Capital Gain Exemption under Section 54 Available Even When New House Is Purchased with Housing Loan – ITAT Kolkata in Amit Parekh Case
One of the most persistent myths in capital gains taxation is that exemption under section 54 of the Income-tax Act, 1961 is available only if the capital gains arising from sale of an old residential house are directly invested in the purchase of a new residential house. Many taxpayers and even assessing officers proceed on the assumption that if a housing loan is taken or borrowed funds are used, the exemption must fail. This assumption has no legal foundation and has been consistently rejected by courts and tribunals. A clear and authoritative reaffirmation of this principle has come from the Kolkata Bench of the Income-tax Appellate Tribunal (ITAT) in the case of Amit Parekh vs. Income Tax Officer, reported in (2018) 170 ITD 213 (Kol).
Section 54 grants exemption from long-term capital gains arising from transfer of a residential house if the assessee purchases or constructs another residential house within the prescribed time limits. For purchase, the new house can be bought either one year before or two years after the date of transfer. For construction, the time limit is three years from the date of transfer. The section nowhere mandates that the same sale consideration or capital gains must be used for the new investment. The statute focuses on the act of investment within time, not on the source of funds.
In the Amit Parekh case, the assessee sold a residential property and earned long-term capital gains. He purchased a new residential flat within the time prescribed under section 54. The cost of the new residential property was higher than the amount of capital gains earned. However, the assessee financed a substantial portion of the purchase by availing a housing loan of ₹82.50 lakh from a bank, while only a smaller portion came directly from the capital gains. The Assessing Officer denied exemption under section 54 on the ground that the capital gains were not fully utilised for the purchase of the new house and that borrowed funds had been used. The Commissioner (Appeals) partly sustained the addition. The matter ultimately reached the ITAT.
The ITAT categorically held that the exemption under section 54 cannot be denied merely because the assessee availed a housing loan for purchasing the new residential house. The Tribunal observed that section 54 requires the assessee to purchase or construct a residential house within the prescribed period. It does not impose any condition that the investment must be made only out of the sale proceeds of the old house. Once the primary conditions of section 54 are satisfied, the source of funds becomes irrelevant. The Tribunal further noted that the cost of the new house exceeded the amount of capital gains and that the purchase was completed within the statutory time frame. Therefore, denial of exemption solely on the ground of borrowed funds was legally unsustainable.
While deciding the issue, the Kolkata ITAT followed the binding precedent of the Punjab and Haryana High Court in CIT vs. Kapil Kumar Agarwal (2016) 382 ITR 56 (P&H), where the High Court held that section 54 does not require the assessee to utilise the same sale consideration for purchase of the new house. The Tribunal also took note of earlier High Court decisions which consistently held that section 54 is an investment-linked exemption and not a source-linked exemption. The essence of the law is that the assessee must acquire a new residential house within the specified period; how the funds are arranged is immaterial.
A critical aspect of the Amit Parekh ruling is its relevance in scrutiny and reassessment proceedings, where assessing officers often question the nexus between capital gains and investment. The Tribunal has made it clear that insisting on a direct one-to-one correlation between sale proceeds and purchase consideration is contrary to the statutory scheme of section 54. This is particularly important in real-life scenarios where taxpayers purchase a new house before selling the old one, or where bridge loans, housing loans, or mixed funds are used. The law itself allows purchase of a new house one year prior to the sale of the old house, which automatically negates any argument of mandatory fund-to-fund tracing.
Another important takeaway from the Amit Parekh decision is that availing a housing loan does not result in any “double benefit” prohibited by law. A taxpayer is legally entitled to claim exemption under section 54 on capital gains and simultaneously claim deduction for interest on housing loan under section 24(b) and principal repayment under section 80C, subject to statutory limits. These operate in different domains and there is no bar in the Act against such simultaneous benefits. The Tribunal’s ruling indirectly reinforces this settled position.
From a tax planning perspective, this judgment provides clarity and confidence to taxpayers who upgrade or shift residences using institutional finance. In modern real estate transactions, housing loans are the norm rather than the exception. Denying section 54 exemption merely because a bank loan is used would defeat the object of the provision, which is to promote reinvestment in residential housing. The ITAT has rightly adopted a purposive and pragmatic interpretation consistent with legislative intent.
The Amit Parekh ruling is particularly valuable because it is a post-2015 decision, directly addresses the issue of borrowed funds, and relies on High Court authority. It is therefore a strong precedent to rely upon during assessment, rectification, appeal before the Commissioner (Appeals), or even in writ proceedings where exemption under section 54 is questioned solely on the ground that capital gains were not directly invested.
In conclusion, the legal position emerging from the Amit Parekh decision is clear and unambiguous: exemption under section 54 of the Income-tax Act cannot be denied merely because the new residential house is purchased using borrowed funds or a housing loan, or because the original sale proceeds were not directly utilised. What matters is timely acquisition of a new residential house and satisfaction of the statutory conditions. Assumptions about fund nexus have no place in the scheme of section 54 and must give way to settled judicial interpretation.
The copy of the order is as under:
1522837768-d.d. 6.3.18 typed 26.3.18 ITA No. 41 K 16 Amit Parekh
