September 21, 2017

The date of possession of a new house, and not that of the purchase/sale agreement, will be considered for calculating the eligibility period for claiming exemption on reinvestment of long term capital gains in residential property, the Income Tax Appellate Tribunal (Mumbai bench) held recently.

If a taxpayer makes a profit on sale of an asset (house, land, commercial property), he/she has held for two years (2017-18 budget reduced the holding period from the earlier 3 years), it is treated as an LTCG, taxable at 20% with an adjustment for inflation.

Source : pexels.com

If a component of LTCG is reinvested in another house in India within a stipulated period–one year prior or two years from the date of sale of the first house—the taxpayer can claim a tax exemption under section 54 of the I-T Act. The reinvestment must be made within that period, failing which the tax benefits are not available.

In this case before the tribunal, the taxpayer, Ramita Mahendra Mehta, claimed I-T deduction as she had sold her house on September 11, 2009 and purchased a new house by entering into an agreement dated August 18, 2007.

The I-T officer said she did not comply with the requirement that the new house must be purchased within one year prior to transfer of the existing property. However, Mehta contended that though the purchase agreement was entered into on August 18, 2007, the final possession of the new house was received only in March 2009. The date of possession must be considered for determining the 'period of eligibility'. Thus, she would meet the criteria of having invested within one year prior to the transfer of the existing property (which was sold on September 11, the same year).

The tribunal bench recognised the issues that buyers of house properties face, especially in metropolitan cities, which could include project delays and thus delay in possession of the new house.

In its order, the ITAT said: "The buyers even after having the agreement for purchase of the new flat cannot exercise any right of ownership or their right cannot be traced to any part of the construction till such time the builder actually gives the possession of a particular flat to the buyer... Against this background of flat transactions, we are now faced with the provisions of Section 54 for granting exemption to the taxpayer, who at one point of time, enters into purchase and another point of time, takes possession and starts actual enjoyment of the flat."

Relying on previous orders of high courts, including the Bombay high court, the tribunal held that the date of final occupation should be considered for calculating the period of eligibility for deduction under section 54. In this case, it would enable the taxpayer to satisfy the requirement that the new house must be purchased within one year prior to transfer of the existing house.

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