The income tax laws give various options to the tax payers, to save the tax liability arising from the sale/transfer of long-term capital gains, if certain investments are made.
- Section 54 exempts long-term capital gains tax, arising on the sale of a residential house, if the indexed capital gains are invested in the purchase or construction of another residential house, within the specified period.
- Likewise, Section 54F exempts long-term capital gains tax arising on the sale of any asset other than a residential house, if the net sale consideration is invested for the purchase/construction of a house, within specified time period and subject to fulfilment of certain other conditions.
- Section 54EC allows an exemption upto Rs 50 lakhs, from long-term capital gains tax, if the indexed capital gains are invested in government-notified bonds within six months.
In view of the COVID-19 pandemic, the Finance Ministry has extended the due date for tax payers to make compliances, vis-à-vis investment, payment, deposit, acquisition, purchase and construction, among others, to claim exemption under Sections 54 to 54GB, which includes Section 54F and 54EC of the Income Tax Act. While, usually, the compliances have to be made between April 1, 2021 and September 29, 2021, it can now be completed on or before September 30, 2021.
Section 54 and 54F are mutually exclusive and cannot be used at the same time, due to the nature of assets covered under these sections. So, either Section 54 exemption will be available or exemption under Section 54F will be available, depending on the nature of the long-term asset sold. However, 54EC offers an investment option, which is parallel to section 54 and 54F.
So, questions have arisen, over whether a tax payer can avail of benefits in a combination of Section 54 and 54EC (in case the long-term capital gains are in respect of a residential house) or in another combination of Section 54F and Section 54EC (in case the long-term capital gains have arisen from a long-term asset other than a residential house property). The matter had come up for consideration before the Mumbai Tribunal, in the case of Deepa S Bheda, Mumbai vs Department Of Income Tax and decided it in favour of the tax payer on March, 23, 2010.
Facts of the case
The assessee had sold his ancestral property on December 13, 2006, for a consideration of Rs 3.40 crores. The cost of the ancestral property was taken at nil. Therefore, the entire consideration was taken as long-term capital gain. Out of the total capital gain of Rs 3.40 crores, the assessee invested a sum of Rs 2.60 crores for the purchase of a housing unit and Rs 50 lakhs was invested in REC bonds. Apart from claiming exemption under Section 54F, the assessee also claimed exemption under Section 54EC, on account of investment in REC bonds.
Section 54F(4) of the Income Tax Act, provides that in case the tax payer is not able to fully utilise the amount of consideration required to be invested for purchase/construction of the house by the due date of filing of the income tax return, then, the unutilised amount is mandatorily required to be deposited in a ‘capital gains account’ to be opened with designated banks, in order to avail the exemption under Section 54F.
The assessing officer interpreted this provision to deposit the money in a capital gains account, to be applicable on the whole of the transaction and stated that that in case the tax payer has opted to avail the exemption under Section 54F and has only partly utilised the money for such residential house, the unutilised money has to be mandatorily deposited in the capital gains account and cannot be used to purchase the capital gains bonds, to avail the exemption provided under Section 54EC. In the opinion of the assessing officer, once the tax payer has made one choice, he cannot at the same time avail the other option, simultaneously.
The observations and decision of the tribunal
The Tribunal, however, observed that it was not a case of the tax payer availing double exemption on the same amount. The assessee had claimed exemption under section 54F, as well as under section 54EC, for the respective amount of capital gain invested in the purchase of a new house and REC bonds. The tribunal further observed that wherever any such restriction was deemed fit, as to electing one option closing the other option, the legislature had provided the same in the statute with sufficient check, like under chapter VI-A of the Income Tax Act.
The Tribunal also observed that as far as the claim of exemption under section 54F and under section 54EC together is concerned, there are no such restrictions in the statute that the assessee cannot claim the exemption under both sections simultaneously, in respect of same asset sold, if the conditions provided under the respective sections are complied with and the same did not result in availing double exemption on the same amount.
The Tribunal had further observed that the expression ‘the whole or any part of capital gains in the long-term specified assets’ used in Section 54EC, made it clear that the exemption under Section 54EC is available even when the part of capital gain is invested elsewhere. Hence, the Tribunal allowed the simultaneous claim of the tax payer, for exemption from long-term capital gains tax under Section 54F, as well as Section 54EC.
From the above case, it is clear that a tax payer can avail of the exemption under Section 54 and Section 54EC together, in case the capital gains have arisen from the sale of a residential house, by partly investing the capital gains in a residential house and partly (within the overall limit of Rs 50 lakhs) in notified bonds under Section 54EC. Likewise, the exemption on long-term capital gains, with respect to any asset other than a residential asset, can be claimed under Section 54F, by investing a part of the net consideration in a residential house and partly by investing the proportionate long-term capital gains in notified capital gains bonds under Section 54EC.
In my opinion, the requirement to deposit the unutilised portion of capital gains/net consideration in a capital gains account with a bank, is applicable to the portion which the tax payer wishes to utilise for buying/constructing the residential house and will not be applicable to the whole of the long-term capital gains or sale consideration. The Tribunal’s decision comes handy, where making investment in just one avenue to the exclusion of other does, not work for the tax payer.
(The author is a taxation and home finance expert, with 30 years’ experience)