Investment in the name of Family Members & Capital Gain Exemption
One of the most common tools for saving tax on gain arising from transfer of Long Term Capital Assets is by investing the amount in another house property. The question arises as to whether the investment should also be in the name of the same person who has earned it or it can be done in the name of any other person? For example, Mr. Smart has sold his plot for Rs. 1 Cr and wishes to use the amount for purchase of a house property in the name of his wife or a daughter. Can he do so? Will he be eligible for capital gain exemption if the investment is done in the name of the family members? Let us discuss it.
Presently, there are two sections (Section 54 & Section 54F) which primarily offer capital gain exemption against investment in the house property. Section 54 offers exemption if gain arises from transfer of any residential house property whereas Section 54F does the same if it arises from transfer of any capital assets (other than residential house property).
Even though both the sections provide exemption against investment in house property, it nowhere explicitly stipulates that investment has to be done in the name of the taxpayers only. Equally true is the fact that both the sections do not explicitly bar the investment in the name of family members or any other persons. In absence of any specific stipulation, taxpayers would be required to take the shelter of the judiciary on the issue. We have judgement on either side as under:
1. Views against the Taxpayers:
Bombay High Court in the case of Prakash Vs. ITO (2008) 220 CTR 0249 has categorically denied the claim of exemption to the taxpayers. In this case, the taxpayer has purchased the house property in the name of son. Court observed that assessee had no domain and/or right whatsoever in the said property & as such he is not entitled to exemption under section 54F. The court has held as under:
“Right from the sale of original assets till the purchase and/or construction of the residential house i.e., the “new asset”, the ownership and domain over the new asset is a must. The new property must be owned by the assessee and/or having legal title over the same. The others may use and occupy the same along with the assessee but the ownership should be of the assessee of the residential house so purchased from the net consideration/sale proceeds of the sale of original asset by the assessee……For qualifying for exemption U/s 54F it is necessary to have the investments made in residential houses in the name of the assessee only”.
Same conclusion has been laid down by Punjab & Haryana HC in the case of Kamal Kant Kamboj Vs. ITO (2017) 397 ITR 0240 (P&H) wherein it is held that purchase in the name of a son or grandson did not qualify for capital gain exemption. The court held that the legislature didn’t intend to advance the benefit of said section to assessee who invested the amount even in the name of a third person.
The view of Bombay HC in Prakash Vs. ITO (2008) has been reconfirmed by ITAT Mumbai in the case of Hem Chandra R. Gavankar Vs. ITO [ITA No. 7451/Mum/2017] by making following observation:
“Since the purchase of new property/flat is in the name of assessee’s wife and adult daughter and not in assessee’s own name, the assessee is not eligible to claim deduction under section 54 of the Act”.
In this case, ITAT, Mumbai after considering the case of ITO vs. Kamal Waha 351 ITR 4, has very consciously held that the exemption u/s 54 is not available if the investment is not done in the name of the Assessee.
2. Views in favour of the Taxpayers:
Delhi High Court in the case of CIT Vs. Kamal Wahal (2013) 351 ITR 0004 has decided the issue in favour of the taxpayers by holding that a purposive construction is to be preferred as against a literal construction. There is nothing in section 54F to show that house should be purchased in name of assessee only, it merely says that assessee should have purchased/ constructed “a residential house”. In this case, taxpayers have purchased the property in the name of his wife & claimed exemption u/s 54F. The court held that the assessee had not purchased a new house in the name of a stranger; it was only in the name of his wife. There was also no dispute that the entire investment had come out of sale proceeds and that there was no contribution from the assessee’s wife. With this, the court concluded that for the purposes of Section 54F, new residential houses need not be purchased by assessee in his own name nor is it necessary that it should be purchased exclusively in his name.
Above decision of the Delhi HC has been further followed in CIT Vs. Ravinder Kumar Arora (2012) 342 ITR 38 (Del). Similarly conclusion can also be drawn from CIT Vs. Gurnam Singh (2010) 327 ITR 278, CIT vs. V.Natarajan, (2007) 287 ITR 271 (Mad), DIT, International Taxation, Bangalore vs. Mrs. Jennifer Bhide, (2011) 15 taxmann.com 82 (Kar) wherein the courts have taken the liberal view and has decided the issue in favour of the taxpayers.
Conclusion:
There is no dearth of tax litigation. Courts are often in conflict with one another. The provisions contained under section 54/54Fare a beneficial provision & need to be construed liberally. Benefit under the section should be allowed to the assessee even if the investment is done in the name of the family members by utilizing the amount from sale of original assets. Though the majority of the courts are in favour of the taxpayers, the issue is controversial. To avoid litigation and enjoy undisputable claims, it is advisable to make investment in the name of the taxpayers only. Taxpayers may further note that it is a well settled principle of law that if there are conflicting views rendered by different High Courts, the view taken by the jurisdictional High Court is binding in the jurisdictional area of the respective High Court.
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
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Regards,
CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
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