The Mumbai bench of the Income-tax Appellate Tribunal (Tribunal) in a recent case[ACIT vs Shri Deepak S Bheda (ITAT No. 5011/Mum 2010)] upheld the simultaneous claim by the taxpayer for exemption of capital gains in respect of investment of the net sale consideration / capital gains both in the acquisition of a house as well as specified bonds. The tax laws permit an exemption in respect of the investment of the net sale consideration arising from the transfer of a long-term capital asset, in the acquisition of a residence, within the time stipulated.[Section 54F of the Income-tax Act, 1961 („the Act‟)] An exemption is also prescribed in the case of investment of the gain from such a transfer in the purchase of specified bonds.[Section 54EC of the Act]
Facts of the case
- The taxpayer sold his ancestral house property in the financial year (F.Y) 2006-07 for a consideration of INR 3,40,00,000. The taxpayer did not claim a cost of acquisition in respect of the ancestral property and hence the entire sale consideration was taken as a long term capital gain.
- Out of the sale proceeds, INR 2,60,00,000 was invested by the taxpayer towards the purchase of a housing unit from a builder. This housing unit comprised of four individual units that were required to be merged under the agreement between the taxpayer and the builder.
- Further, the taxpayer invested INR 50,00,000 in the purchase of specified bonds within the time specified.
- The taxpayer claimed an exemption both in respect of the acquisition of a house and also for the investment in specified bonds.
- The Assessing Officer (AO) held that the remainder of the net sale consideration that is not invested in the purchase of a house can only be deposited into a “Capital Gains Accounts Scheme, 1988” and therefore denied the exemption claimed by the taxpayer for investment in specified bonds. Further, the AO permitted one-fourth of the exemption claimed in respect of the acquisition of the house, by disallowing the treatment of the house purchased as one merged unit.
- On appeal, the Commissioner of Income-tax [CIT(A)] upheld the exemptions claimed by the taxpayer.
Issues before the Tribunal
- Does a claim for exemption in respect of acquisition of house precludes the benefit of exemption for investment in specified bonds?
- Can the house purchased by the taxpayer be treated as one house when the plan approval specified four independent units?
- As per the provisions of law[Section 54F (4) of the Act], the balance net consideration that had not been utilized for the purchase of the house, could only be invested in the Capital Gains Account Scheme, 1988.
- After availing of the exemption for actual investment in residential house, no further exemption is allowable on the same capital gain for investment in specified bonds.
- Additionally the revenue for the first time before the Tribunal raised the contention that the taxpayer had only entered into a purchase agreement and had not actually purchased the house prior to the time limit specified. The house was not in physical existence at the time of the purchase agreement and hence the exemption claimed was to be disallowed. Also, the taxpayer had failed to submit adequate proof that the units purchased were merged as one house.
- The law does not expressly prevent a taxpayer from claiming exemption for a part of the capital gain under section 54F for acquisition of a residential house and under Section 54EC for another unappropriated part of the capital gains for investment in specified bonds in the same transaction of sale of a long term asset.
- The Tribunal agreed with the taxpayer‟s contentions that there is no restriction in the statute that prevents a claim for exemption simultaneously based on two different provisions in the law, particularly where such a claim does not result in availing double exemption on the same amount and is not expressly prohibited.
- The taxpayer had complied with the conditions stipulated and was therefore eligible to claim the exemption.
- The appeal of the tax authorities concerning nonexistence of the house on the date of the purchase agreement was rejected since this issue was not raised before the lower authorities. Even the AO had in his order permitted the exemption, although only one-fourth of the exemption claimed was granted;
- The purchase agreement clearly stated that the four flats originally planned would be converted into one duplex flat. The taxpayer‟s claim was stronger since the merging of the flats was agreed with the builder prior to taking over the possession of the house. The Tribunal relied on judicial precedent [ITO v. Sushila M Jhaveri  107 ITD 327 (Mum. Tribunal)] where the conditions for grant of exemption for a merged unit had been discussed.
This ruling liberally interprets the exemption provisions to permit a claim for exemption of long term capital
gains for acquisition of residential house and investment in specified bonds. It is interesting to note that the exemption in respect of acquisition of residential house(54F) is permitted in respect of net sale consideration invested whereas the exemption for investment in specified bonds is permitted in respect of capital gain invested. Further, the Tribunal has also reiterated that an exemption for acquisition of residential house could be claimed for investment in more than one flat purchased for the purpose of residence by enlarging these units to a single residential house prior to the possession of such house by the taxpayer.