Understanding the nuances of those provisions is crucial, notably in gentle of latest amendments and judicial rulings that proceed to form their interpretation.
The core distinction: Part 54 vs Part 54F
Part 54 applies when the capital achieve arises from the sale of a residential home, whereas Part 54F is obtainable on the sale of any long-term capital asset (“LTCG”) aside from a residential home (e.g., shares, land, gold, and so on.).
In each instances, the reinvestment have to be made in residential home property located in India to avail exemption. Sections 54 and 54F may also be claimed concurrently, supplied the respective circumstances are fulfilled.
From 2023-24, the utmost exemption is capped at ₹10 crore. This transfer goals to curb the misuse of exemptions by ultra-high-net-worth people.
Funding standards and circumstances:
Cut-off dates
Buy: Inside one yr earlier than or two years from the date of switch.
Development: Inside three years from the date of switch.
Capital Positive factors Account Scheme (CGAS): If the quantity isn’t instantly reinvested, it have to be deposited in a CGAS earlier than the due date for submitting the earnings tax return.
Switch of latest belongings: This exemption is maintained by requiring that the brand new asset not be transferred inside three years of its acquisition or development.
Exemption limits
Underneath Part 54: The exemption is the lesser of the capital achieve or the quantity invested.
Underneath Part 54F: The exemption is proportional, based mostly on the web consideration reinvested:
Exemption = Capital Acquire × (Quantity Invested ÷ Web Sale Consideration)
Judicial rulings: Clarifying the gray areas
Whereas the authorized provisions seem simple, their implementation has usually required judicial intervention. Key rulings embrace:
Buy in partner’s title: Eligible for exemption.
In CIT v. Kamal Wahal, the Delhi excessive courtroom held that the exemption can’t be denied merely as a result of the authorized title of the brand new residential property is within the partner’s title, so long as the funds belong to the assessee.
Funding in youngsters’s title: Exemption isn’t allowed.
In Prakash v. ITO, the Bombay excessive courtroom denied the exemption because the helpful possession was thought-about to have handed to the youngsters, defeating the legislative intent of the supply.
Property exterior India: Exemption isn’t out there if the brand new asset is situated exterior India.
Incomplete development: Nonetheless eligible for exemption.
In CIT v. Sardarmal Kothari, the Madras excessive courtroom clarified that completion of development isn’t obligatory; well timed funding is the vital requirement below Part 54F.
A number of flats as one residential home: Allowed, if used as a single house.
In CIT v. Gita Duggal, the Delhi excessive courtroom dominated that the place a number of models are a part of a standard construction and serve a unified residential goal, they qualify as “a residential home” for the aim of exemption.
Reimbursement of housing mortgage for brand new residential home: Handled as legitimate funding for exemption functions.
Delay in registration: Exemption is allowed.
In Siva Jyothi Palam v. ACIT, the ITAT Visakhapatnam dominated that procedural delays in registration shouldn’t defeat substantive compliance with the regulation. Exemption can’t be denied if cost and possession are inside time, even when registration is delayed.
Conclusion
Sections 54 and 54F proceed to be very important planning avenues for taxpayers liquidating long-term belongings. Nevertheless, these provisions demand well timed execution, correct documentation, and generally even judicial steering for interpretation.
The judiciary has repeatedly favoured substance over kind, specializing in the taxpayer’s intent and adherence to cut-off dates moderately than procedural lapses. Nevertheless, warning is warranted. With elevated scrutiny and potential litigation, aligning the declared sale consideration with the stamp responsibility worth is vital to keep away from tax litigation.
With rising litigation round capital positive aspects exemptions, skilled recommendation is strongly really helpful.
Hitesh Kumar and Deepak Kapoor are chartered accountants.
The article displays the authors’ views based mostly on present tax legal guidelines and judicial precedents as of the date of publication. Readers are suggested to seek the advice of with tax professionals earlier than taking any motion.
