1. IntroductionAn 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.
2. Section 54This 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.
3. Holding Period for Under-Construction PropertyThe 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
- The assessee, Keyur Hemant Shah, had sold an apartment on April 4, 2012.
- After working out the indexed cost of acquisition, LTCG was arrived at.
- Following this, the deduction u/s 54F of the Income Tax Act was claimed and the LTCG was reduced further.
- The officer was of the opinion that the flat was purchased by Shah via a Registered Agreement for Sale on March 2010.
- Therefore, his holding period was less than 36 months.
- Hence, the gains resulting from it must be treated as Short Term Capital Gains.
- Shah defended it by submitting that the flat was purchased via an Allotment Letter dated February 26, 2008, upon which a substantial payment was made by July 24, 2008.
- Hence, the resultant holding period would amount to more than 36 months, making it a long term capital gain.
4. Case Where Construction Is Not Completed In Three YearsThe 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 Facts
- Sardarmal and Shanthilal Kothari had invested their long term capital gains in residential house property and claimed deduction u/s 54F
- Three years later, the assessing officer visited the property and found it still wasn’t completed upon which the officer denied the 54F benefits
- The Income Tax Appellate Tribunal in Chennai ruled in favour of the Kothari’s
5. Calculation Of Capital Gains On Sale Of Under-Construction PropertyMr 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|