Introduction:

This article questions the Taxability of Capital Gain (CG), when it is invested in residential property but held for less than three years. This has a reference to the recent Judgment passed by the Hon’ble ITAT Chennai in the case of K.V. Vijayaraghavan Vs. DCIT [TS-7142-ITAT-2016(CHENNAI)-O] wherein the Hon’ble ITAT has rejected the CG benefit as the residential property bought using the CG amount was demolished within three years from the date when CG arose.

Facts and Issues before the ITAT:

1. The assessee had sold two shops in Mumbai for ₹15 Lakhs and also sold the residential property in Chennai for ₹1.08 Lakhs.

2.The Assessee purchased a residential house for ₹1.17 Lakhs and demolished the same after two years and constructed a commercial complex.

3. AO rejected the benefit u/s 54F and CIT(A) upheld the AO order.

Object for enacting Sec 54F:

The purpose of enacting Sec 54F was to encourage housing construction. The CBDT explains the objective via Circular No. 346 dated 30.6.1982. While Sec 54 provides for LTCG exemption on sale of residential property when invested in another residential property, Sec 54F provides for the same benefit when sale proceeds from non-residential property is invested in residential property.

Precedents relied on:

The Department Representative advanced argument basing reliance on Hon’ble Madras HC decision in the case of K.M. Natarajan vs. ITO [TS-5057-ITAT-1992(CHENNAI)-O], wherein it was held that, the strict construction of the section grants exemption only if the property is residential property and used as residence by the buyer. Further, reliance is placed on the Apex court decision in the case of Grace Collis [TS-5-SC-2001-O] wherein it was held that if the old house is only meant for demolition, it may not satisfy the test of purchase of residential house, more particularly when it was demolished within two years. Thus, it may be a symbolic purchase of bungalow which may not pass the test of 'purchase' under section 54F of the Act or if it is treated as purchased, then demolition, being a voluntary act, may amount to 'transfer'.

Held by ITAT :

The Parliament enacted Sec 54F for encouraging housing construction and not for destruction of residential building. Sec 54F emphasizes construction of residential house which must be a real one and not a symbolic construction. Mere construction by extending an old existing house would not mean new construction u/s 54F. Considering these factors, we do not find it necessary to interfere with the order of the CIT(A)that exemption u/s 54F cannot be granted since he has demolished the newly acquired residential house instantly for the purpose of construction of a shopping complex.

Analysis:

The Authors humbly submit that the case was factually dealt wrongly as the claim of the Assessee could be only u/s 54 because 1.08 Crore which forms a part of the total 1.17 Crore investment arose from sale of the Assessee’s residential property which will fall only u/s 54 and only the investment of 15 Lakhs which arose from the sale of shops could fall u/s 54F. To sum up, the Assessee’s major claim of exemption should be covered under Sec 54 and not under Sec 54F.

Even if the Assessee had erroneously claimed exemption u/s 54F, the AO ought to have rejected the claim only stating for the reason that Sec 54F is not applicable for towards the investment in residential property made from the sale proceeds of a residential property.

It is to be noted that in the instant case, had the claim been made u/s 54 and not u/s 54F, the demolition of the property within three years wouldn’t have affected the exemption claim as the purpose enumerated u/s 54F is not applicable to Sec 54.

Citing the parliamentary discussion for insertion of Sec 54F and basing the discussion for rejecting the Assessee’s eligibility is not relevant w.r.t. 1.08 Crores when Sec 54F exclusively prohibits “Residential Property” from its ambit.

A glance at provisions dealing with exemptions under the head Capital Gains

Sec 54 – Profit on sale of property used for residence; this section provides for ways and means of investments in residential property to avoid capital gain arising from sale of residential property.

Sec 54B – Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases; Self explanatory

Sec 54D – CG on compulsory acquisition of lands and buildings not to be charged on certain cases; Self Explanatory

Sec 54E – CG on transfer of capital assets not to be charged in certain cases; not applicable to the present situation

Sec 54EB – CG on transfer of LTCA not to be charged in certain cases; residual

Sec 54EC – CG not to be charged in investment in certain bonds;  Self Explanatory

Sec 54ED – CG on transfer of certain listed securities/ units not to be charged in certain cases; Self Explanatory

Sec 54EE – CG not to be charged on investments in units of a specified fund; Self Explanatory

Sec 54F – CG on transfer of capital assets not to be charged in case of investment in a residential house; dealt with in detail in above discussions.

Sec 54G – CG on transfer of assets in case of shifting industrial undertaking from urban area to non urban area is exempted.

Sec 54GA - CG on transfer of assets in case of shifting industrial undertaking from urban area to SEZ area is exempted.

Sec 54GB – CG on transfer of residential property not to be charged on certain cases; ….

Sec 54H – Extension of time for acquiring new asset or depositing or investing amount of CG.