The Income Tax Act provides for complete saving of Capital Gains Tax if the individual or
the Hindu Undivided family invests the capital gain in buying another house in terms of
Section 54 of the Income-tax Act, 1961.
The investment in the new house can be made within one year before or two years after the
date of transfer. Similarly, if the tax payer invests the capital gains in construction of
residential premises within three years from the date of transfer, capital gains tax can
be saved. Likewise, if the entire sale proceeds in respect of capital gains arising from
the sale of any other asset in a house are invested, then too the tax payer gets exemption
from tax on capital gains as per section 54F of the Income-Tax Act, 1961.
A question, however, arises whether the investment in a flat under the self-financing
scheme of the Delhi Development Authority (DDA) would be treated as construction of the
house for the purposes of Section 54 of the Income-tax Act, 1961.
This issue came up recently before the Madhya Pradesh High court in the case of Smt.
Shashi Varma V. CIT (1997) 224 ITR 106. The assessee is an individual and owned property
in Jabalpur. In the year prior to the assessment year 1982-83, the assessee sold his
property on December 29, 1981, and realised capital gains of Rs 31,980. She invested a sum
of Rs 71,256 for the purchase of a flat in Delhi from the Delhi Development Authority. The
sum represented the first instalment.
Exemption was claimed by the assessee under Section 54 in regard to the surplus realised
on the sale of the residential house at Jabalpur. This was denied by the Income-tax
Officer. Thereafter the matter was taken in appeal before the Appellate Assistant
Commissioner who also upheld the order of the Income-tax officer. Ultimately, the Tribunal
also upheld the finding of the Income-tax Officer. Hence, the assessee approached the
Tribunal for making a reference to the High Court.
The High Court judges felt that the Tribunal had taken a very pedantic approach while
construing the provisions of Section 54 of the Income-Tax Act. In the present case, in
fact, the capital gain was Rs 31,980; whereas the first instalment towards the DDA flat
was Rs 71,256, ie. much more than the capital gains.
While giving the decision the judges of the High Court also referred to Circular No. 471
dated 15-10-86 issued by the Central Board of Direct Taxes. Extract of circular No 471
dated 15-10-86 issued by CBDT:
"The Board have been advised that ...under the above circumstances, the inference
that can be drawn is that the DDA takes up the construction work on behalf of the allottee
and the transaction involved is not a sale. Under the scheme the tentative cost of
construction is already determined and the DDA facilities the payment of the cost of
construction in instalments subject to the condition that the allottee has to bear the
increase, if any, in the cost of construction and the fact that the amount was allowed to
be paid in instalments does not affect the legal position stated above. In view of these
facts, it has been decided that cases of allotment of flats under the Self-Financing
Scheme of the DDA. shall be treated as cases of construction for the purpose of capital
gains."
After relaying on the above mentioned circular of CBDT the judges opined that it was not
proper for the Tribunal to have ignored the circular because it has a persuasive value and
it was in the nature of granting relief. More so, Section 54 of the Act of 1961 only says
that within two years, the assessee should have constructed the house but that does not
mean that the construction of houses should necessarily be complete within two years. In
modern days, it is not easy to construct a house within the time-limit of two years and
under the government schemes, construction takes years and years. Therefore, confining to
two years period for construction and handing over possession thereof is impossible and
unworkable under Section 54 of the Act. If substantial investment is made then it should
be deemed that sufficient steps have been taken.
In view of this decision as also the circular of the CBDT, it is clear that allotment of a
flat by the DDA will be treated as construction for the purposes of saving long-term
capital gains tax.
|
