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Exemption u/s 54,54F

Subject : Income Tax Law
Month-Year : Mar 2001
Author/s : Chetan A. Karia
Chartered Accountant
Topic : Exemption u/s 54,54F
Article Details :

Case Study 4 :

Mr. Smart and Mrs. Wise, husband and wife, are regularly assessed to income-tax. They had jointly inherited ancestral land, held by the family for more than forty years, in their native place, on which they have constructed a new house in 1999. Both of them are holding undivided equal shares in the land and building. Mr. Smart intends to sell his half share in the house to Mrs. Wise for a sum of Rs.5 lakhs.

Mr. Smart and Mrs. Wise have sold substantial part of their investments in shares and securities and have earned long-term capital gains of Rs.15 lakhs and Rs.5 lakhs respectively, on the said sale.

Mr. Smart intends to buy a flat for a total sum of Rs.15 lakhs, which is expected to be ready within a period of eighteen months.

They have approached a housing finance company who have agreed to finance Rs.4 lakhs to Mrs. Wise towards her purchase of half share in house at native place and Rs.12 lakhs to Mr. Smart towards purchase of flat in Mumbai.

Mr. Smart and Mrs. Wise have decided to avail of housing finance to the maximum extent available and finance the balance amount for the house out of amount received on sale of shares. The amount left after investment in house would be invested in shares and units of mutual funds.

They seek opinion on the following :

1. Would Mrs. Wise be entitled to benefit of exemption u/s.54F in view of the fact that she is purchasing only half undivided share in a house and also that she is already owning half share in the said house.

2. Would Mr. Smart be entitled to exemption u/s.54 in respect of gain on sale of his share in house at native place though the building was constructed less than three years ago.

3. Would Mr. Smart be entitled to benefit of both S. 54 and S. 54F though the investment of capital gains on sale of two different assets is in a single asset, i.e., flat at Mumbai.

4. Would both of them be entitled to exemption u/s.54 and u/s.54F on whole of the investment in purchase of house, whether out of own funds or borrowed funds.


5. Would they be entitled to deduction of interest on housing loan u/s.22 and rebate u/s.88 in respect of repayment of loan even though they have availed of exemption u/s.54 and u/s.54F in respect of the same investment.

Answers to Case Study 4 :

1. S. 54F provides for exemption from taxation of a long-term capital gain arising on transfer of an asset other than residential house, if the assessee has purchased or constructed a residential house within the specified period. A share in a residential house is also a residential house and the assessee would be entitled to benefit of exemption u/s.54F even if a share in the residential house is purchased. The Gujarat High Court was considering a similar situation in CIT v. Chandanben Maganlal, (2000) 245 ITR 182 (Guj.) and it was held that purchase of a share in residential house is equivalent to purchase of a residential house for the purpose of S. 54. In arriving at the said decision, the Court relied on the earlier decision in CIT v. Tikyomal Jasanmal, (1971) 82 ITR 95 (Guj.).

Therefore, Mrs. Wise would be entitled to exemption u/s.54F even though only fifty percent in a residential house has been purchased by her. Further, after amendment by Finance Act, 2000, w.e.f. 1-4-2001, a person is entitled to exemption u/s.54F even if such person holds one residential house at the time of reinvestment.

2. Mr. Smart was owning fifty percent share in land and building which is now being transferred. The period of holding of land would be forty years, as the same has been inherited by him. Though the building is held after construction for less than three years, as the land is held for more than three years, part of capital gains relating to land would be long-term capital gains and only gain in respect of building would be short-term capital gains. Mr. Smart can apportion the capital gain arising on transfer of his fifty per cent share on a scientific basis between land and building and gain relating to land would be long-term capital gains in respect of which he can claim benefit of S. 54/S. 54F. Such bifurcation and treatment is supported by the decision in CIT v. C. R. Subramanian, (2000) 242 ITR 342 (Kar.).

3. S. 54 provides for exemption of long-term capital gain arising on transfer of residential house if the assessee has purchased or constructed a residential house within a specified period. Similarly, S. 54F provides for exemption in respect of long-term capital gain arising on transfer of asset other than a residential house. It is possible to claim exemption u/s.54 and u/s.54F in respect of investment in one residential house, however the amount of deduction cannot exceed total amount invested in purchase of new house.

4. Neither S. 54 nor S. 54F require that the sale consideration or capital gain itself should be reinvested in purchase of new residential house. It is not necessary that the same amount need to be reinvested. It only provides that there has to be purchase of a new house. The source of investment is not necessarily to be the same amount as is realised on sale of the earlier asset. Unlike erst-while S. 80C, which required that investment had to be made out of income, no such requirement has been prescribed in S. 54/S. 54F. Rather the very fact that investment can be prior to sale clearly establishes that the source of investment is not necessarily to be out of income which is exempted. The issue has been considered by the Kerala High Court in ITO v. K. C. Gopalan, (1999) 107 Taxmann 591 (Ker.) and it has been held that it is not necessary that sale consideration itself should be utilised in purchase of a new house.

However, care should be taken that provisions of Ss.(2) of S. 54 and Ss.(4) of S. 54F do not apply, i.e. investment in new asset is made prior to the specified time so that one may not be called upon to deposit the amount in specified account and invest further amounts out of the said account.

5. S. 24(3) allows deduction of interest paid on amount borrowed for purchase of a residential house. S. 88(2)(xv) provides for rebate from tax payable, in respect of repayment of amount borrowed for purchase from a specified financial institution. As both Mr. Smart and Mrs. Wise have borrowed money for purchase of a residential house, they would be entitled to the said deduction and rebate, subject to other conditions being satisfied.

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