Benefit of capital gain exemption is available to the assessee who earns capital gain. However, after the death of the assessee, legal heir enters in to the shoes of the assessee for all taxation purpose. Legal representative cannot be differentiated from the assessee for this purpose. But, legal heir is not the person who has earned the capital gain but merely a representative of the person who has earned it.  There are various judgment which has concluded that the capital gain exemption is available only if the person who has earned it, invests it in his own name.

Let us analyze the present issue which is pertaining to legal heir specifically wherein investment in the name of the person who has earned it is not at all possible.

Madras High Court in C.V. Ramanathan v. CIT [125 ITR 191] was faced with the same issue as referred above. The Court held that one of the concessions provided for persons deriving capital gains under the Income-tax Act is that where a person sells property used for his residence and substitutes another its place, then any capital gain derived by him would not be liable to assessment so long as the entire capital gain is reinvested in the newly acquired property.

Section 54 of the Act offers concession on the basis of second events, i.e. substitution of property within one or two years to be taken into account. Hence, unless and until the conditions is satisfied, exemption will not be admissible.

After the death of the assessee, legal heir enters in to the shoes of the assessee for all taxation purpose. Legal representative cannot be differentiated from the assessee for this purpose. If the assessee were liable to pay capital gains tax, the benefit of section 54 which forms part of the scheme of taxation of capital gains then legal heir cannot be denied because the latter condition of section 54 was fulfilled by his legal representative.

In Late Mir Gulam Ali Khan v. CIT [165 ITR 228], the Andhra Pradesh High Court has observed that the object of granting exemption under section 54 of the Act is to give a tax exemption if a person who sells a residential house for purchasing another convenient house and so exemption must be given far as capital gains are concerned. The word ‘assessee’ in section 54 must be given wide and liberal interpretation so as to include his legal heirs also. There is no warrant for giving the strict interpretation to the word “assessee” as that would frustrate the object of granting exemption.

From above pronouncement, one can reasonably conclude that after the death of legal heir, representative enters in to the shoes of deceased and resultantly capital gain exemption can be claimed on it.

In the next write up, we will discuss whether the conditions of not owning more than one house property u/s 54F will be applicable for representative assessee if he is already owning it for his own purpose and not as a representative assessee. Till then, keep sharing your views on this issue as well.