Letter to the editor

Dear Sir,

Re: Taxation of Capital Gains – Exemption u/s 54 and 54F on purchase / construction of a new house.

Section 54 of the Income-tax Act provides relief from taxation in respect of Profit on sale of a Residential House provided the assessee has purchased a house within a period of 2 years from the date of sale or constructed a house within a period of 3 years from the date of such sale. A similar exemption is available under section 54F in regard to capital Gain on sale of any other Long Term Capital Asset, subject to satisfaction of other conditions stipulated in that section.

Now-a-days, due to shortage of land and increasing population and considerations of quality of life, safety & security & availability of other modern amenities at par with advanced societies, there is vertical expansion in Mega Cities and purchase of flats in a residential tower or self-contained gated residential complexes particularly in large cities. Therefore, it is quite common for the taxpayers desiring to avail of exemption u/s 54 or 54F, to purchase flats in such Residential Towers and invest the Sale Proceeds of their existing house or other assets in purchase of flats in such Towers / Residential Complexes.

However, the construction of new Residential Towers generally takes more than 2 years / 3 years, as the case may be, as it is now virtually possible for the Builder/ Developer to complete the Construction of the Tower and comply with other Municipal Regulations concerning construction of such large Residential Towers/Complexes, and hand over possession of the flats to the buyers within the period stipulated in Sections 54 and Section 54F.

The assessing officers are very rigidly applying the time limits laid down in sections 54 and 54F, and denying the exemption available to the taxpayer. Various Tax Tribunals and High Courts have liberally interpreted the aforesaid time limits specified in Sections 54 and 54F and have granted exemption to the taxpayer if the taxpayer had invested the Long Term Capital Gains on sale of the existing house property or other Asset within the time limits specified in the aforesaid sections. However, the Assessing Officers are not giving due recognition to such favorable Judicial Decisions and raising huge demands on the Tax Payers. As a result, a large number of Appeals are pending before various Appellate / Judicial Authorities on this issue.

In the interest of rendering justice to the taxpayers and advancing the underlying objective of sections 54 and 54F, the CBDT should accept the ratio of such favorable Judicial Decisions and issue an appropriate Circular instruction to the Assessing Officers to the effect that deduction/exemption u/s 54 and 54F should be allowed if the taxpayer has invested the amount of eligible Capital Gains within 2 or 3 years, as the case may be, for purchase of a new house / flat so that the genuine taxpayers are not put to hardship and huge backlog of accumulated litigation on this score can be cleared. Increase in time limits for completion of projects in view of changed realties of Real Estate Sector may also be considered.

Yours faithfully,
Tarunkumar G. Singhal.