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February 25, 2021

Is amount invested in purchase of house in daughter’s name eligible for exemption under section 54F?

by CA Jessica Nagaonkar in Income Tax

Is amount invested in purchase of house in daughter’s name eligible for exemption under section 54F?

Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price.

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available under sections 54, 54B, 54D, 54F etc. As per the provisions of these sections, the amount is required to be reinvested in specified investment types before the specified period. However, if the due date of filing income tax returns falls before the expiry of the specified period, the amount of capital gains is required to be invested temporarily in the Capital Gains Account Scheme which can be easily withdrawn at the time of investment in the specified instrument.

What is Section 54F of the Income Tax Act?

The income tax law provides for certain situations where such capital gains will not be subject to tax. Section 54F provides one such exemption. In the case of an assessee being an individual or a HUF, if the capital gain arises from the transfer of any long-term capital asset, not being a residential house (original asset) and the assessee has within a period of 1 year before or 2 years after the date on which the transfer took place purchased, or has within a period of 3 years after that date constructed, one residential house in India (new asset), the capital gain shall be dealt with in accordance with the following provisions of this section:

  • if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45
  • if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45

Let us refer to the case of Shri Krishnappa Jayaramaiah vs Income Tax Officer where the issue under consideration was whether amount invested in purchase of residential house in daughter’s name is eligible for exemption under section 54F of the Income Tax Act, 1961 or not

Facts of the Case:

  • The assessee filed Return of Income declaring total income under the heads `house property’, `income from capital gain’ and `income from other sources’.
  • The assessee claimed deduction u/s 54F for the investment made in a residential property, in the name of his widowed daughter.
  • The assessee submitted before the AO that the property under question was received by inheritance by way of partition.
  • The legal heirs of the property were the assessee, his wife, son and widowed daughter.
  • All legal heirs executed the sale deed in favour of the purchaser.
  • The entire sale consideration received was invested in residential house property in the name of his widowed daughter.
  • The assessee claimed deduction u/s 54F on the capital gains in his return.
  • The AO denied the claim of deduction.
  • Further the assessee claimed an expenditure towards the cost of transfer of capital assets.
  • This was disallowed by the lower authorities on the reason that no evidence produced to show that it was a part of improvement of land or no break up had been furnished by the assessee.
  • Against this addition the assessee appealed before the Income Tax Appellate Tribunal (ITAT).

Observations of ITAT

  • The assessee’s married widowed daughter was having no independent source of income and was fully dependent on the assessee, on the death of her husband.
  • Being so, in ITAT’s opinion, the statute should be construed liberally.
  • Since the provisions permit economic growth has to be interpreted liberally, restriction on it too has to be construed so as to advance the objective of the provisions not to frustrate it.
  • Accordingly, ITAT was of the opinion that the assessee has invested the sale consideration on transfer of Capital Asset in purchasing a new residential property in the name of the married widowed dependent daughter of the assessee and also legal heir of the assessee.
  • Accordingly, ITAT directed the Assessing Officer to grant exemption u/s. 54F on the amount invested in purchase of residential house in his daughter’s name.
  • Pertaining to disallowance of selling expenses, the assessee had not furnished the full details of selling expenses before the lower authorities.
  • Hence in the interest of justice, ITAT remitted this issue to the file of AO for fresh adjudication and with a direction to the assessee to furnish the details before the AO

In conclusion, the Income Tax Appellate Tribunal (ITAT), has ruled that amount invested in purchase of residential house in daughter’s name is eligible for exemption under section 54F of the Income Tax Act, 1961

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