When you sell a long-term capital asset you are eligible to claim exemption on the long-term capital gains if you reinvest the sale proceeds into purchasing or constructing a residential property. Section 54 lets you claim exemption when you sell a residential property and use the capital gains to buy or build a new one. Section 54F is similar but applies when you sell long-term assets other than a house property and reinvest the amount into a new house property.
But can you actually claim both these exemptions at the same time? The answer is yes.
Now, let’s take a closer look at a real case to better understand how this works:
ITAT Hyderabad in the case of Venkata Ramana Umareddy V/S Dy. CIT Cir-3 (3), Hyderabad (2013).
Here are some facts of the case in brief,
- The assessee, an individual, initially reported an income of Rs. 53,60,050 for the assessment year in 2008.
- Tax authorities later scrutinized their return and found long-term capital gains: ₹49,19,513 from selling land to a developer and ₹44,05,302 from selling a house with land.
- The taxpayer claimed exemptions under Sections 54 and 54F, investing the gains in a new house worth ₹1,43,26,665 in Hyderabad.
- Tax authorities disagreed, believing two houses were required for both exemptions, disallowing the Section 54 exemption and adding back ₹44,05,302 to the total income.
Hence, the assessee made an appeal to the Commissioner of Income-tax (Appeals) arguing that Sections 54 and 54F are independent and mutually exclusive. Both sections require investing in a new house, and the law doesn’t restrict claiming exemptions under both for the same property.
However, the CIT(A) rejected the arguments, emphasizing that both sections aim to boost the housing sector and shouldn’t be combined to gain extra benefits by making larger investments in a single property.
Further, the assessee made an appeal to ITAT (Income Tax Appellate Tribunal). The ITAT agreed, stating that these sections are independent, and both provide exemptions for a new residential house. The lower authorities’ interpretation, of requiring two houses, was incorrect. There’s no restriction in the law against claiming exemptions under both sections if the conditions are met, especially when capital gains come from distinct assets.
What can we conclude?
From the above case law, we can clearly interpret that you can claim deductions under Sections 54 and 54F for a single residential property if all conditions are met.
Any questions? Ask away!