In order to simplify the taxation on capital gains, the Finance (No.2) Bill, 2024 proposed to withdraw Indexation benefit and revise the tax rate on LTCG to 12.5% in relation to transfer of a long-term capital asset on or after 23 July 2024 as against the earlier tax rate was 20% with Indexation benefit. However, in case of immovable properties, there were public opinions that the tax outflow would be significantly higher on account of removal of indexation benefit despite of reduction in the tax rate on LTCG from 20% to 12.5%, which led to some further changes in this regard the the Finance (No.2) Act, 2024.

Against this backdrop, Mr. K.K. Chythanya (Senior Advocate) and Mr. Ajit V. Ghatikar (Advocate) inter alia analyse certain privileges and complexities of dual computation of tax in case of transfer of land or building or both, by way of some illustrations.  The authors conclude by remarking that, “One has to therefore carry out proper computation so that he neither ends up paying more tax nor ends up making unnecessary investment. It is also hoped that the form of ITR would provide for the above computation. Else, there will be needless exercise of paying higher tax only to claim a refund.”

“Dual Computation of LTCG Arising from Transfer of Immovable Properties”

A. Introduction :

1. In order to simplify the taxation on capital gains, the Finance (No.2) Bill, 2024 proposed to withdraw Indexation benefit and revise the tax rate on long-term capital gain (LTCG) to 12.5% in relation to transfer of a long-term capital asset on or after 23 July 2024 as against the earlier tax rate was 20% with Indexation benefit. However, in case of immovable properties, there were public opinions that the tax outflow would be significantly higher on account of removal of indexation benefit despite of reduction in the tax rate on LTCG from 20% to 12.5%.

2. Considering various representations, in the Finance (No.2) Act, 2024, vide the 2nd Proviso to Section 112(1)(a), a relief was provided to a resident Individual or HUF in case of transfer of long-term capital asset being land or building or both acquired before 23 July 2024. The Finance (No.2) Act 2024 substituted Section 112(1)(a) w.r.e.f. 23-7-2024. The 2nd Proviso to Section 112(1)(a) reads as follows:

Provided further that in the case of transfer of a long-term capital asset, being land or building or both, which is acquired before the 23rd day of July, 2024, where the income-tax computed under item (B) exceeds the income-tax computed in accordance with the provisions of this Act, as they stood immediately before their amendment by the Finance (No. 2) Act, 2024, such excess shall be ignored;

3. Thus, if the long-term capital asset being land/ building/both were acquired before 23 July 2024 by individuals and HUFs (who are residents) and are sold on or after 23 July 2024, the tax on LTCG is required to be computed as per both provisions namely as per pre-amendment provisions (i.e. with indexation and @ 20% rate) and as post-amendment provisions (i.e. without indexation and @ 12.5% rate). If the tax computed as per post-amendment provisions exceeds the tax computed as per pre-amendment provisions, the excess tax as per post-amendment provisions shall be ignored for the purpose of computing the tax payable by the assessee.

4. It may be noted that the benefit of the 2nd Proviso to Section 112(1)(a) is available only to the resident individual and HUF. The said benefit is not available to AOP, BOI, Firm, Company, Non-resident individual and Non-resident HUF.

5. Further, the benefit of the 2nd Proviso to Section 112(1)(a) is available on “transfer of a long-term capital asset, being land or building or both”. Thus the benefit is not applicable for transfer of lease hold rights, rights in land or rights in building. In the context of Section 50C, the following decisions held that the right in land or building is not land/building/both and thus 50C is not applicable in case of transfer of right in land or building:

• V.S. Chandrashekar v. ACIT [TS-73-HC-2021(KAR)]

• CIT v. Greenfield Hotels & Estates (P.) Ltd. [TS-6112-HC-2016(Bombay)-O], [SLP against the above decision was dismissed in Special Leave to Appeal (C) No. 1154/2018]

• CIT v. M/s. Heatex Products Pvt. Ltd ITXA/270/2014 dated 26.07.2016 (Bombay HC)

• Atul G. Puranik v. ITO [TS-197-ITAT-2011(Mum)]

B. Dual computation

1. The Second Proviso uses the phrase “where the income-tax computed under item (B) exceeds the income-tax computed in accordance with the provisions of this Act”. Hence the taxpayer has to compute income tax under both pre-amendment and post-amendment provisions, and not just the long-term capital gains under both pre-amendment and post-amendment provisions. To put it differently, the taxpayer has to compute long-term capital gains and has to compute income tax after availing exemptions under Section 54, 54B, 54D, 54EC or 54F both under pre-amendment and post-amendment provisions.

2. Hence if the relief is to be determined under Sections 54, 54B, 54D or 54EC, the same should be determined twice i.e. firstly, on the basis of capital gains without indexation under post amendment law for applying 12.5% rate and subsequently, on the basis of capital gains with indexation under pre amendment law for applying 20% rate.

3. This dual computation of tax offers certain privileges and also certain complexities. The same can be demonstrated by the illustrations:

• A case of an assessee claiming exemption under Section 54 on transfer of residential house; and

• A case of an assessee claiming exemption under Section 54F on transfer of land.

4. In the case of an assessee claiming exemption under Section 54 on transfer of residential house, the exemption under Section 54 shall be lower of the amount of capital gains arising on transfer of residential house or amount invested in purchase/construction of new residential house property. In such case, the manner of computation of tax on LTCG on transfer of the residential house under 2nd Proviso to Section 112(1)(a) can be demonstrated in following manner:

5. In the above case, one may note that the Assessee has only invested Rs.2.24 lakhs in the new residential house for claiming exemption under Section 54 which is equivalent to the LTCG of Rs.2.24 lakhs determined as per the pre-amendment provisions. Hence, the entire LTCG of Rs.2.24 lakhs would be exempt by virtue of Section 54. Since the Assessee is not paying any tax under the pre-amendment provisions, he pays no tax under the post-amendment provision under 2nd Proviso to Section 112(1)(a). Although, his LTCG is Rs.7.50 lakhs under the post-amendment provisions, he has managed to invest only Rs.2.24 lakhs to save tax on whole of capital gains.

6. In the case of an assessee claiming exemption under Section 54F on transfer of land, it may be noted that the exemption under Section 54F is determined on the basis of reinvestment of net consideration. If the cost of the new asset is equal to or more than the net consideration, the whole of such capital gain shall be exempted under Section 54F. However, if the cost of the new asset is less than the net consideration, 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 be exempted under Section 54F. The manner of computation of tax on LTCG on transfer of land under 2nd Proviso to Section 112(1)(a) can be demonstrated in following manner:

($Net Consideration = Rs.10,00,000 – Rs.50,000 i.e. 9,50,000)

7. In the above case, as the net consideration remains neutral, taxpayer’s exemption would depend on relation between the cost of new property and net consideration.

Conclusion :

One has to therefore carry out proper computation so that he neither ends up paying more tax nor ends up making unnecessary investment. It is also hoped that the form of ITR would provide for the above computation. Else, there will be needless exercise of paying higher tax only to claim with refund.