© All rights reserved
Price : ` 3495
Law stated in this book is amended by the Finance Act, 2025
Published by :
Taxmann Publications (P.) Ltd.
Sales & Marketing : 59/32, New Rohtak Road, New Delhi-110 005 India
Phone : +91-11-45562222
Website : www.taxmann.com
E-mail : sales@taxmann.com
Regd. Office : 21/35, West Punjabi Bagh, New Delhi-110 026 India
Printed at :
Tan Prints (India) Pvt. Ltd.
44 Km. Mile Stone, National Highway, Rohtak Road Village Rohad, Distt. Jhajjar (Haryana) India
E-mail : sales@tanprints.com
Disclaimer
Every effort has been made to avoid errors or omissions in this publication. In spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition. It is notified that neither the publisher nor the author or seller will be responsible for any damage or loss of action to any one, of any kind, in any manner, therefrom. It is suggested that to avoid any doubt the reader should cross-check all the facts, law and contents of the publication with original Government publication or notifications.
No part of this book may be reproduced or copied in any form or by any means [graphic, electronic or mechanical, including photocopying, recording, taping, or information retrieval systems] or reproduced on any disc, tape, perforated media or other information storage device, etc., without the written permission of the publishers. Breach of this condition is liable for legal action.
For binding mistake, misprints or for missing pages, etc., the publisher’s liability is limited to replacement within seven days of purchase by similar edition. All expenses in this connection are to be borne by the purchaser. All disputes are subject to Delhi jurisdiction only.
Circumstances where section 45(4) can be invoked
Section 45(4) and revaluation of asset
to retiring partner by remaining partners
to retiring partner by incoming partner
Section 45(4), revaluation of the asset and conversion into company
Section 45(4) and reduction in share capital
COA of the asset received by retiring partner
Section 45(4) and transfer of stock-in-trade to partner
Whether a case of dissolution or retirement
Section 45(4) and scope of the term ‘otherwise’
Section 45(4) and section 50C
Section 45(4) and transfer of unquoted shares to retiring partner
Section 45(4) and dispute before a Court
Section 45(4), retirement of a partner and goodwill
AND CHECK
CAPITAL GAINS ON RECONSTITUTION OF FIRM/ SPECIFIC ENTITY- SECTIONS 45(4) AND 9B
Conditions for invoking section 9B
Conditions for invoking section 45(4)
Constitutional validity of section 9B
Retrospective effect of section 9B
Section 9B and section 50C/43CA/56(2)(x)(b)
Section 9B v. section 48
Section 9B and transfer of stock in trade
Interplay of section 9B and section 45(4)
Mechanism of operation of section 9B and section 48(iii)
Conditions for attributing capital gains
CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY COMPANIES IN LIQUIDATION - SECTION 46
46A v. Section 47(iv)
46A v. Section 10(34A)
46A, 10(34A), 115QA and 115-O
Capital gains on equity shares received by company in gift
Section 47(iii) applies to actual gift 468
Exemption u/s 54 and gift of new asset 469
Conditions for applicability of section 47(iv) 470
The law as on the date of execution of the agreement to apply 470
Transfer of warrants/shares and section 47(iv) 471 iv) 472
Transfer of shares between holding and subsidiary company 472
Section 47(v) not to apply to transfer of stock-in-trade 481 vii) not available on part transfer of shares 481
Section 47(viii) and transfer of agricultural land 482
Capital gains on conversion of bonds/debentures into shares 482
Membership of a Stock Exchange 484
Section 47(xiii) and sale of shares to company 485
Capital gains under the conditions of section 47(xiii) 485 486
Capital gains and violation of conditions u/s 47(xiii) 486
Depreciation on revalued intangible assets received by a private 487 Conditions laid down u/s 47(xiii) are mandatory
Revaluation of assets in credit into partner’s account
Section 47(xiiib) not to apply on grant of loan
Ingredients of section 47(xiiib)
gains on succession of proprietary concern by a company
WITHDRAWAL OF EXEMPTION OF CAPITAL GAINS IN CERTAIN CASES- SECTION 47A
Section 47A(3) v. section 47(xiii)
Time of allotment of shares in case of succession by a company 503
Charge of capital gains on violation of conditions u/s 47(iv)/47(v)/ 47(xiii)
18
MODE OF COMPUTATION OF CAPITAL GAINS - SECTION
48
Full value of consideration 523
Receipt by seller/payments by purchaser not part of FVC 533
Full value of consideration and section 50C 534
Year when sale consideration is to be used for computing capital gains 535
Cost of acquisition 535
Expenses not to form part of COA 544
Legal fees as part of COA 547
Capital gains on transfer of TDRs 548
Concept of wholly and exclusively 549
Expenditure to be included in computation of capital gains 551
Expenditure not be considered for computation of capital gains 556
Cost of improvement 561
Expenditure to fall or not to fall as part of COI 562 Miscellaneous 567
INDEXATION - SECOND PROVISO TO SECTION
Indexation in case of conversion of capital asset into stock-in-trade
Indexation in the case of transfer of preference shares 581
Indexation in the case of conversion of units of UTI into bonds 582 582
Indexation in case of inheritance of property 583
Indexation on cumulative sale of original/bonus shares 583
Indexation to asset in remand proceedings 584
Indexation from date of payments/allotment
Indexation on sale of shares allotted by BSE
in the case of JDAs
COST WITH REFERENCE TO CERTAIN MODES OF ACQUISITION - SECTION 49
COA to the previous owner to be the COA to the assessee 621
Determination of COA in the cases of different transferees 622
Amendment in section 49(1)(iii) is not retrospective effect 635
Capital gains on sale of right to purchase additional shares 636
Capital gains on sale of properties earmarked for the directors 636 637 638 Determination of period of holding of an asset
CAPITAL GAINS AND FAMILY SETTLEMENTSECTION 49(1)(i)
Family settlement as partition
Distribution in family settlement is not a transfer 652
Liability to capital gains in family settlement 653
Stock-in-trade received in family settlement is not capital asset 656
Transfer of shares by a company in family arrangement 656
No capital gains on provision of owelty 657 657
Section 47(i) is not applicable on money received after valuation 658
Family settlement and section 56(2)(v) 659
Family settlement and section 56(2)(vii) 660
Family settlement and section 2(22)(e)/56(2)(vi) 660
Family settlement and section 2(47)(v) 661
Family arrangement and section 54F 661
Family settlement, difference in book value and FMV, whether unaccounted transaction 662
Family settlement, buy-back of shares and expenditure
CAPITAL GAINS ON DEPRECIABLE ASSETSSECTIONS 50 AND 50A
Capital gains on depreciable assets before insertion of section 50 673
Essential conditions u/s 50 674
For invoking section 50 claim and allowing of depreciation 674
Difference between section 50(1) and 50(2) 676
Interrelationship between sections 50, 48, 49 & 55(2) 677
Estimated income and section 50 677
Section 50 and use of the asset in business 678
Section 50 and block of asset 678
Goodwill, section 50 and Rule 8AC 681
Section 50 and distribution of depreciable assets among partners 683
Section 50 and sale of undertaking 684
Section 50 and sale of both tangible and intangible assets 686
Section 50 and claim of exemptions u/s 54E/54F/ 54EC 686
Section 50 and set off of brought forward losses 687
Substitution of FMV u/s 50 688
Section 50 and taxability of compensation 689
Section
Section
Section
Section 50A and section 48
Section
CAPITAL GAINS IN CASE OF MARKET LINKED DEBENTURE - SECTION 50AA
CONTENTS
Stamp duty value, Fair market value and determination of fair market value 741
Section 50C and full value of consideration 746
Section 50C and cost of acquisition 747
Scope of the word ‘assessable’ 748
Objections to stamp duty value 750
Reference to DVO and opportunity by DVO 752
Adoption of stamp duty valuation as full value of consideration 757
DVO’s report and challenge to it 765
Tolerance limit 767
Section 50C and joint development agreement 770
Section 50C and development rights 774
Section 50C and rural agricultural land 775
Section 50C and transfer by way of gift/will/merger 776
Section 50C and exemption u/s 54/54F/54EC 777
Section 50C and transfer of shares 780
Section 50C and leasehold rights, Kashtkari Rights and other rights in immovable property 781
Section 50C and section 56(2)(vii)/56(2)(x) 784
Interplay of sections 50, 50C and 43(6) 787
Section 50C and depreciable assets 788
Section 50C and year of chargeability 792
Section 50C and section 263 793
Section 50C and real income 794
Section 50C and writ 795
Section 50C and section 69B 796
Section 50C and stock in trade 796
Section 50C and section 45(3) 799
Section 50C and section 45(4)/49 800
Section 50C and mediatory 801
Section 50C and reopening of assessment 801
Section 50C and penalty for concealment 802
Section 50C and auction sale 802
Section 50C and unregistered sale 802
Section 50CA and date of its applicability
Retiring partner given unquoted equity shares and section 50CA
Incoming partner bringing unquoted equity shares and section 50CA
Date of acquisition of property 844
Investment of sale consideration of two or more houses 846
Exchange of old house with new house 846
Circumstances where exemption u/s 54 is available/not available 848
Exemption u/s 54 for transactions covered under development agreement 860
Forfeiture of exemption u/s 54 860
Reckoning the date of acquisition for indexation 860
SDV of old house is not the FVC for investment in new house 861 SUMMARY AND CHECK
FOR TAX PLANNING 861
EXEMPTION ON INVESTMENT IN AGRICULTURAL LAND - SECTION 54B
Entities to whom section 54B is applicable 868
Section 54B and short term/long term capital asset 870
Section 54B and agricultural land/income 871
Section 54B and deposit in CGAS account 871
Section 54B and investment in new agricultural land 872
Section 54B and penalty for concealment 878
Section 54B and power of Tribunal to estimate COI 879
Consequence to failure to invest in new asset 879
Section 54B and reckoning the period of two years 880
Section 54B and investment in non-agricultural land 880
Availability of exemption u/s 54B as well as u/s 54F 880
Section 54B and section 263 881
Section 54B and partition of ancestral agricultural land 881
Exemption u/s 54B to a builder 882 882
Section 54B and legal heir 883
Section 54B and purchase of new asset prior to sale of old asset 883
Section 54B, investment in new asset and DLC rates 883
SUMMARY AND CHECK POINTS FOR TAX PLANNING 884
COMPULSORY ACQUISITION AND EXEMPTION FOR INVESTING IN NEW INDUSTRIAL UNDERTAKINGSECTION 54D
Meaning of ‘industrial undertaking’ for exemption u/s 54D 890
Change of nature of asset on subsequent development 891
Claim of exemption and mentioning wrong section 892
SUMMARY AND CHECK POINTS FOR TAX PLANNING 892
32
EXEMPTION ON INVESTMENT IN SPECIFIED ASSET- SECTION 54E
Exemption allowed even on transfer of depreciable asset 900
Constitutional validity of Section 54(1C) 900
Transfer of property to take effect on date of registration 901
Source of funds used for investment not material 902
FVC to include amount of discharged mortgage 902
No exemption if impugned transaction not regarded as transfer 902
Manner of reckoning period of 6 months 903
Exemption u/s 54E on enhanced compensation 904
Reopening not valid if no claim made by assessee 905
Discounted value of interest on bonds chargeable in the year of receipt 905
Exemption available even if investment made in names of partners 905
Exemption only on sale of lot of shares yielding capital gains 905 906 907
Exemption only after allowing deduction u/s 48(2) from LTCG 907
SUMMARY 907
33
EXEMPTION ON INVESTMENT IN SPECIFIED ASSET- SECTION 54EA
Exemption u/s 54EA and joint development agreement (JDA) 911
Exemption u/s 54EA and sale of business along with goodwill 911
Exemption u/s 54EA on enhanced compensation for land 912
Exemption u/s 54EA on sale of shares held under stock options 913
Exemption u/s 54EA on surrender of tenancy rights 913 SUMMARY 914
EXEMPTION ON INVESTMENT IN SPECIFIED ASSET- SECTION 54EB
Manner of reckoning of period for making investment 918
Exemption u/s 54EB when consideration received in instalments 918 SUMMARY 918
EXEMPTION ON INVESTMENT IN CERTAIN BONDS - SECTION 54EC
Section 54EC and sale of TDRs 927
Reckoning of period of six months for investment 928
Section 54EC and period of holding of capital asset 931 932
Reasonable cause for delay in making investment 933
Maximum limit of investment 933
Investment made jointly with assessee permissible 935
Investment in FDs not eligible for exemption 935
Exemption permissible under both sections 54EC and 54/54F 935 936
Firm to get exemption even if investment made in names of partners 936
No exemption if investment made before transfer of original asset 937
Exemption to be claimed before set off of capital loss 937
Separate exemption for land and building sold together 938
Section 54EC and section 115JB 938
Section 54EC and penalty for concealment 939
Section 54EC and section 64 939
Exemption in respect of sale of land held as capital asset 939
Restriction of exemption upto amount of investment 940
Exemption on sale of client relationships and goodwill of business
Section 54EC and section 45(4) 941
CAPITAL GAIN ON TRANSFER OF CERTAIN LISTED SECURITIES/UNITS - SECTION 54ED
EXEMPTION ON INVESTMENT IN UNITS OF A SPECIFIED FUND - SECTION 54EE
Section 54EE deserves liberal construction 951
Scope of applicability of section 54EE 951
Investment in new asset can be from other sources/ borrowings 952
Maximum amount of exemption u/s 54EE 953
Manner of reckoning the eligibility period of 6 months 953 953 No denial of exemption if investment made jointly 954
entailing withdrawal of exemption u/s 54EE 955
EXEMPTION FOR INVESTMENT IN NEW RESIDENTIAL HOUSE - SECTION 54F Various conditions for claiming exemptions u/s 54F 965 54F can be claimed stock options 967
Tenancy rights 969
Sale of allotment letter 970
Section 54F and section 64
Section 54F and owning of more than one residential house
Section 54F and investment in house owned by father
Section 54F and cancellation of agreement to sell
Withdrawal of exemption u/s 54F(3)
Residential house on commercial land
Investment of net consideration/capital gains in single units or multiple units 1018
Claim of Exemption at different stages of assessment and appeal 1024
Purchase/construction of house in the name of close relatives or inserting their names 1026
Exemption even if wrong section or no section is mentioned 1032
Exemption if agreement with builder failed and money refunded 1033
Exemption if investment in new asset is staggered 1034
Reckoning date of purchase or allotment 1035
Source and Period of investment made in new asset 1037 Making investment in new asset in prescribed time 1041
EXEMPTION FROM CAPITAL GAINS TAX AND CAPITAL
EXEMPTION ON SHIFTING OF INDUSTRIAL UNDERTAKING FROM URBAN AREA - SECTION 54G
Relevant evidence to prove shifting of industrial undertaking 1080 Manner and scope of investment of capital gains in new asset u/s 54G 1081
Deposit in CGAS account made within time limit available u/s 1082
Tax treatment of unutilized CGAS deposit in the hands of legal heirs 1083
Section 54G and purchase of land/building for business at new place 1083 1084
Essential conditions for availing exemption u/s 54G 1084
SUMMARY AND CHECK POINTS FOR TAX PLANNING 1085
42
EXEMPTION ON SHIFTING OF INDUSTRIAL UNDERTAKING TO SEZ - SECTION 54GA
Essential conditions for claiming exemption u/s 54GA 1090
Preference for adjustment of exemption u/s 54GA against capital gains 1092
Circumstances leading to withdrawal of exemption u/s 54GA 1092
Tax treatment of unutilised CGAS deposit in the hands of legal heirs 1093
Common principles/ propositions applicable to section 54GA 1093
Filing of return mandatory to claim exemption 1096
SUMMARY AND CHECK POINTS FOR TAX PLANNING 1096 43
EXEMPTION FOR INVESTMENT IN START-UP - SECTION 54GB
Time limit for investing capital gains in eligible company 1109
Time limit for eligible company to invest in the new asset 1109
How to determine cost of the new asset 1109
Grounds for withdrawal of exemption u/s 54GB 1110
Illustration to explain how section 54GB works 1111
Common principles/propositions for exemption applicable to section 54GB 1113
SUMMARY AND CHECK POINTS FOR TAX PLANNING 1116
44
EXTENSION OF TIME FOR INVESTMENT IN CASES OF COMPULSORY ACQUISITION - SECTION 54H 1121
Liability to Capital Gains when compensation received in instalments 1122
Remedial action available u/s 155(11) if capital gains charged 1122
COST OF ACQUISITION IN CERTAIN CASES - SECTION 55
Financial assets covered u/s 55(2)(aa) 1139 aa) 1140
Determination of cost of acquisition u/s 55(2)(ac) 1140
Determination of cost of acquisition u/s 55(2)(b)(iii) 1141
Determination of cost of acquisition u/s 55(2)(b)(v) 1141
Determination of cost of acquisition of any other capital asset 1142
Cost of acquisition of bonus/right shares/detachable warrants 1142
Determination of cost of acquisition of units of business trust 1146
Determination of cost of acquisition on conversion of securities 1146
Determination of cost of acquisition on amalgamation 1147
Determination of cost of acquisition in case of demerger 1147
Cost of acquisition of transactions between holding and subsidiary companies 1148
Cost of acquisition on conversion of company to LLP 1149
Treatment of advance money forfeited 1149
Cost of acquisition of immovable property covered u/s 56(2) 1149
Cost of acquisition as cost to previous owner 1150
Meaning of ‘previous owner’ 1151
Cost of acquisition in the case of a joint development agreement 1151
Cost of acquisition in case of enhanced compensation 1152 1152
Cost of acquisition in case of transfer of a depreciable asset 1152
Determination of cost of acquisition in case of slump sale 1153
Cost of acquisition of goodwill, trademark or brand name 1153
Cost of acquisition in case of transfer/surrender of tenancy rights 1155 1155
Determination of cost of acquisition of patent 1156
Determination of cost of acquisition of IPRs 1157
Cost of acquisition of licences etc. for setting up a plant 1157 1158
CONTENTS
Cost of acquisition in case of transfer of ‘jagirs’ 1158
Cost of acquisition of gold received on redemption of Gold Bonds 1159
Relevant factors in determination of cost of acquisition u/s 55(2)(a) 1159
Cost of acquisition of shares issued against surrender of BSE card 1160
Relevance of value of asset declared in wealth tax records 1161
Concept of Fair Market Value (FMV) in section 55 1162
Relevance of report of registered valuer/Departmental valuer 1162
Ground for invoking section 55(3) 1163
Salient features of exercising option u/s 55(2)(b) 1164 1166
Relevant factors while determining cost of acquisition 1167
Salient features of cost of improvement u/s 55(1)(b) 1169
Issues related to COA of unlisted shares 1172
SUMMARY AND CHECK POINTS FOR TAX PLANNING 1173
REFERENCE TO VALUATION OFFICER - SECTION 55A
Scope of reference to DVO u/s 55A and section 142A 1179
Procedure to be followed by DVO and his powers u/s 55A 1182
Reference to DVO u/s 55A by investigation wing 1183
Reference to DVO by the AO u/s 55A 1184
Validity of reference to DVO if report received after assessment 1185 1185
Addition u/s 153A on the basis of DVOs report 1186
FMV determined by DVO cannot be substituted for FVC u/s 48 1186
DVO’s report as basis for action u/s 148 1187
Reference to DVO and rejection of books of account by AO 1187
Difference between reference to DVO u/ss 142A and 55A 1188
Reference to DVO valid even if declared value is more than FMV 1190
Amendment made in section 55A(a) is prospective 1191
Reference to DVO permissible for purpose of section 45(4) 1191 1192
Prior hearing to assessee not required for reference to DVO 1192
DVO’s report open to challenge by the assessee 1192 1193 1193
AO can estimate FMV if DVO fails to furnish report in time 1193
Reference to DVO only after due application of mind by AO 1194
No reference to DVO u/s 55A after completion of assessment 1194
Power to remand case on objections to DVO’s report raised in appeal 1195
Reference u/s 55A does not extend limitation 1195
SUMMARY AND CHECK POINTS FOR
47
SET OFF OF CAPITAL GAINS/LOSS - SECTIONS 70, 71, 74 AND 80 Set
1195
48
TAXATION OF SHORT-TERM/LONG-TERM CAPITAL GAINS - SECTIONS 111A, 112 AND 112A
Section 111A does not apply to STCG 1251
(i) On transfer of preference shares 1251
(ii) 1251
(iii) On transfer of unlisted shares 1252
Applicability and scope of section 111A 1252
Deductions allowed from STCG 1253
Deductions not allowed u/s 111A 1254 1254
No credit of STT available to assessee 1254
No capital gains on disgorgement of sale proceeds 1255
Section 111A applies not on trading but on investment in shares 1255
Section 111A does not apply where DTAA is attracted 1256
of ‘zero coupon
Effect of proviso to section 112(1)
Tax rates u/s 112 apply to private discretionary trust
Tax rate on LTCG arising on transfer of shares allotted in public issue 1263
Section 112(1) attracted even if depreciable assets are sold
GAINS TAX ON OFFSHORE FUNDS/NON-RESIDENT PERSON/ FIIs IN RESPECT OF
SECTIONS 115AB, 115AC, 115ACA, 115AD
Distinction between units and securities 1301
Scope of applicability of section 115AD 1302 1303
Tax rates for LTCG on sale of shares u/ss 112 and 112A 1303
FIIs assessable on LTCG on transfer of securities only u/s 115AD 1304 1304
FIIs not barred from trading in derivatives 1305
Income of FIIs from dealing in derivatives taxable as capital gains 1305 1306
Tax rate applicable to interest income of an FII 1306
Taxability of interest income of foreign company on FCCBs 1307
Chargeability of capital gains on conversion of debentures/bonds 1307
Section 115AD and income of FIIs from sale of portfolio investments 1308
Section 115AD and Interest earned by FII on NCDs 1308 1309
Section 48 and section 111A/115AD 1310 1310
AND
ALTERNATIVE TAX REGIME IN THE CASE OF NON-RESIDENT INDIANS- SECTIONS 115C, 115D, 115E, 115F, 115G, 115H AND 115-I
Section 115D v. section 88 1328 1329
Section 115E and section 115H 1329
Section 115E and transfer of FE asset from one bank to another 1330
Section 115E and section 88 1330
Section 115E and declaration in the return 1331
Section 115E and short term capital gains 1331
Section 115E and interest income from NRO account 1332 1333
Nature of bonus share is same as that of original share 1333 1334
Transactions not regarded as transfer in the case of NRI also 1334
Section 115C/115H and nationalised bank deemed to be an Indian company 1336
AND
CAPITAL GAINS AND INTERNATIONAL FINANCIAL SERVICES CENTRE (IFSC)
Persons permitted to deal in securities listed in IFSC 1355
Kind of securities traded through the RSEs in IFSC 1356
Transactions in IFSC not treated as ‘transfer’ u/s 47 1359 1361
Capital Gains tax on transactions in IFSC charged at concessional rates 1364
AND CHECK POINTS FOR TAX PLANNING 1366 53
CAPITAL GAINS UNDER INTERNATIONAL TAXATION
Scope of Article 13 of DTAA relating to capital gains 1378
Capital gains under Article 13 not always charged in source country 1379 1379
Taxability of units of mutual funds under DTAA 1382
Taxation of capital gains arising to Indian resident in a foreign country 1382 1383 1383
Cost of acquisition of shares received on redemption of GDRs/FCCBs 1384
Tax rates for charging capital gains in India 1384 v 1386 1387
Scope of the expression ‘movable property’ used in Article 13(2) 1388
Taxation under I.T. Act in absence of DTAA 1390
Parameters for place of effective management to locate PE 1391 1391 1392 1393
Tax treatment of capital gains on transfer of immovable property 1393
Nature of income of FIIs from dealings in securities 1394 1395
No capital gains on notional or hypothetical basis 1395
Carry forward of capital losses allowable to a Mauritian company 1396 1396 1397 1399
Taxability of compensation received by a foreign national 1399
Capital gains arising to PE in India to be taxable in India 1399
Relevance of situs of capital asset for tax treatment of capital gains 1400 Capital gains arising to resident of Mauritius on transfer of CCDs 1400
MISCELLANEOUS COMMON QUERIES
Claim of exemption 1435
(i) Claim of exemption u/s 54/ 54F 1435
(ii) During appellate proceedings 1436
(iii) On enhanced compensation 1436
(iv) 1437
(v) Only on sale of land attached with the house 1437
(vi) If new house is subsequently used for commercial purposes 1437
(vii) On sale of several houses and investment into one 1437
(viii) On purchase or construction of new house before sale of old house 1437
(ix) On exchange of new house for old house 1438
(x) 1438
(xi) On purchase of a house with tenancy 1438
(xii) cum residence 1439
(xiii) On making a claim under wrong section 1439
(xiv) On sale of land and building constructed thereon 1439
(xv) On getting the house from the builder beyond stipulated period 1440
(xvi) On purchasing new residential house in joint name with wife 1440
(xvii) On purchase of the new house for the purposes of hostel 1440
(xviii) Purchase of farmland after sale of old farmland through plotting 1441
(xix) On purchase of new house outside India 1441
(xx) On sale of tenancy rights 1441
(xxi) On sale of house property received in gift 1441
(xxii) On sale of freehold house which was earlier on lease 1442
(xxiii) On sale of house in the joint name but capital gains de clared by husband 1442
(xxiv) On sale of house built on leasehold land 1442
(xxv) Claim by a minor 1442
(xxvi) On extension of existing house 1442
(xxvii) On investment in two units forming one residential house 1443
CONTENTS
CGAS withdrawals taxable after three years 1472
Development agreements constitute transfer under section 2(47) 1473 1474 1474
PMS expenses allowed as deduction under section 48 1475
FMV of shares can be assessed if no DCF valuation 1475
Interest on land compensation taxable under other sources 1476
Section 54F deduction allowed for property in spouse’s name 1477 1477
Section 54F deduction allowed despite delayed sale deed 1478
Holding period of liquidated assets includes company’s ownership 1478
Appeal delay can be condoned if order not served correctly 1479
Section 56(2)(vii)(b)(ii) not retrospective for land transactions 1480
Share transfers in amalgamation not taxable under section 56(2)(vii)(c) 1480 viib) 1481
DCF valuation cannot be arbitrarily rejected 1482 1482 1483 1483
47(xiii) 1484
Interest on temporarily parked funds is a capital receipt 1485
Development agreement income taxed as capital gains 1485 1486
No section 153A additions for capital gains, if no incriminating search material 1487 1487
Assessee can challenge stamp duty valuation under section 56(2) (vii)(c) 1488 1489
treasury income 1490
Commissioner (Appeals) must decide appeals on merits 1490
Section 54F deduction cannot be denied if supporting documents exist 1491
Section 54F deduction allowed in reassessment return 1492
Exemption from Investment in Residential House [Section 54] [Basic Conditions]
A. INTRODUCTION:
When an individual or a Hindu Undivided Family (HUF) transfers a building or land appurtenant to it, which qualifies as a residential house and is a long-term capital asset, capital gains tax is typically applicable. However, the law provides an exemption if the long-term capital gains resulting from the transfer of the original residential house are reinvested in purchasing or constructing a new residential house within India, under specific conditions and within a set timeframe. This chapter outlines the fundamental conditions required to qualify for this exemption and circumstances that can lead to its forfeiture, drawing insights from various judicial decisions. Additionally, a more detailed examination of the conditions surrounding the investment in a new residential house is presented in a separate chapter.
B. THE PROVISION:
1. Section 54:
“Profit on sale of property used for residence.
54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India, then, instead of the capital gain being charged to income-tax as income
FROM INVESTMENT IN RESIDENTIAL HOUSE
of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or
(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45 and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain:
Provided that where the amount of the capital gain does not exceed two crore rupees, the assessee may, at his option, purchase or construct two residential houses in India, and where such option has been exercised,—
(a) the provisions of this sub-section shall have effect as if for the words “one residential house in India”, the words “two residential houses in India” had been substituted.
(b) any reference in this sub-section and sub-section (2) to “new asset” shall be construed as a reference to the two residential houses in India:
Provided further that where during any assessment year, the assessee has exercised the option referred to in the first proviso, he shall not be subsequently entitled to exercise the option for the same or any other assessment year.
Provided also that where the cost of new asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purposes of this sub-section.
(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited, shall subject to the third proviso to sub-section (1), be deemed to be the cost of the new asset:
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—
(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.
“Provided further that the capital gains in excess of ten crore rupees shall not be taken into account for the purposes of this sub-section.”
Explanation.—Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.”
2.
Amendment by Finance (No. 2) Act, 2014: (As explained in CIRCULAR NO. 1/2015 [F. NO. 142/13/2014-TPL], DATED 21-1-2015)
“20. Capital gains exemption in case of investment in a residential house property
20.1 The provisions contained in sub-section (1) of section 54 of the Income-tax Act, before its amendment by the Act, inter alia, provided that where capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, and the assessee within a period of one year before or two years after the date of transfer, purchases, or within a period of three years after the date of transfer constructs, a residential house, then, the amount of capital gains to the extent invested in the new residential house is not chargeable to tax under section 45 of the Income-tax Act.
20.2 The provisions contained in sub-section (1) of section 54F of the Income-tax Act, before its amendment by the Act, inter-alia, provided that where capital gains arises from transfer of a long-term capital asset, not being a residential house, and the assessee within a period of one year before or two years after the date of transfer, purchases, or within a period of three years after the date of transfer constructs, a residential house, then, the portion of capital gains in the ratio of cost of new asset to the net consideration received on transfer is not chargeable to tax.
20.3 Certain courts had interpreted that the exemption is also available if investment is made in more than one residential house. The benefit was intended for investment in one residential house within India. Accordingly, sub-section (1) of section 54 of the Income-tax Act has been amended to provide that the rollover relief under the said section is available if the investment is made in one residential house situated in India.
20.4 Similarly, sub-section (1) of section 54F of the Income-tax Act has been amended to provide that the exemption is available if the investment is made in one residential house situated in India.
20.5 Applicability: —These amendments take effect from 1st April, 2015 and will accordingly apply in relation to assessment year 2015-16 and subsequent assessment years.”
3. Amendment by Finance Act, 2019:
(As explained in Notes on clauses to Finance Bill, 2019)
“Clause 6 of the Bill seeks to amend section 54 of the Income-tax Act so as to provide relief to the taxpayers having long-term capital gains up to two crore rupees, arising from transfer of a residential house, by affording the assessee a one time opportunity, at his option, to utilise the said amount for the purchase or construction of two residential houses in India instead of one residential house as currently provided.”
4. Amendment by Finance Act, 2023:
25. In section 54 of the Income-tax Act, with effect from the 1st day of April, 2024,––
(a) in sub-section (1), after the second proviso, the following proviso shall be inserted, namely:––
“Provided also that where the cost of new asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purposes of this sub-section.”;
(b) in sub-section (2),––
(i) after the words “amount so deposited shall,” the words, brackets and figure, “subject to the third proviso to sub-section (1)” shall be inserted;
(ii) after the proviso, the following proviso shall be inserted, namely:––“Provided further that the capital gains in excess of ten crore rupees shall not be taken into account for the purposes of this sub-section.”
5. The amendment was explained in “EXPLANATORY NOTES TO THE PROVISIONS OF THE FINANCE ACT, 2023……CIRCULAR NO. 1/2024 [F. No. 370142/38/2023], DATED 23-1-2024” as under:
“Ceiling on the amount of roll over benefit u/ss 54 and 54F:
29. Limiting the roll over benefit claimed under section 54 and section 54F
29.1. Prior to the FA, 2023, the provisions of section 54 and section 54F of the Act allowed deduction on the Capital gains arising from the transfer of long-term capital asset if an assessee, within a period of one year before or two years after the date on which the transfer took place purchased any residential property in India, or within a period of three years after that date constructed any residential property in India. For section 54 of the Act, the deduction was available on the long-term capital gain arising from transfer of a residential house if the capital gain is reinvested in a residential house. In section 54F of the Act, the deduction is available on the long term capital gain arising from transfer of any long-term capital asset except a residential house, if the net consideration
was reinvested in a residential house. These deductions are available subject to certain conditions specified in these sections.
29.2. The primary objective of the sections 54 and section 54F of the Act was to mitigate the acute shortage of housing, and to give impetus to house building activity. However, it has been observed that claims of huge deductions by highnet-worth assessees were being made under these provisions, by purchasing very expensive residential houses, which was defeating the very purpose of these sections.
29.3. In line with the Government’s policy of limiting deductions, FA 2023 has imposed a limit on the maximum deduction that can be claimed by the assessee under section 54 and 54F of the Act. It has been provided that if the cost of the new asset purchased is more than rupees ten crore, the amount exceeding rupees ten crore shall not be taken into account for computing deduction under the said sections.
29.4. Consequentially, the provisions of sub-section (2) of section 54 and sub-section (4) of section 54F that deals with the deposit in the Capital Gains Account Scheme have also been amended. FA 2023 has inserted a proviso to provide that the provisions of sub-section (2) of section 54 and sub-section (4) of section 54F, for the purpose of deposit in the Capital Gains Account Scheme, shall apply only to capital gains or net consideration, as the case may be, up to rupees 10 Crores.
Applicability: These amendments will take effect from 1st April, 2024 and shall accordingly, apply in relation to the assessment year 2024-25 and subsequent assessment years.
C. HIGHLIGHTS OF THE PROVISION:
The provided text outlines various amendments and provisions related to Section 54 of the Indian Income Tax Act, focusing on capital gains from the sale of residential property and their reinvestment. Highlights of the provision are as under:
(i) Eligibility for Exemption:
(i) The exemption under Section 54 is available to individuals or Hindu Undivided Families (HUFs). This benefit can be availed by an assessee on more than one occasions in his lifetime.
(ii) It applies to capital gains from the transfer of long-term capital assets, specifically residential houses or lands appurtenant thereto. It is not applicable to short-term capital gains.
(ii) Income Assessment: The income from such a residential house, whether self-occupied or rented, is assessed under ‘income from house property.’ If rental income is assessed under ‘profits and gains of business or profession,’ the exemption may be denied.
(iii) Conditions for Availing Exemption:
(i) The transferor must purchase or construct a new residential house within specific time frames related to the transfer of the original asset.
(ii) The term ‘purchase’ is interpreted broadly to include taking possession of the property, not just the legal transfer.
(iii) The new asset must be located in India, and this provision was amended in 2014 to specify ‘one residential house in India’.
(
iv) Investment in Multiple Houses: For AY 2020-21 onwards, the benefit is extended to investment in two residential houses in India, provided the total long-term capital gains do not exceed ` 2 crores. This option is available only once in a lifetime.
(
v) CBDT Clarifications and Tribunal Views:
(i) The CBDT clarified that allotment of flats/houses by cooperative societies and other institutions is considered ‘construction’ for exemption purposes.
(ii) Different benches of the ITAT have had varied interpretations regarding the application of this clarification to private developers.
(
vi) Depositing Unutilized Capital Gains:
(i) Where the amount of capital gains is not appropriated towards the purchase of the new asset within one year before the transfer of original asset or not utilised for the purchase/construction of the new asset before the date of filing of return u/s 139, such amount has to be deposited by the assessee before the due date of filing of return u/s 139(1) in an account opened in a scheduled bank under the Capital Gains Account Scheme (CGAS) and proof of such deposit has to be enclosed with the return of income.
(ii) If part of the amount of capital gains is utilized for purchase/ construction of new house and the balance is deposited in CGAS account, the assessee will get exemption u/s 54 on such aggregated amount.
(iii) Where the amount deposited in the CGAS account is not utilized for purchase/construction of the new residential house within the specified period, the amount so deposited shall be taxed as ‘capital gains’ in the previous year in which the period of three years from the date of transfer of the original asset expires. The assessee shall thereafter be entitled to withdraw the amount lying in CGAS account in accordance with the said scheme.
(vii) Computation of Capital Gains Exemption: In case of an assessee claiming exemption of long-term capital gain u/s 54, the capital gains accruing as a result of transfer of the residential house/original asset will be dealt with as under:—
(i) Where the amount of capital gain is equal to or less than the cost of the new asset, being a new residential house purchased or constructed, the whole of the capital gain shall be exempt. For the purpose of computing capital gain arising on transfer of the new asset within a period of 3 years of its purchase or construction, the cost shall be reduced by the amount of capital gain.
(ii) Where the amount of capital gain is higher than the cost of the new asset, will be charged to capital gain u/s 45 of the Act. For the purpose of computing capital gain arising on transfer of the new asset within a period of 3 years of its purchase or construction, the cost shall be taken as ‘nil,’
(viii) Investment and Transfer Rules:
(
i) The exemption applies to the combined cost of purchasing land and constructing a house on it.
(ii) Exemption can be forfeited if the new asset is transferred within three years or if CGAS funds are not utilized as specified.
(ix) Registration and Possession: The acquisition of the new asset is considered from the date of possession, not just payment. The property transfer should be through a registered document for the exemption to apply, though there are views that possession suffices.
(x) Various Amendments:
(i) Amendment by Finance (No. 2) Act, 2014:
i. Clarifies that the exemption for reinvestment in residential property is limited to one residential house in India. This was in response to court interpretations allowing exemptions for investments in multiple houses.
ii. Applicable from the assessment year 2015-16 onwards.
(ii) Amendment by Finance Act, 2019: Introduces a one-time opportunity for taxpayers with long-term capital gains up to two crore rupees from the transfer of a residential house to invest in two residential houses instead of one, as an exemption.
(iii) Amendment by Finance Act, 2023:
i. Introduces a ceiling of ten crore rupees on the cost of the new asset for the purpose of capital gains exemption under Section 54.
836 EXEMPTION FROM INVESTMENT IN RESIDENTIAL HOUSE
ii. The condition of deposit of capital gains amount in CGAS account is also restricted to capital gains upto ` 10 crore.
iii. Aims to prevent high net-worth individuals from claiming large deductions under this section by purchasing expensive residential houses.
iv. This amendment is effective from April 1, 2024, and applies to the assessment year 2024-25 and onwards
(xi) Forfeiture: The amount of exemption allowed u/s 54 can be forfeited under following circumstances:
(
i) Amount of deposit in CGAS account is not utilized for purchase/construction of the new asset within three years of date of transfer of the original asset.
(ii) The new asset/house is transferred within three years of its purchase or construction.
(xii) Extension of time limit for investment: If the time limit for making investment in the new asset expires during the period 20-03-2020 to 29-09-2020, the same shall stand extended to 30-09-2020. [Section 3(1) (c) of the Taxation and Other Laws (Relaxation and Amendment of certain provisions) Act, 2020; Notification No. 35/2020, dated 24-062020 and Corrigendum Notification No. 39/2020, dated 29-06-2020] This extension has been granted in view of outbreak of Corona Virus pandemic.
D. RELEVANT JUDICIAL VIEW:
(i) Exemption Eligibility Under Section 54 Limited to Long-Term Capital Gains: Exemption u/s 54 is available when capital gains which arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto and a residential house (hereafter called ‘the original asset’). Deduction u/s 54 is not available on short term capital gains.1
(ii) Taxation of Income from Residential House Under the Head ‘Income from House Property’: The income from such residential house/original asset, whether self-occupied or rented, is assessable under the head ‘income from house property.’2
(iii) Denial of Section 54 Exemption for Rental Income Under Business or Profession: Where rental income from the house property (original
1. Smt. Seema Shah v. ITO 2022 (5) TMI 1383 - ITAT Varanasi/[2022] 140 taxmann.com 623 (Varanasi - Trib.)
2. [CBDT Circular No. 538 dated July 13, 1989]
(
EXEMPTION FROM INVESTMENT IN RESIDENTIAL HOUSE 837
asset) is assessable under the head ‘profits and gains of business or profession’, the exemption u/s 54 may be denied.3
iv) Interpretation of the Term ‘Purchase’ in Section 54: The word ‘purchase’ in section 54 is not defined under the Act and, therefore, one has to resort to its ordinary meaning as understood by a layman. In many dictionaries, the word ‘purchase’ means the acquisition of property by party’s own act as distinguished from acquisition by act of law. The context demands not the literal interpretation but liberal and wider interpretation. Accordingly, the said word cannot be taken as having been used in the sense of legal transfer.4 The expression ‘purchase’ would connote the domain and control of the property given into the assessee’s hands. The crucial date for the purpose of determining when the property is purchased within the meaning of section 54 is not the date of registration of the sale deed in favour of the assessee but the date of taking over possession of the property purchased.5
(
v) Location Requirement for the New Residential House: The new asset being ‘one residential house’ should be located ‘in India’ It is pertinent to mention that the words ‘constructed, a residential house’ occurring in section 54(1) earlier were substituted by the words ‘constructed, one residential house in India’ by the Finance (No. 2) Act, 2014 w.e.f. 01-04-2015. The amended provision will be applicable for the AY 2015-16 onwards.6
(vi) Applicability of Section 54 Exemption to Investments Abroad: Thus, where the investment in purchase of a residential house was made in the USA by a non-resident assessee during the previous year relevant to AY 2010-11 [prior to 01-04-2015], she would be entitled to exemption under section 54.7
(vii) Eligibility of Exemption for Land Appurtenant to Residential House: Exemption u/s 54 cannot be confined merely to a residential house but it is available on transfer of land appurtenant to such residential house.8
3. CIT v. M.A. Sather (P) Ltd. [1997] 226 ITR 910 (Mad.)
4. CIT v. Dr. Laxmichand Narpal Nagda [1995] 78 Taxman 219 (Bom.)
5. CIT v. Shahzada Begum [1988] 173 ITR 397/38 Taxman 311 (AP).
6. ITO v. Kusum Gupta 2022 (7) TMI 1300 - ITAT Delhi
7. CIT v. Saroja Naidu [2021] 128 taxmann.com 127 (Mad.); Leena Jugalkishor Shah v. Asstt. CIT [2016] 72 taxmann.com 185 (Guj.); Dipankar Mohan Ghosh, In re [2018] 89 taxmann. com 218/401 ITR 129 (AAR - New Delhi) and CIT v. Vinay Mishra [2020] 121 taxmann.com 243 (Kar.)
8. Charu Agarwal v. Dy. CIT [2022] 137 taxmann.com 283 (Delhi - Trib.)
838 EXEMPTION FROM INVESTMENT IN RESIDENTIAL HOUSE
(viii) Circular on Allotment of Flats/Houses by Cooperative Societies: It has been clarified by the CBDT that allotment of flats/houses by cooperative societies and other institutions having schemes of allotment and construction similar to those of DDA under self-financing scheme may also be treated as cases of construction for the purposes of exemption under sections 54 and 54F of the Act.9 ITAT - Hyderabad took a view that, this Circular will not be applicable where purchase of the new house is made from private parties other than cooperative societies.10 However, other Benches of the Tribunal have taken a liberal view and held that Circular No. 471 and 672 will also be applicable to private developers who allot a flat to the assessee, it will be treated as case of construction.11
(ix) Aggregating Costs for Deduction under Section 54/54F: Where assessee has partly utilized the amount of capital gains/net consideration for purchase of a plot and partly utilized the same for construction of a residential house thereon within the stipulated period of three years after the date of transfer of original asset, the aggregate cost should be considered for determining the quantum of deduction under section 54/54F.12 Similarly, a part consideration is utilised in purchase of property and part consideration is utilised in interior decoration, aggregate sum will be eligible for exemption.13
(x) Determining the Date of Acquisition Based on Possession: The date of acquisition of new asset will be reckoned from the date of possession and not from the date of payment of last instalment to the builder. If date of possession of new asset falls within one year of the date of sale of original asset, exemption u/s 54 cannot be denied.14
(xi) Requirement of Registered Document for Section 54 Compliance: For getting benefit u/s 54, it is necessary that purchase of the new residential house should be made through registered document as transfer of property cannot be affected through unregistered
9. CBDT Circular No. 471, dated October 15, 1986 and Circular No. 672, dated December 16, 1993
10. Smt. Neeta Goswami, Hyderabad v. ITO 2022 (11) TMI 367 - ITAT Hyderabad
11. Pradeep Kumar Sonthalia v. DCIT 2022 (10) TMI 490 - ITAT Kolkata; Kishor H. Galaiya v. ITO [2012] 24 taxmann.com 11(Mum. - Trib.); Asstt. CIT v. Smt. Sunder Kaur Sujan Gadh (2005) 3 SOT 206 (Mum. - Trib.); Mrs. Jyoti Arun Kothari v. ITO 2015 (9) TMI 698 - ITAT Mumbai; [2015] 54 taxmann.com 52 (Mum. - Trib.) M. George Joseph v. Dy. CIT [2021] 130 taxmann. com 279 (Kar.); Principal CIT v. Vembu Vaidyanathan [2019] 101 taxmann.com 436 (Bom.); Smt. Harminder Kaur v. ITO [2021] 126 taxmann.com 160 (Delhi - Trib.)
12. CBDT Circular 667 dated October 18, 1993
13. Sapna Hemanshu Shah v. DCIT 2024 (2) TMI 40 - ITAT Bangalore/[2024] 160 taxmann.com 1194 (Bang. - Trib.); Meher R. Surti v. ITO [2013] 40 taxmann.com 138 (Mum – Trib.); Mrs. Rahana Siraj v. CIT [2015] 58 taxmann.com 333 (Kar); Y. Manjula Reddy v. ITO [2022] 140 taxmann.com 441 (Bang. - Trib.)
14. Om Prakash Malhotra v. ITO 2022 (10) TMI 829 - ITAT Delhi
document.15 A contrary view is that if entire investment in new house has been made and possession has been taken, then it will be sufficient compliance of section 54 and exemption will be available.16
(xii) Year for allowing exemption: In a case where capital gains is to be taxed in an earlier year, the issue of allowing exemption u/s 54 has to be examined in that earlier year.17
E. ISSUES:
CONDITIONS FOR EXEMPTION U/S 54
1. Issue: Is exemption u/s 54 allowable only on sale of a long-term capital asset being a residential house?
Solution: Yes. For example, where land was purchased long ago making it a long-term capital asset and construction of building thereon was made recently making the building so constructed a short-term capital asset, the issue was whether exemption u/s 54 would be allowable only in respect of investment of long-term capital gains being gains on sale of land and not on sale of building. Hon’ble Karnataka High Court held in C.N. Anantharam v. Asstt. CIT18 that because of the expression ‘capital gain arising from transfer of a long-term capital asset being buildings or lands appurtenant thereto and being a residential house’ used in section 54(1), if land is sold as a long-term capital asset, then building appurtenant to such land will also be a longterm capital asset. Section 54 does not provide bifurcation of capital gain arising from the sale of land and building separately and to allow deduction in case any one of them is a long-term capital asset. If a land appurtenant to a residential house is entitled to the said benefit, it is difficult to accept that the land on which the residential building is constructed is not entitled to the said benefit.
A different view has been taken in another case by the Tribunal. Where land was purchased much before the construction thereon started and if both were sold together, then holding period for land would be different from the holding period of super-structure which would be counted from the date of completion certificate. If super-structure was held for less than 36 months at the time of sale, it would give rise to short-term capital gains on which exemption u/s 54 could not be allowed. However, part of the consideration
15. Anusuya M. Hemdev v. ACIT 2022 (8) TMI 859 - ITAT Chennai
16. DCIT v. Radheshyam Agrawal 2022 (9) TMI 1246 - ITAT Raipur
17. Manesh Bansilal Shah v. ITO 2023 (8) TMI 435 - ITAT Ahmedabad
18. [2015] 55 taxmann.com 282 (Kar.)
received which was relatable to sale of land would be eligible for exemption u/s 54F.19
However, the view taken by the Hon’ble High Court will prevail.
2. Issue: Are land and building two separate assets?
Solution: Yes. Splitting of land and building into long-term capital asset and short-term capital asset based on the period of holding of the respective assets was recognized in undernoted cases.20
3. Issue: On what basis can a land be said to be appurtenant to the building situated thereon?
Solution: Hon’ble Andhra Pradesh High Court in CIT v. Smt. Zaibunnissa Begum21 laid down the following tests to determine whether land on which building is situated is appurtenant thereto:
“(1) Indivisible Unit and Enjoyment of Building and Land: If the building together with the land is treated as an indivisible unit and enjoyed as such by the persons occupying the building, it is an indication that the entire extent of land is appurtenant to the building.
(2) Examination of Extensive Lands Appurtenant to the Building: If the building has extensive lands appurtenant thereto and even if the building and the land have been treated as one single unit and enjoyed as such by the occupiers, an enquiry could be made to find out whether any part of the land contiguous to the building can be put to independent user without causing any detriment to the effective and proper enjoyment of the building as such. Such an enquiry should be conducted not based on any artificial considerations but from the point of view of the persons occupying the building. The number of persons or different branches of families residing in the building, the requirements of the persons occupying the building consistent with their social standing, etc., are relevant for the purpose. If any surplus is arrived at on such an enquiry, then the extent of such surplus land may not qualify to be treated as land appurtenant to the building.
(3) Evidence of Land Use for Purposes Other Than Building Enjoyment: If there is any evidence to indicate that any portion of the land contiguous to the building was put to user other than the enjoyment of the building, then that provides a safe indication regarding the extent of land put for such user. For instance, the land used by the occupiers for commercial, agricultural, and horticultural purposes, although forming part of the land adjacent to the building, does not qualify to be treated as land appurtenant to the building.
19. R. Venkata Dhana Lakshmi v. ITO 2021 (6) TMI 982 - ITAT Visakhapatnam
20. CIT v. Dr. D. L. Ramachandra Rao [1999] 236 ITR 51 (Mad.); CIT v. C. R. Subramanian [2000] 242 ITR 342 (Kar.); CIT v. Citibank N. A. [2004] 134 Taxman 467 (Bom.) & CIT v. Hindustan Hotels Ltd. [2011] 10 taxmann.com 175/199 Taxman 127/335 ITR 60 (Bom.)
21. [1985] 20 Taxman 120 (AP)
(4) Derivation of Income from Land Not Taxable as ‘Income from House Property’: If the owner or occupier is deriving any income from the land which is not liable to be assessed as ‘income from house property’ under section 22, then the extent of such land does not qualify to be treated as land appurtenant to the building and
(5) Material Indicating Attempted Use of Building for Other Purposes: any material pointing out to the attempted user of the building for purposes other than the effective and proper enjoyment of the house would also afford a safe guide to determine the extent of surplus land not qualifying to be treated as land appurtenant to the building.”
4. Issue: What are the other considerations for treating a land as land appurtenant to the building?
Solution: The extent of land which can be said as appurtenant to the residential house is determined with regard to locality where residential house is situated, social status and profession of the individual.22 It is also to be seen whether extent of land is required for pathways, sit-outs, servant quarters, cow sheds etc. All these factors put together will determine the extent of land which is appurtenant to residential house.23 An assessee owned a large portion of land and buildings having area of over 5 acres with a bungalow, out-houses, garage, sheds, and other erections. In 1966, he entered into an agreement with ‘R’, a dealer for sale of portion of building and vacant land. ‘R’ converted vacant land into plots, nominated parties and sale deeds were executed between 23-04-1967 to 09-07-1969. Thereupon, assessee vacated the building on 01-08-1967. On 12-12-1968, a portion of the property in which dwelling house was situated was sold. For relevant assessment years, assessee claimed exemption u/s 54. It was found that the assessee himself had sold part of the lands even before 1966. This showed that the lands to that extent were not appurtenant to the bungalow; otherwise, he could not have continued to reside in the building after the sale of those plots. Similar was the position with regard to vacant plots of land sold between 23-04-1967 and 09-07-1969 which were also not appurtenant to the house property and hence, section 54 could not have any application in respect of sale of such plots of land. As regards sale of that portion of property in which dwelling house was situated on 12-12-1968, in view of fact that assessee had vacated the house on 01-08-1967 and, consequently, he was not in occupation of said property as dwelling house during entire period of two years preceding date of transfer, no exemption under section 54 could either be granted even in respect of this sale.24
22. Tony J. Pulikal v. Dy. CIT [2013] 37 taxmann.com 221/145 ITD 172 (Cochin - Trib.)
23. CIT v. Smt. M. Kalpagam [1997] 93 Taxman 283/227 ITR 733 (Mad.)
24. S. Radhakrishna v. CIT [1984] 145 ITR 170 (Mad.)
Rs. 3495/-
