capital Gains Accounts Scheme. By 4-5-2010 he had utilised only Rs. 8,00,000 out of the sum of Rs. 11,00,000 deposited under the CGA Scheme for construction of the house. Compute capital gains.

Assessment year 2008-09
`
Full Value of consideration
15,00,000
Less : Indexed cost of acquisition : 5,00,000 × 551/426
6,46,700
8,53,300
Less : Deduction under section 54F = 12,00,000 × 8,53,300/15,00,000
6,82,700
Taxable long term capital gain
1,70,600
Assessment year 2011-12 – Deemed long term capital gain
`
Exemption u/s. 54F originally allowed earlier
6,82,700
Less : Exemption allowable as per actual investment 9,00,000 × 8,53,300/15,00,000
5,12,000
Capital gain chargeable to tax on deemed basis
1,70,700
14.   Extension of time for acquiring new asset or depositing or investing capital gain

The Finance (No. 2) Act, 1991, has inserted section 54H to provide that notwithstanding anything contained in sections 54, 54B, 54D, 54EC and 54F, where the transfer of the original asset is by way of compulsory acquisition under any law and the amount of compensation awarded for such acquisition is not received by the assessee on the date of such transfer, the period of acquiring the new asset by the assessee referred to in those sections or, as the case may be, the period available to the assessee under those sections for depositing or investing the amount of capital gain in relation to such compensation as is not received on the date of the transfer, shall be reckoned from the date of receipt of such compensation.

Sub-section (11) of section 155 provides that where in the assessment for any year, a capital gain arising from the transfer of any original asset as is referred to in section 54H is charged to tax and within the period extended under that section the assessee acquires the new asset referred to in that section or, as the case may be, deposits or invests the amount of such capital gain within the period so extended, the Assessing Officer shall amend the order of assessment so as to exclude the amount of the capital gain not chargeable to tax under any of the sections referred to in section 54H; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of section 154 being reckoned from the end of the previous year in which the compensation as received by the assessee.
Refer extract of section 54 F (Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house) of Income Tax Act, 1961  on following link:

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