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Ltcg split between land & building

Jag Mohan (Retired Senior Citizen) (59 Points)

30 October 2014

A close friend has a plot in India bought about 14 years ago that has given him good capital appreciation.

Now he has another 2 residential flats in India apart from this plot.

If he sells the plot and reinvests in a residential house or flat, he will not be covered u/s 54 but only Sec 54F and since he is already owning 2 flats, he will not be eligible for Capital gains exemption.

Now in order to fit u/s 54,if he makes a small house on that plot and sells it immediately thereafter will the capital gains be apportioned between the land (Long term) and house(Short term).

To give an example

Land bought in 2000 20 lakhs

House raised in 2014 10 Lakhs

Sale value 2 Cr in 2014 .What will be the LTCG and STCG assuming that the figures above are after adjusting cost of lnflation index as specified.

Can he claim deduction u/s 54?

Please provide citations, if any.

THANKS INDEED. GOD BLESS YOU.

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7 Replies

Swami Ayyappa Nuli (TAX ADVISOR & CONSULTANT AT G.S.T SUVIDHA CENTER) (1372 Points)
Replied 30 October 2014

Generally if it is a business asset , you need to apportionate between Land(Non depreciable) and Building(Depreciable) even both are Long term capital assets. But for personal purpose you need not to bifurcate between them if both are Long term capital Assets (as Indexation will be applicable whether it is House or plot). As this is the case for Reinvestment to avail capital gain exemption whether they are LTCA or not, you need to bifurcate. If you bifurcate you can not go for both 54 and 54F and indeed you can not avail those sections even you dont bifuricate as Building with revenue department is from one year in existance and it would be Short term capital asset(not eligible for 54 sections).

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Ajay (CA Job) (512 Points)
Replied 30 October 2014

Dear Jag Mohan

From the facts, it doesn't seems like a case eligible for exemption u/s 54 or 54F whether you bifurcate or not.
Case 1 - You do not construct a building - then, the capital asset in question is Land which is not an eligible asset u/s 54. But Sec.54F will also not be applicable as your friend already owns more than one residential property as on the date of transfer of the land.
Case 2 - You construct a buidling and you do not bifurcate the Sales consideration - Here, if we do not bifurcate, we go by the assumption that by the construction of a propoerty on the land, a new capital asset namely the "New Building" has come into existence. But now, assuming your friend plans to dispose off the asset in question immediately after constructing the new building, neither Sec. 54 nor Sec.54F will be applicable since the former requires that the asset transferred to be a long term asset which is not the case, and the latter section requries a long term asset other than a residential property which again is not the case. Thus constructing the builidng doesn't make sense. Else, your friend will have to wait for another 3 years after construction to make the Capital Asset, that is the Buidling a LTCA so that the exemption u/s 54 can be claimed by investing in another residential property.
Case 3 - You construct a buidling and you bifurcate the Sales consideration - There are decisions which held that sales consideration can be bifuracted towards land and to building - 1. CIT Vs. Dr.D.L.Ramachandra Rao [1999] 236 ITR 51 (Mad.), 2. CIT Vs. C.R.Subramanian [2000] 242 ITR 342 (Kar.), 3. CIT v. Vimal Chand Golecha [1993] 201 ITR 442 (Rajasthan HC). These cases held that sales condiserations can be bifurcated which may result in one portion being STCG and another LTCG. Here in your case, the STCG bifurcated towards new building will not be eligible for exemption u/s 54 or 54F for reasons stated in Case 2. Also, the LTCG arising from transfer of land portion wiill not be eligible for exemption either u/s 54 or 54F for reasons stated in Case 1. Thus constructing the builidng doesn't make sense.

Instead why don't your friend claim the exmption u/s 54EC by investing in eligible securites? Is there any obvious reason that I failed to see why you did not consider this Section? There again, you need not construct a new building as under Sec.54EC, any LTCA is eligible, that is including land. Infact, construting a building again only complicates the matter (assuming you got the idea of constructing a building just for tax purpose) becasue, then again you will have to bifurcate the Sales Consideration and you can get the exemption only for the LTCG apportioned towards land and STCG for Buidling portions will be taxable as per slab.

Lemme know your views.

Regards

Ajay

GULRAJ AILANI (CA) (234 Points)
Replied 31 October 2014

correct Ajayji , Opinion of Ajayji is correct.

Mihir (Wealth Manager) (5293 Points)
Replied 31 October 2014

If you construct a house on the plot of land, and then you sell it, you may claim exemption u/s 54 by reinvesting in another residential property. But sale of the house can happen only after 2017 as you will construct the house in 2014.

Jag Mohan (Retired Senior Citizen) (59 Points)
Replied 31 October 2014

Thank you Ajay for your very comprehensive analysis and I tend to agree with you cent percent though a Practising CA advised otherwise.

Section 54EC restricts the quantum to Rs 50 Lakhs while my friend's property is worth much more.

Where are you based as I would loke to give your reference to my friend overseas.

Can I have your email id/contact details?

Are you a practiusing CA ?

God bless you my brother.

High regards,

Jag Mohan

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Jag Mohan (Retired Senior Citizen) (59 Points)
Replied 31 October 2014

ADDENDUM

I wanted to also know how Sections 54 and 54 F are placed in the new DTC.

I read a news item in the press only last week that the Govt is planning to introduce this within 6 months.

God bless.

Jag Mohan

Ajay (CA Job) (512 Points)
Replied 04 November 2014

Dear Jag Mohan

I am sorry. I am not practicing as of now. So there is a huge limitation to my knowledge and so I am not sure if I can be of much help. I can only help with whatever little I know. My mail id is ajay147 @ rediffmail.com

It is definitely advisable to consult a practicing CA for such issues.

And, coming to the issue, yes, true there is a limitation of Rs.50 Lakhs as per Sec.54EC (that too, after Finance Act, 2014, you can't even take the benefit by reinvesting in 2 different years). But then, even other Sections are not applicable to the case viz. Sec.54 or Sec.54F or so i feel. If that's the case, something is better than nothing. If your CA has any better idea, do go with that.

And, regarding DTC, I think as per Direct Taxes Code, 2013, they plan to introduce relief in line with Sec.54F with proportionate exemption for Capital Gains depending on the amount you reinvest. But I haven't studied it properly, so i can get back to you on it later only.

Regards

Ajay

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