Mumbai High Court lays strict rules for availing section 54F exemption

The Income Tax Act, 1961 provides exemption to tax payers from paying income tax on long-term capital gains where the profits of the asset which is sold are invested in a new residential house.

The Mumbai High Court in a recent case of Humayun Suleman Merchant (Appellant) vs. The Chief Commissioner of Income Tax (Respondents), being Income Tax Appeal No. 545 of 2002, by an order has held that an exemption paying income tax on long-term capital gains can be availed only up to the extent that has been actually used by the taxpayer before the due date of filing his return.

The bench comprising of M.S. Sanklecha and A.K. Menon passed the said judgment on 18.8.2016.

It has been categorically held that if a taxpayer partly uses the proceeds of the long-term capital gains by making payments to the builder but does not deposit the balance amount in a specified bank account, the actual payments will be taken into consideration for computing capital gains exempt under Section 54F of the Act.

The taxable part of long-term capital gains is calculated after taking into consideration the exemption provided in Section 54F.

The said order will decrease the amount that can be claimed as exempt from the long-term capital gains. As a result, there will be a higher tax payout.

Though the aforesaid order relates to Section 54F, it would also apply to Section 54 that deals with long-term capital gains arising out of sale of a residential property.

Scope of section 54 and 54F:

Both the sections provide for an exemption to assessees from paying tax on long-term capital gains if the amount is invested in a residential property or the same is deposited in a specified bank account.

To claim such an exemption after the sale of a non-residential property, Section 54F puts an obligation upon the taxpayer to invest the proceeds from sale either in a residential property within two years from the date of sale or to construct another house within a period of three years.

The  amount  that is not invested for a new residential house till the due date of filing a return has to be deposited in a specified bank account. If the full amount is not invested or deposited, the remaining portion shall be subject to tax.

The Mumbai High Court has strictly interpreted the provisions of Section 54F(4) of The Act, holding that the unused amount before filing return must  be deposited in an account specified by the Central Government in order to be exempted.

Judicial precedents:

The Apex Court in many cases has held that exemption provisions should be interpreted broadly till there is a compliance with the requirements.

In the aforesaid case, it was contended on behalf of the tax payer by his counsel that the taxpayer met with the spirit of the tax laws as buying a new flat was completed before the assessment was taken.

The instant case:

In this case, the assessee had sold his land on 29.4. 1995 at the total consideration of Rs. 85.3 lakh. He entered into an agreement with a builder on 16.7.1996 to buy a flat at the total consideration of Rs. 69.9 lakh.

He took possession in January, 1997 and filed his return on 4.11.1996 when he had paid the builder only Rs. 35 lakh and did not make any bank deposit.

The assessing officer allowed a proportionate exemption of about Rs. 31 lakh and made Rs. 43.8 lakh taxable.

Reliance was placed upon the judgment of the Delhi High Court in Commissioner of Income Tax vs. Ravinder Kumar Arora , 2012,  342 ITR 38 by the counsel of the assessee.

The tribunal had dismissed the appeal filed by the assessee. Thereafter assessee filed an appeal before the Mumbai High court.

The judgment:

However, the judgment was passed against the assessee and in favour of the department.

Also read:

All about capital gains tax