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August 14, 2020

Section 54F Exemption cannot be denied if New Purchase made in Sons Name & even if he default on Home Loan

by Rubina Dsouza in Income Tax

Section 54F Exemption cannot be denied if New Purchase made in Sons Name & even if he default on Home Loan

Introduction

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amount of capital gains is required to be invested temporarily in the Capital Gains Account Scheme which can be easily withdrawn at the time of investment in the specified instrument.

Let us refer to the ITAT order in the case of Goulikar Jawaharlal Vs ITO (ITAT Hyderabad) which dealt with the denial of exemption of Section 54F.

Facts of the Case:

  1. Assessee is an individual engaged in the business of selling mutton and sheep, filed his return of income.
  2. Initially the return was processed u/s 143(1) of the Act, subsequently the case was taken up for scrutiny wherein the AO disallowed the claim of deduction U/s. 54 of the Act.
  3. It was observed that the assessee had admitted sale of his 1/3rd share in the immovable property and after claiming indexed cost of acquisition the assessee had computed Long Term Capital Gains (LTCG).
  4. Further the assessee claimed deduction for the amount u/s 54F of the Act with respect to the new semi finished residential house purchased vide sale deed executed in the name of the assessee’s son.
  5. It was further observed that the assessee’s son had purchased the new residential house from the loan obtained by him from HDFC Bank.
  6. The AO opined that since the sale proceeds were not deposited in the capital gain scheme account and also the new asset purchased was not sourced from the sale consideration received by the assessee, the assessee is not eligible for deduction U/s. 54F of the Act.

Let us first refer to the Provisions of Section 54F before we move ahead:

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:

  1. 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
  2. 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

Provided that nothing contained in this subsection shall apply where

1.the assessee,

i. owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or

ii. purchases any residential house, other than the new asset, within a period of 1 year after the date of transfer of the original asset; or

iii. constructs any residential house, other than the new asset, within a period of 3 years after the date of transfer of the original asset; and

2. the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”

Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]

1.Aggrieved with the order of AO, assessee appealed before the CIT(A).

2. On appeal, before the CIT (A) the assessee made the following submission:

i. The assessee had paid advance towards purchase of residential house property and an unregistered sale agreement was also executed.

ii. The property was subsequently registered in the name of his son.

3. However, the CIT (A) rejected the submission of the assessee and confirmed the order of the AO by observing as follows:

i. There was no date of issue of stamp paper on the deed of agreement of sale.

ii. It was clear that the agreement of sale was fabricated to create evidence that the appellant advanced an amount, so that he will be entitled to benefit u/s 54.

iii. In the sale deed executed at a later date, no reference was made to the advance paid initially,

iv. As per sale deed the property was purchased by appellant’s son by obtaining loan from HDFC Bank.

v. In the sale deed no reference is made to the agreement of sale executed previously.

4. In view of the above discrepancies, CIT(A) was of the opinion that no advance was paid by appellant .

5. Therefore, in the absence of any evidence of payment of advance and also due to unexplained discrepancies the action of the AO in denying benefit u/s 54 was confirmed by the CIT(A)

6. Aggrieved with the order of the CIT(A), assessee appealed to the Income Tax Appellate Tribunal (ITAT)

Submissions by Both the Parties before the ITAT

  1. The assessee submitted that the entire sale proceeds were utilised for the purchase of the residential house property in the name of his son.
  2. Asseessee also relied on the decision of the Delhi High Court in the case of CIT-Tax vs. Kamal Wahal wherein it was held that the benefit of deduction U/s. 54F of the Act shall be available to the assessee even if the new residential house is purchased in the name of his spouse.
  3. Assessee further submitted that the loan was obtained from the HDFC bank subsequent to the payment made for purchase of the property and therefore the source for the purchase of the new residential property was from the sale proceeds of the asset sold by the assessee.
  4. It was further submitted that the new asset was purchased by the assessee was within the due date of filing of the return and therefore there was no statutory obligation to deposit the sale proceeds in the capital gain scheme account.
  5. It was therefore requested that the benefit of deduction U/s. 54F of the Act may be granted to the assessee.
  6. The Departmental Representative on the other hand relied on the orders of the Revenue Authorities and prayed for confirming the same.

Observations of ITAT

  1. From the facts of the case it was apparent that the sale proceeds received by the assessee were utilised for purchase of the new residential property in the name of his son.
  2. The new asset was also purchased within the due date of filing of the return by the assessee.
  3. Therefore, the assessee was not bound to deposit the sale proceeds in the capital gain scheme account.
  4. Further the bank loan obtained by the assessee’s son from the HDFC Bank did not appear to be the source for the purchase of the new residential house by the assessee’s son.
  5. Violations made by the assessee’s son with respect to the terms of loan agreement entered with HDFC Bank towards the purchase of the residential house was of no relevance as far as the Income Tax Act is concerned for granting deduction U/s. 54 of the Act.
  6. Penal action against such violation if any will initiated by the Bank, as per the Banking Regulations Act or as per the terms of the agreement between them and not by the Revenue.
  7. Moreover, the case decided by the Delhi High Court had also held that “wherein the assessee purchases new house in the name of his wife and not in the name of any stranger who was unconnected with him, exemption cannot be denied if entire investment had come out of proceeds of old property”.
  8. From the above it was clear that the assessee had not violated any of the provisions mentioned in section 54F of the Act in order to be denied for the benefit of deduction.
  9. Therefore, ITAT hereby set aside the order of the CIT (A) on the issue and directed the AO to grant the benefit of deduction U/s 54F of the Act to the assessee.

Therefore, deduction under section 54F cannot be denied if a residential house is purchased in the name of the son of the assessee and not the assessee himself as the house is not in the name of any stranger who was unconnected with the asseessee. Exemption cannot be denied if entire investment had come out of proceeds of old property.

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