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Section 54 Urgent

Max Payne (employed) (2574 Points)

15 July 2010

URGENT

Assessee has 2 properties H1 which is assessed as let out and H2 which is under construction.

Assessee has taken a loan from a Scheduled Bank for constructing H2.

It is proposed that the Property H1 be sold, and the proceeds be utilized to close the loan on construction of H2.

Please tell me

"If Repayment of loan on new asset qualifies for deduction u/s 54?"

You may assume that the construction is being completed within 3 years from the date of transfer of original asset.

Pls support your answers.

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4 Replies

Amir (Learner) (4016 Points)
Replied 15 July 2010

HI Bhai,

Yes Sec 54 shall be available -

Exemption on capital gains could not be refused to the assessee simply on the ground that the construction of the new house had begun before the sale of the old house - CIT v. H.K. Kapoor [1998] 150 CTR (All.) 128.

But more important question is - Whether "repayment of existing Loan" would tantamount to "Utilization of Sale proceeds" as required by Sec 54?

I will say Yes, going with the spirit that exemption provisions and more particularly the procedural provisions are interpreted in order to extend the benefit under the same.

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Amir (Learner) (4016 Points)
Replied 15 July 2010

Another thing which I forgot to add above is that the construction of New House should not complete before disposing the earlier house.

Construction cannot precede sale of old house - To claim exemption under section 54, the construction of the new house should be within two years after the transfer of the existing house. The exemption is not available where the new construction is made before the transfer or sale of the existing house - Smt. Shantaben P. Gandhi v. CIT [1981] 129 ITR 218 (Guj.).

Max Payne (employed) (2574 Points)
Replied 15 July 2010

Hi Bhai,

I also checked out HK Kapoor's case, Shanthaben P Gandhi (Gujarat) case and

J R Subramanyam Bhat's (1987, Karnataka) case.......

But whether there could be an issue that the proceeds of the original asset are being utilized to repay an existing liability and not for investing in a new house...?

I mean there is no nexus between the ultimate use of funds and the end use directed in the Act??

(pls also remember some case where house was built out of borrowed fund, the deduction u/s 54F was denied.....?)

Please clear my doubt.....

Amir (Learner) (4016 Points)
Replied 15 July 2010

Bhai,

I could recollect that case and in fact when we were discussing that thing I also said that the exemption will be denied since in that case assesee did not routed, whether directly or indirectly the sale consideration at all for the acquisition of new property as the new house was solely financed.

There could be an argument that even in that case it could have been said that sales proceeds would go into the acquisition of new house in the form annual repayment of loan. But then that would be no less than pulling rabbit out of the hat...........:)

I think "one time repayment of loan" instead of "repayment over 20 years" will turn the decision in favor of the assesee....

Wot say??