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A recent ruling by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) determined that for an under-construction property, the date of taking possession should be considered when determining eligibility for tax benefits under Section 54 of the Income Tax Act. Section 54 of the Income Tax Act allows taxes on long-term capital gains from selling an old home to be reduced by investing in a new property within a specified time period. However, an Income Tax officer denied benefits to a non-resident couple citing the purchase agreement date, not possession date. ITAT ruled in favour of the taxpayers, holding that possession date, which fell within the required period, determined eligibility for the tax break.
The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) recently ruled that for an under-construction property, the date of taking possession determines eligibility for tax benefits under Section 54 of the Income Tax Act. Advertisement
This ruling is significant as tax breaks for investing in a new home require the purchase to occur within a set timeframe. To the extent of investment in the new house, the taxable component of long-term capital gains (which has arisen on sale of the old house) is reduced. This lowers the overall tax owed.
As per Section 54 of the Income Tax Act, the new residential property must be bought within one year before or two years after the sale of the old property. Alternatively, construction of the new home must be completed within three years of selling the original one.
The case under consideration involved a non-resident (NRI) couple who were taxed for fiscal year 2010-11. The Income Tax officer denied the exemption and assessed taxable income of around Rs. 36 lakh each. Penalties were also levied, as the officer viewed claiming the incorrect deduction as concealment of income or providing wrong particulars of income.
The non-resident couple had sold the old house on Feb 10, 2011. Thus, the new house could have been purchased from Feb 11, 2010 (one-year prior) till Feb 9, 2013 (two-years after). However, the I-T officer noted that the agreement with the builder for purchase of a new house was made on July 25, 2009, and denied the tax benefit.
ITAT ruled in favour of the taxpayers. The bench held that by entering into an agreement to purchase, only the right to purchase had been acquired. It is the date of possession Feb 2, 2011, which should be considered for the purpose of the tax benefit. This date fell within the prescribed period.
The ITAT's ruling clarifies an important aspect of the tax provision that aims to facilitate taxpayers upgrading their homes. By focusing on possession date for under-construction properties, it provides certainty for taxpayers investing in real estate being built over several years. This will help avoid confusion and uncertainty in interpretation of eligibility timelines for industry and home buyers alike.
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