Budget 2019: Devil in the detail
When we sat down to analyse the provisions of the recent Budget, I was reminded of a couplet --
I am the parliamentarian draftsman, I make the laws
For most of the litigations, I am the cause.
Sec. 54 dealing with long-term capital gains arising from sale of housing property stated “... where, the capital gains arises from the transfer of a long-term capital asset being ... a residential house, ... and the assessee has ... purchased a residential house,...”
There were a flood of litigations revolving around two problems --i) the meaning of ‘a residential house’. Did 'a' mean only one residential house? Or was the function of the letter 'a' that of an article (in grammar) just so that the sentence was grammatically correct.
Judiciary pronouncements were contradictory and inconsistent with one another. A few declared that ‘a’ means one whereas others claimed that this was just an article. ii) Secondly, the silence in the section relating to the location of the property made it possible to claim the benefit even on a house purchased abroad.
The Finance Act 2014 solved both the problems at one stroke by replacing the phrase ‘purchased a residential house’ with ‘purchased one residential house in India’.
Yes, the amendment did solve two problems but ended up creating two more.
1. For claiming exemption arising from transfer of a house, the assessee has to purchase only one house. What if he sells two houses? Has he has to buy two new additional houses or only one?
DCIT v Ranjit Vithaldas  23taxmann.com226 ITAT Mum Bench ‘A’ — If two flats are sold even in different years and capital gains from both flats is invested in one residential house, exemption will be available for each flat sold provided the time-limit for construction or purchase of new house is satisfied. Is this HC verdict negated by this amendment?
2. If ‘a’ is ‘one’ it is also not ‘half ’. Can an assessee purchase the new house jointly with his wife who has also contributed a share of the cost? The answer is and also was in the negative.
ITO vs Rasiklal N. Satra 280ITR243 dt 19.9.05 — Ownership of a residential house, means ownership to the exclusion of all others. Therefore, where a house is jointly owned by two or more persons, none of them can be said to be the owner of that house.
Surely, this is not the intention of the legislation.
Now let us examine the recent amendments Self-occupied house property So far, the annual value of selfoccupied property had to be taken to be nil. The interest payable on capital borrowed for acquiring, constructing, repairing, renewing or reconstructing the property had a ceiling of Rs 2 lakh. Income tax on notional rent is payable if one has more than one self-occupied house.
The interest payable on amount borrowed for the second house, whether self-occupied or not is deductible without any limit. Any unabsorbed loss can be carried forward for eight years for set-off against income from house property.
Now the Budget proposes, to exempt levy of income tax on notional rent on second self-occupied house, considering the difficulty of the middle class.
Also the Budget provides that where the amount of the capital gain does not exceed Rs 2 crore, the taxpayer will have the option to purchase or construct two residential houses in India (instead of being limited to the erstwhile one house).
Also, this benefit of having the facility of reinvesting the capital gain in two houses instead of one will be only available for any one transaction in the lifetime of the taxpayer i.e. once for a particular stream of long term capital gain income, deduction has been availed of by investing in two residential houses, the same cannot be done again in the entire lifetime of the taxpayer.
Sec. 54F dealing with sale of financial assets, other than residential houses such as land, commercial property, gold etc. has identical provisions with minor differences such as whereas 54 exempts tax on if the capital gains are invested, 54 requires the entire sale proceeds to be invested in buying or constructing another house within stipulated time frame.
Problem-1: Strangely, this facility of being able to invest in two houses has been made available to only to Sec. 54 and not to Sec. 54F. Consequently in Sec. 54F, the tax deduction is still applicable with respect to one residential house only. We wonder why this step motherly treatment meted out to Sec. 54F particularly. Is it an oversight?
Problem-2: This is more, much more serious. The interest on second house which was deemed to be rented one and now it is deemed to be self-occupied has lost its carry forward facility for 8 years.
Next time we shall revert with another amendment in the Budget which could lead to some practical difficulties for the taxpayers.
The authors may be contacted at wonderlandconsul[email protected]hoo.com