CA.Swathi Jain (CA ) (155 Points)
30 March 2011hi all,
My uncle bought a residential plot. he sold it later resulting in capital gain. after that he took a residential house on loan basis. my query is can he utilise only section 54F for exemption from CG tax? And can section 54F be invoked if the residential house is purchased by way of loan? what documents would be neccesary for availing the exemption?
thanks and reply...
MD
(AAA)
(117 Points)
Replied 31 March 2011
Dear Swathi,
There is nothing in provisions of section 54F to warrant establishing a direct nexus or live-link between the amount of net consideration and the cost of new asset.
Hence, a residential house purchased on a loan basis can be allowed for claiming exemption u/s 54F.
Documents required are property purchased agreement and if AO insists than loan agreement.
Regards
MD
Rahul Agarwal
(Future CA)
(217 Points)
Replied 31 March 2011
Mr MD is correct and you can avail 54F exemption without any difficulty.
CA Saiyum khan
(Practicing CA)
(685 Points)
Replied 31 March 2011
| Originally posted by : MD | ||
 |
(4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then, - (i) The amount by which - (a) The amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds,
(b) The amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset, shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and (ii) the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid.
|
 |
On going through the provision of sub section (4) of section 54F, it appears that the idea of legislator behind allowing the exemption u/s 54F is to restrict the Assessee to utilise the sales consideration of original asset only for the purpose of acquisition of residential house.
Therefore in my view by purchasing a residential house on loan basis implied that the sales consideration had been deployed some where else, which hit subsection 4 of section 54F.
If cost of acqisition of new house property exceeds net sales consideration of the original asset then it may be justifed to take a loan to the extent of amount of shortfall.
CA.Swathi Jain
(CA )
(155 Points)
Replied 31 March 2011
Thanks for the replies.
As correctly pointed out by Mr.Saiyumkhan the object of section 54F seems not to use the sale consideration for any other purpose but for the purchase of residential house. This purpose gets vitiated if the house is taken on loan basis
But as Mr.MD said there is no requirement to have a direct nexus between the sale consideration and cost of new asset.
In my case the cost of new asset is lesser than the sale consideration. so can i avail full exemption of the cost of new asset which is the amount of loan taken from housing finance company?
Is there any case law to support this situation?
CA Saiyum khan
(Practicing CA)
(685 Points)
Replied 31 March 2011
| Originally posted by : CA.Swathi Jain | ||
|
|
(1) Subject to the provisions of sub-section (4), where in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed 842a , a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, - (a) If the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) If the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45 : |
|
If cost of aquistion of new assets is less than the slaes conisderation then 54F exemption would be applicable proportionately.
MD
(AAA)
(117 Points)
Replied 31 March 2011
Section 54F(1) provides time limit for acquiring the new asset and the said asset can be purchased 1 year backward from the date of transfer.
Hence, the intention of the legislation seems to be clear that a residential house purchased on a loan basis can be allowed for claiming exemption u/s 54F.
CA Saiyum khan
(Practicing CA)
(685 Points)
Replied 31 March 2011
| Originally posted by : MD | ||
|
|
|
|
Section 54F(4) broadly talk about the time limit of utilisation of fund that has been realised on sale of original assets. So if residntial house is putchased from the loan amount that means the sales consideration has not been utilised as per section 54F.
MD
(AAA)
(117 Points)
Replied 31 March 2011
Mumbai ITAT in case of ACIT v. Dr P S Pasricha (2008) 20 SOT 468 has held that
"source of funds is quite irrelevant inasmuch as it is not necessary that same funds must be utilized for purchase of another residential house".
CA.Swathi Jain
(CA )
(155 Points)
Replied 31 March 2011
Thank you Mr.Md for the clear explanation.
Mr.Saiyum khan, if the intention of the section was to utilise only the capital gain fund for purchase of the house then the time limit of purchase of house 1 year before sale of original asset would not have been provided in the section.
U S Sharma
(glidor@gmail.com)
(21056 Points)
Replied 01 April 2011
to get the benefit of not paying the capital gain tax, one has to ensure that capital gains are used for buying of residential property.
in case the house is taken on loan, the assesee can show that the capital gain is used in purchase of house and loan is used to develop the house further.
CA Saiyum khan
(Practicing CA)
(685 Points)
Replied 01 April 2011
| Originally posted by : CA.Swathi Jain | ||
|
|
Thank you Mr.Md for the clear explanation. Mr.Saiyum khan, if the intention of the section was to utilise only the capital gain fund for purchase of the house then the time limit of purchase of house 1 year before sale of original asset would not have been provided in the section. |
|
Swathi, Pls. go through the following decision carefully. Hope this will clear the doubt.
CA Saiyum khan
(Practicing CA)
(685 Points)
Replied 01 April 2011
Latest decision in Miian Sharad Ruparei vs ACIT(supra) In this case assessee earned LTCG on sale of shares and reinvested in residentialhouse claiming deduction uis.54F. The net-consideration on sale of Shares was Rs. 17,28,686 and assessee purchased a new flat for Rs. 17,29,355. Bank loan of Rs. 15 lacs was taken for investment in flat. AO noted that major portion of house was financed by bank. A0 therefore disallowed the exemption to the extent itwasfinanced by bank. The ITAT confirmed the order ofAO and held that section 54F{1] shall be read with section 54F{4}. If both these sub-sections are read in conjunction only one inference is drawn that to avail of the benefit of section 54F, the assessee is required either to purchase or construction a residential house out of the sale proceeds of LTCG within specified period. If assessee is not able to appropriate the sale proceeds upto due date, same shall be deposited in Capital Gain Account Scheme. In giving this decision, the ITAT discussed the decisions of ITO vs l<.C. Gopalan {supra}, Smt. Prema P. Shah {supra}, Bombay Housing Corpn. (supra) In para 13 interestingly held that it is not thatthe same amount shall be invested in the new house. But, the fund should be available with the assessee forits investment in residential house. The law does not expect that the sale amount should be kept in locker and the same should be utilized in purchase of residential house. Neither the law nor does any circular require the identity of the amount received on sale and utilization for purposes of section 54F and other relevant provisions. It is quite likely that the assessee may use the money for his business and draw the amount for investment from his past savings. Since money has no color, all that is required is compliance with the condition of investment within specified time.
CA.Swathi Jain
(CA )
(155 Points)
Replied 01 April 2011
thank you Mr.saiyum.
So the conclusion that we can draw from the above is that the assesse in order to claim exemption under sec.54F has to either use the capital gain funds or his past savings i.e.his own funds but not borrowed funds for buying another residential house.
CA Saiyum khan
(Practicing CA)
(685 Points)
Replied 01 April 2011
| Originally posted by : CA.Swathi Jain | ||
|
|
thank you Mr.saiyum. So the conclusion that we can draw from the above is that the assesse in order to claim exemption under sec.54F has to either use the capital gain funds or his past savings i.e.his own funds but not borrowed funds for buying another residential house. |
|
Yes. Exactly.
Live class on PF & ESI Enrollment & Returns Filing(with recording)
CAclubindia
