save ltcg tax by investing in business




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Query 1]

My son owns two independent house properties, one at Nagpur and the other one in Hyderabad. Hyderabad house property was gifted by me to him by executing gift deed in 2002. He want to sale my Hyderabad property and want to invest the sale proceeds in the business of manufacturing engineering product which he has started in 2008.  For his investment in business, whether I would be getting exemption from income tax on profit arising from sale of Hyderabad house property? Few days back, I read that the capital gain will not be taxable if the amount is arising on sale of property is invested in the business. Please advice. [rao2319k@gmail.com]

Opinion:

Your son could save tax arising on transfer of Hyderabad house property by investing the sale proceeds in the business. Blanket exemption is not available for investment in existing business. However, the possibility of claiming an exemption from LTCG could be explored under section 54GB of the Income Tax Act-1961 by forming a new company and investing the sale proceeds in the new assets.

There are certain sets of conditions and precautions that should be taken care of while investing the sale proceeds, for claiming an exemption u/s 54GB, as under:

  1. Exemption is available to an individual & HUF.
  2. Exemption is available if the assessee transfers a residential property (a house or a plot of land). The residential house property should be a long term capital assets i.e., should have a holding period of more than 36 months.
    [Readers may note that exemption is not available if the capital gain arises from transfer of any other capital assets which is not a residential plot]
  3. The transfer should take place in between 01.04.2012 to 31.03.2017.
  4. For exemption, the assessee will have to utilize the net sale considerations for subscription in equity shares of an “eligible company” before the due date of furnishing of return of income under section 139(1),
  5. The “eligible company” should utilize this amount for the purchase of a “New Asset” within one year from the date of subscription in equity shares. If, however the company does not utilize this amount for the purchase of a “New asset” before the due date of furnishing of return of income by assessee (i.e., transferor of residential property), it will be required to be deposited by the company in Capital Gains Deposit Account Scheme(CGDAS). In such a case, exemption would be available on the basis of amount deposited in the CGDAS.
  6. Amount of exemption is as follows (It cannot, however, exceed the amount of capital gain): = Investment in “new asset” by the eligible company/Net sale considerations*Capital gain
  7. Net sale consideration is sale considerations minus expenditure on transfer incurred by the transferor.
  8. Meaning of “eligible company” as mentioned above:
    It means a company which satisfies the following conditions:
    It is incorporated on or after April 1st of the financial year in which residential property is transferred but on or before the due date of submission of return of income under section 139(1) by the assessee (i.e., transferor of residential property). In short, investment in the already running business of the assessee would not be eligible for exemption. The new company incorporated during the relevant period only is eligible for exemption.
    b. It is engaged in the business of manufacture of any articles or thing.
    c. The assessee (i.e., transferor of residential property) should have more than 50% share capital (or voting right) after subscription in the shares of the company.
    d. The company qualifies to be a SME (i.e., small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006)(i.e., where the investment in plant and machinery is more than Rs. 25 Lacs but not more than Rs. 10 Crore).
  9. Meaning of “New Asset”:
    It means new plant and machinery but does not include the following:
    Any plant or machinery which is used in India or outside India by any person before its installations by the eligible company.
    b.Any plant or machinery which is installed in office premises/residential accommodation/guest house.
    c. Any office appliance.
    d. Computers
    e. Computers software
    f. Any vehicle
    g. Any plant or machinery which is allowed 100 per cent deduction (by depreciation or otherwise) in any ‘previous year.
  10. Words of Caution:
    In the following cases, exemption will be taken back and the amount of exemption (or proportionate exemption) given earlier under section 54GB will become a long term capital gain of the assessee (i.e., transferor of residential property). It shall be taxable in the year in which the assessee or the eligible company commits the following defaults:
    If the equity shares in the eligible company are sold or otherwise transferred by the assessee within 5 years from the date of acquisition.
    b. If the “New Asset” is sold or otherwise transferred by the eligible company within 5 years from the date of acquisition.
    c. If the deposit account is not utilized fully or partly by the eligible company for purchasing the new asset within 1 year from the date of subscription in equity shares (by the assessee).

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