21 February 2011
Assessee’s mother purchased the house property in April 1974. After her death on January 2008 her two sons and a daughter made the partition deed on March 2008 in which the building was valued at Rs.15 lakhs and the assessee paid Rs.5 lakhs each to his brother and sister in cash and take the entire house property in his name. Assessee sold the house property for Rs.30 lakhs on August 2010 and purchased the house property on January 2011 for Rs. 15 lakhs. The issues are 1) Whether it is long term capital gains or short term capital gains 2) If it is a long term capital gains, can the assessee claim the amount paid to his brother and sister Rs.10 lakhs as cost of acquisition and claim the house property purchases u/s 54.
18 July 2024
Based on the information provided, here are the answers to the issues raised:
### 1) Classification of Capital Gains:
- **Long Term or Short Term Capital Gains:** - The property was originally purchased by the assessee's mother in April 1974. - The property was inherited by the assessee upon the mother's death in January 2008. - The partition deed among the siblings took place in March 2008, where the value of the building was agreed upon at Rs. 15 lakhs. - The property was sold in August 2010 for Rs. 30 lakhs and a new property was purchased in January 2011 for Rs. 15 lakhs.
**Calculation:** - The period of holding the property is calculated from the date of acquisition by the mother in April 1974 until the date of sale in August 2010. - Since the holding period exceeds 36 months (3 years), the capital gains will be classified as **Long Term Capital Gains (LTCG)**.
### 2) Cost of Acquisition and Exemption under Section 54:
- **Cost of Acquisition:** - The cost of acquisition for the purpose of calculating capital gains can be taken as the higher of: - The actual cost paid by the mother (in this case, the original purchase price in April 1974). - The fair market value (FMV) as on April 1, 2001, as per the rules applicable for properties held for a long period of time. Since the property was purchased in 1974, the FMV as on April 1, 2001 can be considered for indexation purposes.
- **Claiming Exemption under Section 54:** - Section 54 of the Income Tax Act allows exemption from LTCG arising from the sale of a residential property if the capital gains are reinvested in another residential property within a specified time frame. - In this case, the assessee sold the property for Rs. 30 lakhs and purchased a new property for Rs. 15 lakhs in January 2011. - The amount paid to his brother and sister (Rs. 10 lakhs) cannot be considered as part of the cost of acquisition for the purpose of claiming exemption under Section 54. The cost of acquisition for the new property is Rs. 15 lakhs.
**Conclusion:** - The capital gains arising from the sale of the property in August 2010 will be treated as Long Term Capital Gains (LTCG). - The assessee can claim exemption under Section 54 on the LTCG by investing in another residential property (purchased for Rs. 15 lakhs) within the specified time frame. - However, the amount paid to his brother and sister (Rs. 10 lakhs) cannot be included as part of the cost of acquisition for the new property or claimed under Section 54.
It's advisable for the assessee to consult with a tax advisor to ensure proper compliance with tax laws and optimize tax planning based on the specific circumstances of the transaction.
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