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Capital Gain Exemption on Purchase of one house property and sale of multiple capital assets
Mr. Smart has sold a house property in the FY 2019-20 for Rs. 5 Crore and have earned a Long Term Capital Gain (LTCG) of say Rs. 1.60 Cr. He has invested the amount for purchase of another house property for Rs. 4.90 Cr in the FY 2020-21. Now, Mr. Smart want to sale another house property in the FY 2020-21 for Rs. 3 Crore on which he will be earning LTCG of Rs. 1.60 Cr and he will be further selling 2 plots for Rs. 1.50 Crore in the FY 2021-22 (i.e., within one year of acquiring house property of Rs. 4.90 Cr).
The question arises, whether the capital gain arising from sale of a house for Rs. 3 Cr as well as from sale of 2 plots in the FY 2021-22 will be exempt from tax as Mr. Smart has purchased a house property for Rs. 4.90 Cr in the FY 2020-21? In short, whether capital gain arising from sale of multiple properties can be claimed as exempt against purchase of just one single house property? Is there any restrictions like investment in “one” house property can be claimed as deduction against sale of only “one” property.
It may be noted that section 54 & section 54F of the IT Act allows an exemption on capital gain from sale of capital assets if the amount is invested for purchase of a house property. This exemption is subject to the conditions that new house property must be purchased either 1 year before the sale or 2 years after the sale of the property or the new residential house property must be constructed within 3 years of sale of the property.
Here is an interesting case by ITAT Delhi in Mohinder Kumar Jain IT APPEAL NO. 5254 (DELHI) OF 2014 wherein it is held that if multiple properties are sold to buy a new residential house then exemption on capital gains arising on sale of all such properties will be allowed against the purchase of just one residential house property. It is held that even if multiple properties are sold in different years to construct a residential property then multiple year exemption can also be claimed against the under construction house.
The overall facts of the case and the observation of the Delhi ITAT was as under:
- In the case, taxpayer had sold his commercial property and invested the proceeds in the construction of a house at Mehendi Farm on which he claimed a deduction of Rs 47.84 u/s 54F in 2008-09 against the investment made in construction of a farm house.
- Thereafter in the FY 2010-11,Taxpayer had again sold 5 properties and invested further in the construction of the same house at Mehendi Farm. He claimed a deduction of Rs 1.59 crore under section 54F in his I-T returns for 2010-11 against the investment made in the same house at Mehendi Farm.
- ITAT Delhi allowed the deduction of Rs 1.59 crore under section 54F against the investment made in the construction of house at Mehendi Farms.
- ITAT noted that taxpayer did not own more than one residential house on the date of sale of commercial property. Taxpayer had one house at D-3/8 Vasant Vihar, New Delhi, the same was let out during the year, which is also evident from the computation of income for the relevant assessment year, wherein the rental income from the same house has been declared as income from house property. ITAT further observed that the taxpayer was not using that house as his residence during the relevant assessment year. At the same time, the construction of residential house at 9, Mehendi Farms, Chhatarpur New Delhi was also not complete and the taxpayer was residing during the relevant period in a residential property in the name of Hindu undivided family at E-222,Naraina Vihar, New Delhi. This fact is also evident from the documents such as telephone bill, copy of passports and copy of correspondences with IFCI.
- ITAT Delhi concluded that there is no bar in section 54F for claiming deduction second or third time also for the same property if the cost of the property is within the capital gain arising to the taxpayer. In the above case, the total capital arising to the taxpayer in all the three years 2009-10 to 2011-12 was less than the cost of construction of the residential property at Mehendi Farms,New Delhi.