If you have purchased a property in joint name with your spouse, you can now claim full exemption from long-term capital gain tax when you sell it. Recently, the Delhi High Court held that full exemption under Section 54F of the Income-Tax Act, 1961, should be allowed even if the new property is purchased in joint name, if the tax-payer was the real owner, that is, if he has funded the entire cost of the property.
The ruling was given on a case filed by a tax-payer who sold a plot of land to Nirala Developers for R4.3 crore and earned long-term capital gain (LTCG) of around R46 lakh. Out of the total LTCG earned, the tax-payer purchased a new house and claimed an exemption under Section 54F of the IT Act for financial year 2006-07.
The assessing officer of the IT department noticed that the purchase deed was made jointly in the names of the tax-payer and his spouse and the officer also noticed that the tax-payer had claimed exemption under Section 54F of the Act with reference to the whole amount invested in the new house.
Subsequently, the assessing officer sought reasons from the tax-payer to explain his claim of exemption under the Section. The tax-payer submitted that spouse's name was included in the sale deed only to avoid any litigation after his death and all the funds invested in the new house were borne by him.
The assessing officer passed an order allowing only 50% of the exemption claimed under Section 54F of the IT Act, as against a total claim of R3.19 crore made by the tax-payer. Not satisfied, the tax-payer filed an appeal before the Commissioner of Income Tax (Appeals), which was disallowed. The tax-payer then filed an appeal before the Income Tax Appellate Tribunal (ITAT), which ruled in the favour of the tax-payer.
It cited that the tax-payer was the real owner of the residential house and was entitled for benefit of Section 54F of the Act. The ITAT filed an appeal before the high court.
In fact, Section 54F of IT Act
exempts tax on LTCG arising from transfer of any long-term capital asset, excluding a residential house, invested in a residential house. It also says that this exemption cannot be availed if there is a house in existence on the date of transfer. The high court actually relied on the Supreme Court ruling, which held that Section 54F mandates that the house should be purchased by the tax-payer and it does not stipulate that the house should be purchased in the name of the tax-payer only.
The court also ruled that the basic objective of Section 54F of the Act is to provide impetus to house construction and so long as the purpose of house construction is achieved, such hyper technicality should not impede the way of deduction which the legislature has allowed. The high court held that the conditions stipulated in Section 54F of the Act was fulfilled by the tax-payer and he was entitled for benefit of Section 54F of the IT Act.
Commenting on the judgment, Sanjiv Chaudhary and Parizad Sirwalla, Partners at KPMG, say this is an important ruling by the high court, which highlights that the exemption under Section 54 F of the Income Tax Act should not be restricted to the share in the house property purchased in joint name. “Actual and constructive owner of the house should be looked into while determining the exemption under Section 54F of the Act based on contribution to cost of property,” they say.