Tax tribunal allows capital gain exemption in case of house purchase

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The seller of a residential property can avail of capital gains tax exemption even if she had entered into an agreement to buy a new house much earlier than the sale of the old property, an Income Tax tribunal has ruled.

However, possession of the new house must qualify the time period given under the Section 54 of the Income Tax Act (I-T Act). The new residential property must be purchased either one year before the sale of the old property or two years after it or constructed within three years of it, ruled the Delhi-based Income Tax Appellate Tribunal (ITAT).

The case relates to a non-resident Indian (NRI) who claimed exemption from capital gains tax for assessment year 2020-21 since she used part of the gains to pay a bank loan and the builder. The NRI had entered into an apartment buyer agreement in 2016, sold old property in 2020 and was given possession of a bare shell flat in 2021. Thereafter, the assessee spent money to make the house liveable. After that, the builder issued an occupation and use certificate in 2022.

However, the tax officials claimed that the NRI is ineligible for the exemption on the ground that she did not satisfy the prescribed conditions of purchasing a new property. The assessee had booked the new property much earlier, paid for it through loan and payment to the builder before the stipulated period, they argued.

On the other hand, the assessee argued that the requirement of the Section 54 of the I-T Act is met as construction is completed and possession was handed over within three years from the date of the sale of the old property notwithstanding that the agreement to buy the new property was signed much before.

ITAT observed that the conditions under the said section should be met if the stipulated period is satisfied from the date of the sale of the old property – 2020. It is observed that the possession of the semi-finished flat was given in 2021.

As such, the condition of acquiring the new property within the stipulated period is satisfied, the ITAT ruled.

The tribunal also allowed expenditure made to make the house liveable within stipulated period to get tax deduction under the section.

Such arrangement is common in metro cities where property purchase agreement is signed much before beginning of the construction and possession is handed over after a few years.

In many cases, possession time is extended for multiple reasons. The tax department usually denies the benefit of Section 54 in such cases.

“Hence, the tribunal’s order is likely to set a precedent for similar cases as well as it will help keep the essence of section 54 alive which provides relief to the seller of residential house from some capital gains tax if they purchase or construct a new residential house in specified time limit,

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Pooja Gupta

CA Pooja Gupta (CA, ISA, having 15 years of experience. Educator and Digital Creator

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CA Pooja Gupta (CA, ISA, having 15 years of experience. Educator and Digital Creator

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