Tax sop available even if capital gains not used for new house

MUMBAI: The Income-Tax Appellate Tribunal (ITAT)’s Mumbai bench has held that the investment-linked capital gains tax exemption, available on purchase of a new house, cannot be denied to a taxpayer merely for not investing the capital gain proceeds.

The I-T officer had denied the tax benefit as the investment made towards purchase of the new house “was not out of the taxpayer’s own funds”. The commission (appeals) agreed with this stand. The taxpayer thereafter approached the ITAT, which passed an order in her favour.

Capital gains are taxable under the I-T Act. If a taxpayer makes a profit on the sale of a residential house held for at least two years, then such profit is treated as a long-term capital gain (LTCG). This gain is taxable at 20% with an adjustment for inflation, referred to as indexation benefit.

Ishita Sengupta, tax partner, PwC India, says: “This beneficial order will help taxpayers as practically there could be time gaps in real estate deals between the sale and purchase of a new house property and other funds could be deployed for the new investment. However, it is vital that the new house is purchased within the prescribed time limits.”

Similarly, in April last year, the ITAT’s Kolkata bench had ruled that the tax benefit cannot be denied merely because the taxpayer has used the proceeds of a housing loan and not the capital gain funds itself.

I-T Act’s Section 54 provides for an investment-linked capital gains tax exemption. If an investment is made in another house in India, within the stipulated period of time, then the cost of the new house is deducted and only the balance component of the LTCGs is taxable. Such deduction results in a lower tax outgo. Thus, if the amount of capital gain is equal to or less than the cost of the new house, the entire sum of LTCG is not taxable (which was the case heard by the ITAT).

The new house needs to be purchased either within a period of one year prior to or two years from the date of the sale of the old house. This tax benefit is also available if the taxpayer constructs a new residence within three years from the date of the old house’s sale.

In this case, which was decided by the ITAT on March 8, taxpayer Neelam Nananni had invested nearly Rs 69 lakh in a new house. The LTCG computed by the I-T officer was much lower at Rs 58 lakh. In other words, the quantum of investment towards purchase of the new house was much more than the LTCG.

The I-T department submitted to the ITAT that if the investment is not made out of capital gain proceeds, the taxpayer’s claim of deduction under Section 54 is not allowable.

The ITAT differed and held: “On a careful reading of Section 54, as a whole, we do not find any restriction or condition imposed mandating investment of the capital gain or sale proceeds towards purchase of new house for claiming deduction.”

As the investment towards purchase of the new house was made within the stipulated time, it held that the taxpayer was entitled to claim the benefit. “

As Section 54 even permits purchase of a new residential house, up to one year, prior to the sale of the old house, when obviously the capital gain would not yet have arisen, it is clear that other funds can be used,” says Sengupta.

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