The Income-Tax (I-T) Act provides for exemption from long-term capital gains where the sale proceeds of the original asset are invested in a new residential property. The Bombay high court, in a recent order, has held that such an exemption will be available only to the extent to which the amount has been actually utilized by the taxpayer, before the due date of filing his I-T return.

If a taxpayer has only partly utilized proceeds of the long-term capital gains (LTCG) by making payments to the builder and has not deposited the balance unutilized amount in a specified bank account, then only the actual payments will be considered for computing capital gains exempt under Section 54F of the I-T Act, the HC held.

The taxable component of LTCG is arrived at after taking into consideration the exemption available under Section 54F. This order will reduce the quantum that can be claimed as exempt from LTGC, consequently there will be a higher I-T payout (see box).

Tax authorities say while this order relates to Section 54F (covering LTGC arising on sale of non-residential property) its principle would also apply to Section 54 (covering LTGC on sale of a residential property). Both these sections provide for an exemption if the amount is invested in a residential property or deposited in a specified bank account. Thus, a larger number of taxpayers could be impacted.

To claim I-T benefits, post the sale of a non-residential property (say land), the taxpayer under Section 54F is required to invest the proceeds from LTCG in a residential property within two years from the date of sale. Or, he can construct another house property within three years.

That amount, which is not utilized towards a new residential house till the I-T return due date, is required to be deposited in a specified bank account. If the entire amount of LTGC is not invested or deposited, the remaining portion of the gain is subject to I-T. The HC adopted a strict interpretation of Section 54F(4), holding that “the amount which has not been utilized in construction or purchase of property before filing I-T return, must ‘necessarily’ be deposited in an account duly notified by the Central Government, so as to be exempted.”

“The Supreme Court, in various cases, has held that exemption provisions should be liberally interpreted as long as there substantial compliance with the requirements. In this case, the taxpayer had met with the spirit of the I-T law, as purchase of the new flat was completed well before the I-T assessment was taken up,” says Saroj Maniar, tax partner at CNK & Associates. Given this order, taxpayers should make deposits, wherever necessary, before filing their I-T return, she cautions.

In this case, Humayun Merchand had sold land on April 29, 1995 for Rs 85.3 lakh. He entered into an agreement on July 16, 1996, with a builder to purchase a flat for Rs 69.9 lakh (possession taken in January 1997). He filed his I-T return on November 4, 1996, by which date he had only paid the builder Rs 35 lakh and not made any bank deposit. The I-T officer allowed a proportionate exemption of Rs 31.6 lakh and treated Rs 43.8 lakh as taxable capital gains.

The tax tribunal had dismissed the appeal filed by Merchant who moved to the Bombay high court. Here, too, the verdict was not in his favour.

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