Waiting for possession of your apartment? Here’s how to claim the capital gains exemption

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Investing in construction projects has become quite normal nowadays, especially in towns and cities. A price advantage and a longer payment period are the key factors that make the deal more enjoyable for home buyers. However, there were many instances where projects were not delivered within the timeframe promised at the time of booking. Often times, buyers end up waiting for the project to be completed and take possession of their reserved apartment, but does that time frame (beyond the stipulated time frame) bode well with the specific time frames for capital gains exemptions provided by the Income Tax Act?

Section 54 of the Income Tax Act (the “Act”) provides for an exemption from capital gains resulting from the sale of real estate if it is invested in the purchase of real estate. real estate within two years of the date of sale. In addition, the exemption can also be claimed if the resulting capital gains are invested in the construction of a house provided that the construction is completed within three years from the date of sale.

In one of the cases brought to the Chandigarh Tax Court, the taxpayer had sold her apartment in Mumbai for Rs 5.20 crore in September 2012 and claimed the resulting capital gains of Rs 2.97 crore as exempt from 54 for his investment in another apartment in Mumbai for Rs 3 crores.

During the appraisal procedure, during the verification of the deed of purchase, the tax officer noted that the agreement was not signed until September 2014 with the possession of the apartment which was to be be delivered no later than August 2016. The tax officer concluded that the taxpayer had purchased only the right to purchase the apartment that was proposed to be donated after four years from the date of transfer ( September 2012). As these contravened the conditions prescribed in section 54 of the Act, the tax officer refused the exemption requested in the taxpayer’s return.

At the first level of appeal, the taxpayer has argued and relied on various legal precedents where it has been held that if the taxpayer invests capital gains in a house under construction and possession is delayed through no fault of the taxpayer, then l exemption cannot be refused. The first-level appeals authority, however, did not accept the above, as the decisions relied on by the taxpayer in her defense concerned exemption requests made under section 54F of the Act.

He further observed that, as the purchase contract had been signed almost a year after the due date of the tax returns for the year in which the property was sold, the taxpayer was required to file the amount of capital gains in the specified capital gains account as prescribed. by subsection (2) of section 54.

In this case, the taxpayer had simply invested the money in term deposits. The appeal authority rejected the taxpayer’s request for exemption on these two grounds. When the case was brought before the Tax Court, it was observed that in various precedents, the Tax Courts and the High Courts adopted a liberal interpretation of the exemption provisions of Articles 54 and 54F, which aim to promote the purchase and construction of residential houses. Relying on various decisions of the High Court, the Court held that, since the agreement for the purchase of the apartment has been concluded and the full amount of capital gains is paid within three years from the date of sale, the basic condition for requesting u / s 54 relief has been met and therefore the exemption request has been granted.

Regarding the second reason for not depositing money in the capital gains account scheme before filing the returns, the Tribunal observed that in its opinion, this provision was enacted as a provision to collect the intention taxpayer’s real estate; who intends to claim the benefit of the section 54 exemption by investing the amount in the purchase / construction of a house. While the primary purpose of section 54 is to promote housing, the procedural and enabling provisions of subsection (2) cannot be interpreted strictly to impose strict limitations on the taxpayer and deny him the benefit in default. . Consequently, the Court held that, as the taxpayer was able to prove during the assessment procedures that she had already invested the capital gains for the purchase of a new house, the exemption cannot be refused.

This ruling cannot be interpreted that in all cases with a similar set of facts the appeals authorities will rule in favor of the taxpayer, but it helps to understand the judicial intent behind these most useful provisions.

Things to know:

1. Section 54 exempts long-term capital gains if they are invested in a new apartment within two years or if they have built a new house within three years of the date of sale.

2. In the event that the capital gains are not invested before the return filing due date, the money must be placed in a separate capital gains account program prior to the return filing.

3. Liberal interpretation of the exemption of article 54 taken by the judicial authorities in various cases.

4. The execution of the agreement and the payment of a consideration to the seller, which covers at least the amount of the capital gain, are some of the key elements taken into account by the judicial authorities.

(The writer is the founder of Arvind Rao and Associates, a Mumbai-based tax and financial consultancy)

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Posted on: Sunday January 09, 2022, 7:00 a.m. IST

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