Could you please answer the following query regarding exemption U/S 54 of the Income Tax Act.

Facts

The assessee, an individual, Major, has sold his residential house and earned long term capital gain on the sale of the said house.

The assessee intends to spend the total sale proceeds on the construction of the new house within the allotted period of 3 years, to avail exemption U/s 54.

However the assessee does not own the plot of land on which he wants to spend the money for construction.

The said plot of land in fact belongs to his father.

Thus the assessee will be spending the total amount on the construction but on the plot of land which belongs to his father.

Query

a)     Will the assessee be entitled to claim exemption in such situation i.e. without completing any formalities for the transfer of land in his name.

b)    If not can the assessee enter into a sort of collaboration agreement or MOU with his father and become proportionate joint owner of the said property.

c)     If so will this kind of arrangement attract any stamp duty, since it is an arrangement between son and father and no transfer or sale of the property has happened.

d)    What is the suggested foolproof  route to utilize the plot of land belonging to the father and investment of long term capital gain for construction there upon by the son, without involving any stampduty.

e)     Could you also cite some case laws.

Thanks

P. M. Arora

Can you please expedite the answer to the following query sent by us on 17 March 2015.

Thanks

P. M. Arora

Dear Mr Arora

the option B appears to be th best, 

Thank you for your reply

Could you please further elaborate, If the option B is executed, whether such agreement will be accepted without getting it registered because registration will involve stamp duty.

and

It will help me a lot if you please reply to all the points (a) to (e).

Thanks

P. M. Arora

Can you please do the needful today.

Section 54 reads - “the assessee has within a period of ……………… purchased, or has ……….. constructed a residential house”. The other sections use similar language. In view of the stipulation in the abovementioned provisions, that require the acquisition by an assessee, a question has arisen before the courts as to whether the acquisition (purchase, construction, etc.) by the assessee necessarily means that the new asset must be acquired in the name of the assessee or that it would be sufficient where the funds belonging to the assessee are used for acquiring the specified asset to enable an assessee to claim the exemption from tax

In all the cases, it was held that the new asset is acquired by the assessee (even with joint name of wife etc.) and construction is also done by the assessee.

The cost of plot together with cost of construction is to be completed within the period specified in these sections.(Circular no. 667, dated 18.10.1993)

Your query is replied as under:.

a) No exemption is allowed.You must be the owner of property.

b) Yes u can do that because non registration of the plot does not disentitle you from exemption as is held in the CIT v. Shahjada Begum(1980)173 ITR 397(AP).

c)In case no sale or transfer is done, no exemption is allowed.You can not make sham agreement and get the benefit.

d)Nothing.You can not have both the benefits.

e)No case laws saying that you can get both the benefits. However, there are 100 case laws where agreement for purchase of property is made and construction is done by the assesee but in that case either you can get the plot under gift or by paying the consideration and then constructing it.