An investment in property involves a lot of thought not only in the financial sense but also in an emotional one. After all, it is one of those decisions that is made after giving considerable time, thought and money.
Capital gains on the sale of a property is one of the aspects of Income Tax that always sparks a debate. There has been a difference of opinion most times, leading to different court judgements in different cases. All in all, it is a tricky business.
This section of the Income Tax Act deals with exemptions availed on the sale of house property. The capital gains obtained from this sale may be re-invested into buying or constructing up to two other house properties. The exemption of two houses was introduced in the Budget 2019, prior to which the exemption was limited to 1 house.
The main purpose of allowing exemptions u/s 54 is to encourage individuals to buy or to construct houses. However, one of the conditions under this section is that if the house is bought through capital gains is to be built or is under construction, the same must be completed within 3 years of the investment being made. This is applicable to both a flat under construction on purchase and a house to be built on a plot purchased.
The holding period is an essential component in the calculation of capital gains tax. Since the Income Tax Act has had certain ambiguities with regard to the calculation of holding period for sale of under-construction property, clarity has been provided on the same recently with regard to a decision taken by the Mumbai bench of Income Tax Appellate Tribunal. The case being referred to here is Assistant Commissioner of Income Tax vs Keyur Hemant Shah, April 2nd, 2019.
Facts of the Case
Ruling by the Income Tax Appellate Tribunal The Bombay High Court in the case of PCIT Vs. Vembu Vaidyanathan [ITA No. 1459 of 2016], held in January 2019 that the date of allotment would be treated as the date of acquisition. The ITAT reiterated the same principles.
Example:- Chethan books a flat on 5th June 2016, pays the booking amount on the same date. An allotment letter is issued by the builder on the same date. An agreement to sell is entered into by Chethan and the builder on 7th July 2016. Chethan sells the under-construction property to Mr. Darwin on 25th August 2019. The holding period is calculated based on the date of the letter of allotment, which in this case is the 5th of June, 2016.
The Income Tax Act, in itself, is not very clear on the stand to be taken in the event where the construction of the house is not completed in three years. Here, “house” refers to the house bought through the proceeds from capital gains. Legal precedent has been set through several court cases on the avail of LTCG exemption under Section 54 and 54F even if the house is not constructed completely within 3 years of purchasing it.
Case Law:- Commissioner of Income Tax vs. Sardarmal and Shanthilal Kothari, 2008
“In order to claim benefit under Section 54F, the assessee needn’t complete construction of the house and occupy the same. It is sufficient that the assessee establishes that the entire net consideration is invested within the stipulated period.”
Mr Kiran acquired an under-construction property for Rs. 40 lakhs on the 18th of June, 2016. He received possession of the property from the builder on 2nd of September, 2017. Mr Kiran then sold it on the 15th of February, 2019 for Rs.80 lakhs. He incurred expenses of Rs. 65,000 on transfer of property.
|Less:- Selling Expenses||65,000|
|Less:- Indexed Cost of Acquisition||(40,00,000 x 280/264)||42,42,424|
|Long Term Capital Gains||36,92,576|
Therefore, the ruling Hemant Shah case provided much clarity as to the taxation of capital gains arising from the sale of an under-construction property. In other words, the basis for deciding whether to treat the above as a short term gain or a long term gain is now established firmly. Also, from FY 2017-18, in the case of immovable property, it is considered long term capital asset when held for a period of more than 2 years.