Whether LTCG exemption can be withdrawn if the building is demolished within 3 years of its purchase?

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LTCG - Exemption

Whether LTCG exemption can be withdrawn if the building is demolished within 3 years of its purchase? – CA Naresh Jakhotia

 

 

Query]

I have sold my “A” capital assets in December 2018 and claimed an exemption u/s 54 by investing it another house property “C” in July 2019 by fulfilling all the requisite conditions for capital gain exemption. Now, I have sold another capital assets “B” in February 2020. I want to demolish the structure over my property “C” purchased in July 2019 and want to invest the sale proceeds received from sale of capital asses “B” for constructions over property “C” purchased in July 2019.

I have read in your article that the property against which LTCG exemption  is claimed cannot be transferred within a period of 3 years.

I seek your advice on the following issue:

1.      Whether exemption claimed earlier under section 54 by investing in “C” will withdrawn if I demolish the house over “C” now? Or I can continue with the earlier exemption u/s 54?

2.      Whether I can claim the LTCG exemption u/S 54 arising on sale of capital assets “B” by constructing the house property on the property “C” after demolition of structure thereon. [MN]

Reply

1.      It is true that any property against which LTCG exemption is claimed cannot be “transferred” within a period of 3 years. Non compliance would result in denial of capital gain exemption claimed earlier. This condition of 3 years holding is there in section 54 as well as in section 54F.

2.      The condition in section 54 & 54F places a restriction on “Transfer”.

3.      In your case, you are not making any “Transfer” and resultantly there is no violation of section 54 in your case. Supreme court in Vania Silk Mills (1991) 191 ITR 647 (SC) has held that there can be transfer of an asset in a transaction only if the asset continues to exist after the transaction is over. In absence of its subsequent existence like in case of destruction of an asset in your case, there cannot be any “transfer”. Further, for transfer, there should be two persons, transferor and the transferee. A unilateral act can never result in a transfer. Demolition of the existing building by the assessee is a unilateral act. The ratio laid down above can be extended to your case as well.

4.      Demolition of the structure over your earlier assets “C” against which you have claimed capital gain exemption cannot be regarded as “Transfer” so as to violate any of the stipulations for capital gain exemption withdrawals.

5.      With above basic principle in mind, you  can claim an exemption u/s 54F by utilizing the sale proceeds on sale of capital assets “B” for construction of building over your capital ssets ”C”.

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