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
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
They seek opinion on the
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
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.