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DEDUCTION US/ 54

IF A PERSON GAINED CAPITAL GAIN OF RS. 10,00,000/- ON SALE OF A PROPERTY AND PURCHASED NEW PROPERTY OF RS. 10,00,000/-. HE TAKE HOME LOAN FOR THE SAME OF RS. 10,00,000/-. CAN NOW HE CLAIM DEDUCTION US/ 54 FOR THE NEW HOUSE PURCHASED OUT OF THE LOAN PROCEEDS U/S 54?

Dear Jatin,

Exemption shall not be available in this case. Because new property has not been purchased from the funds of assessee, therefore exemption shall not be available.

Kind Regards
TaxReply.com 

If the assessee constructs or purchases a residential house out of the borrowed funds, he is not eligible for deduction u/s 54F of the Act. If it is not construed in such a manner the object of introduction of the beneficial provisions would be frustrated. The fiscal provisions are to be construed in such a manner, so that its objects of introduction can be achieved. [Milan Sharad Ruparel 005 ITR 0570 (ITAT – Mum) [2010].

However a different view was taken in Bombay Housing Corporation v. Asst. CIT 81 ITD 545 (Bom.-ITAT) (2002), Where assessee utilized the sale consideration for other purposes and borrowed the money for the purpose of purchasing the residential house property to claim exemption under section 54,it was held that the contention that the same amount should have been utilized for the acquisition of new asset could not be accepted.

 

Other relevant judicial pronouncement: There is no requirement for claiming exemption under section 54 that same amount of sale consideration should be utilized for acquisition of property, even borrowed funds can be utilized for that purpose. [Prema P. Shah Vs ITO 101 TTJ 849 (Mum-ITAT)(2006)]. Also see J.V. Krishna Raovs DCIT [2012] 24 taxmann.com 104 (Hyd.-ITAT) - 

As we all know that Money do not have its permanent character, so the amount utilised for the purchase of New House/ Construction of new Building would be adjusted against the Capital gain.

The intention of the statute is that people should not live homeless and they are encouraged to have their own house by giving the exemption for the capital gains from the sale of Residential house if invested in the Residential House.

 

The intent of the legislation was to get the amounts reinvested but nowhere it stipulate the reinvestment of same funds. Moreover the borrowed funds also partake the character of own funds as the liability for repayment of borrowed funds is lying on the assessee too.  Therefore the investment may be from borrowed funds shall be available for benefit u/s 54F

I think with a little planning the exemption would be available. The proceeds be used first for buying the new property and get it registered in own name. Thereafter take a loan against this new property, which in any case would be available only if the property is duly registered in your name. In my opinion, no ambiguity should arise as discussed above.

16
Apr

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