Liberal Dimensions Of Secti On 54 Of The Income Tax Act , 1961

Author:Mr Smeeksha Bhola
Profession:Singh & Associates
 
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Introduction

There has been a phenomenon increase in trend of getting property developed by builders. More and more people are going in for getting their property developed by builders, for which consideration in form of a developed portion of the property (mostly in form of one or more floors) is paid to the builders. A complication that arises in structuring such transaction is the taxation aspect of the capital gains arising on such transfer and development of property. A recent judgment of Delhi high court in the case of CIT v. Gita Duggal1 tries to clarify the applicability of levy of capital gains on such transaction.

Facts

The taxpayer was the owner of a property comprising of basement, ground floor, first floor and second floor. The taxpayer entered into a development agreement with a builder in 2006, pursuant to which the builder demolished the property and constructed a new building comprising of three floors. In consideration of the development rights, the taxpayer received INR 40 million and two floors of the new building. Third floor was retained by the builder. In other words, the taxpayer sold his residential property to purchase two units of residential property in the same building.

Issue

whether the taxpayer should be given deduction under section 54 of the Act, in respect of different residential units in same building?

Before we discuss further, it would be worth discussing the provisions of section 54 of Income tax act of 1961.

Section 54 of the Income tax Act of 1961

Section 54 provides exemption to capital gains arising from the transfer of a residential house property (being building or lands appurtenant thereto, the income of which is chargeable under the head "Income from house property")

In respect of the above section, following points should be noted:

1. Only an Individual or Hindu Undivided Family can claim exemption.

2. Under section 54 exemptions is available only if the capital asset which is transferred is a residential house property (i.e. building or land appurtenant thereto) whose income is taxable under the head "Income from house property". The exemption is available whether the residential house property is self occupied (in such a case income of house property is nil or negative) or let out.

3. The house property which is transferred should be a long term capital asset.

4. To claim the exemption the taxpayer will have to purchase a residential house property (old or new) or construct a residential house property...

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