If a taxpayer sells a long-term capital asset, she is entitled to exemption if she purchases or constructs a new residential house within the specified period. In case the asset that she is selling is a residential house, the exemption is available under section 54, whereas if the house that she is selling is any other asset, the exemption is provided under section 54F.
In order to claim the exemption under both the sections, various conditions are prescribed, besides the period within which the new residential house has to be acquired.
One of the conditions common to both the sections is that if the payment required to claim the exemption in respect of a proposed purchase or construction of a new residential house has not been made, and the taxpayer proposes to make the payments for a new residential house after the due date of filing of her return of income, the payments required to be made after that date for the new residential house, should be deposited in a capital gains scheme account with a nationalised bank, before the due date of filing of the return of income.
The subsequent payments for the new residential house are then required to be made from such capital gains scheme account.
The capital gains scheme account is therefore a parking space for the funds, till such time as they are utilised for the payment for the house.
At times, the taxpayer may purchase a new residential house within a period of 2 years from the date of transfer of her long-term capital asset, or construct a new residential house within a period of 3 years from the date of such transfer. However, she may not have made the payments for it, or deposited the amounts paid after the due date of filing of her return of income in a capital gains scheme account.
She has, therefore, complied with the substantial requirement of the law by acquiring a new residential house within the specified period, but has not fulfilled the procedural requirement laid down by the law, of deposit in such an account. In such a case, is the taxpayer entitled to the tax exemption?
In a recent case before the Bombay High Court, the court has taken the view that, under such circumstances, the taxpayer is not entitled to the exemption in respect of payments made after the due date of filing of her return of income.
The facts before the Bombay High Court were that the taxpayer sold a plot of land in April 1995 for Rs85.33 lakh. His return of income was due to be filed by 31 October 1996. In July 1996, he entered into an agreement to purchase a flat for Rs69.60 lakh. He paid a sum of Rs20 lakh before 31 October 1996 for the new flat, and a further sum of Rs15 lakh on 1 November 1996. He took possession of the new flat in January 1997. He filed his return of income late, on 4 November 1996, claiming exemption for the full cost of the flat of Rs69.60 lakh.
In his assessment, he was allowed exemption only in respect of payments of Rs35 lakh made till the date of filing of the return of income, on the ground that the taxpayer had not deposited the balance amount of Rs34.60 lakh in the capital gains scheme account before filing his return of income.
The Bombay High Court agreed with the view taken by the tax department. The department has held that the taxpayer was not entitled to exemption in respect of the payments that was made after he had filed his return of income, as he had not deposited the amounts in the capital gains scheme account prior to filing his return of income.
Earlier, a contrary view had been taken by the Karnataka High Court in a similar case, where it had held that if the intention was not to retain the capital gains, but to invest the net sale consideration in the construction of a property, the taxpayer was entitled to the exemption, even if he had not invested the amount in the capital gains scheme account.
The Bombay High Court noted the fact that the intention of introduction of the capital gains scheme account was to ensure that the taxpayer had appropriated the money towards the acquisition of the new residential house, so that this fact could be verified by the tax department.
Therefore, though a part of the payment, Rs15 lakh, was made after the due date of filing of the return, but before the actual date of filing the return, the tax authorities had allowed the exemption for it.
Interestingly, in this case, the balance payments had been made before the tax assessment came up before the tax authorities, and such payments could easily have been verified by the tax officer. Therefore, the spirit behind the requirement of depositing the amount in the capital gains scheme account was met in this case.
Given the view that the Bombay High Court has taken, it is essential that taxpayers ensure that the amounts that are not actually utilised, but which they intend to utilise for acquisition of the new residential house, should be deposited before the actual date of filing of the return; if not before the due date of filing of the return, to ensure that they do not have to face litigation on this account.
Gautam Nayak is a chartered accountant.