The seller of a residential property can take advantage of capital gains tax An income tax tribunal has ruled that even if he had entered into an agreement to buy a new house long before the sale of the old property, he would still be entitled to the exemption.

However, the possession of the new house should be eligible for the time period given under section 54 of the Income Tax Act (IT Act). The new residential property must be purchased one year before or two years after the sale of the old property or constructed within three years of it, ruled the Delhi-based Income Tax Appellate Tribunal (ITAT).

The case pertains to a Non-Resident Indian (NRI) who claimed exemption from capital gains tax for assessment year 2020-21 as he used a part of the profit to pay off bank loans and builders. The NRI had entered into an apartment buyer agreement in 2016, sold the old property in 2020 and was given possession of a vacant shell flat in 2021. Thereafter, the assessee spent money to make the house habitable. After this, the builder issued the Occupation and Use Certificate in 2022.

However, the tax authorities claimed that the NRI is ineligible for the exemption on the ground that he does not fulfill the prescribed conditions for purchasing the new property. He argued that the assessee had booked the new property much in advance and paid for it by way of loan and payment to the builder well before the stipulated period.

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The assessee, on the other hand, argued that the requirement of section 54 of the IT Act was satisfied as the construction was completed and the possession was handed over within three years from the date of sale of the old asset, even though the agreement to purchase was entered into yes. The new property was signed long ago.

The ITAT observed that if the prescribed period lapses from the date of sale of the old asset – 2020, then the conditions under the said section have to be satisfied. It is observed that the possession of the semi-finished flat was given in 2021.

Thus, the condition of acquiring the new asset within the prescribed period is satisfied, ruled the ITAT.

The tribunal also allowed the expenditure incurred to make the house habitable within the prescribed period to avail tax deduction under the section.

Amit Maheshwari, partner at tax and consulting firm AKM Global, said such an arrangement is common in metro cities where property purchase agreements are signed much before construction begins and possession is handed over after a few years.

In many cases, the possession time is extended for a variety of reasons. He said that the tax department usually refuses to give the benefit of section 54 in such cases.

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“Therefore, the order of the Tribunal is likely to set a precedent for similar cases as well as help in keeping alive the essence of section 54 which provides certain capital gains tax relief to the seller of a residential house if he buy or construct a new residential house in the specified time frame,” said Maheshwari.

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