You are eligible for capital gains exemption if you buy a property

What can be regarded as one of the most popular provisions of the Income Tax Act (‘the Act’) is Section 54. It provides that the longterm capital gains you earn from the sale of a residential house property can be claimed exempt, if you were to invest the gains, so earned, in another residential house property. The law has also prescribed the time limit for buying the new house property.

Generally, the value of new flat as per the agreement is considered for the sake of calculating the value eligible for exemption u/s 54. The stamp duty and registration fees paid to complete the registration process too can be added to this value. In one of the recent cases that was decided by the Tax Tribunal, there was a twist to this generally accepted principle.

The taxpayer claimed an exemption of Rs 62.5 lakhs from long-term capital gains earned on sale of his residential flat, in his return of income, on account of investment made in a residential property within the prescribed time limit. During the course of assessment, the taxman observed that the purchase deed of the said property showed price of the new property as Rs 48.50 lakhs only. Based on this, the taxpayer was asked to explain why the exemption should not be denied to him.

In his explanation, the taxpayer submitted that he had incurred expenses of Rs 12 lakhs for extra work to make the new house inhabitable, and Rs 2.5 lakhs for various local taxes and legal fees. Further, these payments were made through the banking channel and the relevant details of the same were submitted before the tax officer.

The taxman was not convinced with the above and disallowed the claim for exemption u/s 54 of the Act to the extent of Rs 14 lakhs on the grounds that this expenditure was incurred before taking possession of the flat. This stand by the taxman was accepted by the first level appellate authority.

The taxpayer took up this matter further before the Tax Tribunal, where the latter observed on the basis of records presented before them, that the genuineness of the payment of Rs 12 lakhs for repair work and the balance amount has not been doubted by the tax officer. The Tribunal relied on an older decision of the Tribunal, wherein it was held that there is no restriction on the buyer from incurring any construction expenditure on improvisation or supplementary work of a ready-made unit. The additional expenses, so incurred, would be eligible for qualifying as investment made under section 54 of the Act.

The Tribunal ruled that the taxpayer was eligible to claim the expenditure as an exemption u/s 54, that was earlier disallowed by the tax officer.