PERSONAL TAX: Full ITR gains for one in joint house

A taxpayer sold his property in Mumbai that was jointly owned with his wife. In his return of income, the taxpayer recorded his share in the sale proceeds at Rs 51,27,500 and after indexation offered long-term capital gains of Rs 43,01,665. 

Under Section 54 of the Income Tax Act (the Act), if long-term capital gains arising from the sale of a house property is reinvested in another house property within a specified period; then the taxpayer can claim exemption from capital gains to the extent of the amount invested in a new property. The taxpayer claimed exemption u/s 54 of the Act on account of his investment in a new residential house property for Rs 42,65,856 (with stamp duty and registration fees). On the balance gains of Rs 35,809 the taxpayer discharged tax liability of Rs 7,376. 

During assessment, the tax officer observed that the new property was purchased in the taxpayer and his brother’s names. The tax officer, accordingly, concluded that the exemption claimed by the assesse on account of his investment should be restricted to 50%, being the taxpayer’s share in the said property. The taxpayer submitted that his brother’s name was included purely for the sake of convenience, while he had paid the entire amount. At the first appellate level, the authority agreed with the tax officer’s view and ruled against the taxpayer. At the second level too, the tax officer restricted the exemption to 50%, however, agreed that the entire investment for the purchase of the property along with stamp duty and registration charges were paid by the taxpayer. 

The tax tribunal referred to precedents available in another case with similar circumstances, where the Delhi High Court had held that a taxpayer was entitled to full exemption if the full amount is invested by the taxpayer, even though the property may be purchased in joint names with spouse. Section 54/54F of the Act mandate that the house should be purchased by the taxpayer; it does not stipulate that the house should be purchased in the name of the taxpayer alone. The objective of these sections is to provide impetus to house construction. 

So long as this purpose is achieved, tax officers cannot impose conditions, such as above, so that the intention of the Legislature behind the exemption provisions is defeated. Section 54 is a beneficial provision, which should be interpreted liberally in favour of the exemption to the taxpayer. Other high courts have even held that for the purpose of these exemptions, the term ‘assessee’ must be given wide and liberal interpretation so as to include legal heirs too. In view of the above, the tax tribunal ruled in favour of the taxpayer, and allowed his claim for the full exemption. 

The above decision serves as a good precedent for home buyers to add their spouse’s name while reinvesting their sale proceeds into another house, without bothering about the claim for exemption.

The author is a Sebi-registered investment adviser and a chartered accountant