Capital Gain Exemption if the payment towards flat done prior to the date of LTCG

When a residential house is sold/transferred, the taxpayer can reinvest the capital gain in another residential house to avail tax exemption to legally avoid income-tax thereon.

Further, Finance Act, 2019 increased the scope for availing this exemption by permitting purchase or construction of two residential houses in India on the condition that the amount of capital gain does not exceed Rs. 200 lakhs.

Effectively, if the capital gain on sale of a residential house exceeds Rs. 200 lakhs, the assessee can avail exemption under section 54 for only one residential house purchased or constructed by him subsequently.

The capital gain exemption is available if the amount is invested in purchase or construction of house property.

Purchase can be done either one year before the transfer or two year after the date of the transfer.

However, construction has to be done only after the date of transfer.

Question arises whether capital gain exmepiton would be admissible if the taxpayer makes the payment before transfer for purchase of the house property.

In Pr. CIT v. Akshay Sobti (2020) 188 DTR (Del) 158 the tenant paid maintenance charges as per the terms of the agreement with owner. It was held that amount cannot be considered for the purpose of computation of income under the head ‘Income from house property’. Also, the assessee had booked a semi-finished flat before the sale of one residential property. The property was handed over to the assessee subsequent to the sale of residential property and exemption was claimed under section 54. The claim was allowed by the court by citing CBDT Circular No. 672, dated 16th December, 1993 in which reference was made to Circular No. 471, dated 15th October, 1986 wherein it was stated that acquisition of flat through allotment by DDA has to be treated as construction of flat and this would apply to co-operative societies and other institutions.

The builder in this case, the court observed would fall in the category of other institutions. Since the assessee has occupied the property within the stipulated time and fulfilled other conditions, the exemption under section 54 has to be granted.

It is worth noting that when the assessee and developer enter in to JDA it may be stated that the developer must provide accommodation to the assessee until the project is completed. The developer when provides such accommodation, the expenditure so incurred by him would not be included in sale consideration for computing capital gain for assessee-land owner and the developer can also claim the expenditure so incurred as business deduction under section 37. (P. Madhusudhan v. Asstt. CIT (2020) 189 DTR (Mad) 163).