CBDT circular dated January 21, 2015 clarifies that the benefit under Section 54F and Section 54 is limited to one residential house.
A recent Delhi High Court ruling denied capital gains tax exemption under Section 54F of the Income Tax Act, 1961, to a widow who purchased two separate flats in Noida using proceeds from the sale of an inherited plot in Jaipur. The court upheld the Income Tax Department’s view that Section 54F allows exemption for only one residential property.
Case Background
The taxpayer inherited a plot in Jaipur from her late husband in 2005, which was originally purchased in 1983. She sold the plot in the financial year 2012-13 for Rs. 77,75,000 and invested the proceeds in purchasing two apartments in Noida, valued at Rs. 44,13,775 and Rs. 42,39,275, respectively. She filed her Income Tax Return (ITR) on July 31, 2013, claiming exemption under Section 54F. However, the Assessing Officer (AO) denied the claim on the grounds that the law permits exemption for only one residential house.
Also Read: Bombay High Court Rules in Favor of NRI in Section 54F Amendment Case
Key Points Raised by the Income Tax Department
- Inquiry Report: The AO deputed an inspector to examine the flats, who confirmed that they were on different floors and located at opposite ends of the same tower, making them distinct and separate units.
- Amendment in Finance Act 2014: The department argued that the amendment replacing ‘a residential house’ with ‘one residential house’ clarified that only one property qualifies for exemption.
- Assessment Order: The AO concluded that since the flats were not adjacent or structurally integrated, the taxpayer was ineligible for Section 54F exemption on both properties.
Delhi High Court’s Ruling
The court addressed two critical questions:
- Whether the phrase ‘a residential house’ in Section 54F allows exemption for more than one property.
- How ‘new asset’ is interpreted in the context of the exemption.
Findings:
- The court ruled that two non-adjacent flats on different floors could not be considered a single residential unit.
- It referenced the CBDT circular dated January 21, 2015, which clarified that the benefit under Sections 54 and 54F is limited to one residential house.
- The amendment to Section 54F reinforced the original intent of allowing exemption for only one house.
Also Read: Case Laws on Section 54F of the Income Tax Act
Distinction from Geeta Duggal 2013 Case
In the Geeta Duggal case, the taxpayer reconstructed a single residential unit, making it eligible for exemption. However, in this case:
- The taxpayer purchased two distinct flats instead of constructing a unified residential house.
- The builder confirmed that the flats could not be structurally combined into a single unit.
- As a result, the Delhi HC ruled that the Geeta Duggal precedent did not apply.
Final Verdict
The Delhi High Court upheld the decision to grant exemption on only one of the two flats, reducing the taxpayer’s eligible exemption to Rs. 44,13,775. The remaining Rs. 33,08,182 was subjected to capital gains tax.
Can Two Adjoining Flats Qualify for Section 54F Exemption?
Experts suggest that an assessee can claim Section 54F exemption for two adjoining flats if they can be legally and structurally combined into a single residential unit. However, in cases where flats are non-adjacent and structurally separate, the exemption applies to only one flat.
Understanding Capital Gains Tax Exemption Under Section 54F
Section 54F provides tax exemption on long-term capital gains arising from the sale of any asset other than a residential property if the proceeds are reinvested in a new residential house.
Eligibility Criteria:
- The new house must be purchased within 1 year before or 2 years after the sale of the original asset or constructed within 3 years.
- The taxpayer should not own more than one residential house at the time of sale.
- The newly acquired house should not be sold for 3 years from the purchase/construction date.
- No additional residential property should be purchased/constructed within 2 or 3 years.
Exemption Calculation:
- Full exemption if the entire net sale consideration is reinvested.
- Proportionate exemption if only part of the consideration is reinvested.
- If the cost of the new property exceeds Rs. 10 crores, the excess amount will not be considered for exemption.
Conclusion
The Delhi HC ruling reiterates that Section 54F benefits apply to only one residential house unless two properties can be structurally and legally integrated. Taxpayers investing in multiple properties should ensure they meet the eligibility criteria to avoid disputes with tax authorities.
For more insights on capital gains tax exemptions and compliance, consult a tax expert.
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