I sold a piece of land for ₹40 lakh in April 2012. I deposited the amount in a capital gains account. I booked two flats in June 2012 for ₹30 lakh each, to be completed by December 2014. I also got a loan of ₹20 lakh to cover the balance cost. The money in the capital gains account has been deducted but the construction of the flats has been delayed. Will I have to pay capital gains tax and penalties as the building has not been registered in my name within three years?
It is assumed that the land sold by you in April 2012 was a long-term capital asset (held by you for more than 36 months) and exemption under Section 54F of the Income-tax Act was claimed in FY13.
We understand that you had booked two residential flats in June 2012. It should be noted that as per the conditions stipulated for the above referred exemption, the net consideration should be invested in “a residential house" (referred to as new house) and not in two houses. In fact, the exemption is withdrawn if the taxpayer purchases or constructs another house (other than the new house) within a stipulated period. A few judicial precedents have held that two adjacent flats may be construed as “a residential house" based on certain parameters such as a common kitchen and living area, and allowed the exemption. However, this is fact-specific and not free from litigation. So evaluate this aspect based on your specific situation.
On the timing of construction, one of the conditions for the exemption is that the assessee constructs a new house within three years from the date of sale. Generally, subject to facts, the completion of construction coincides with the receipt of possession (on payment of the entire consideration) even if the property has not been registered. A few judicial precedents have, however, allowed the exemption even where the house was not completed within three years, on the basis of factors such as the intention of the taxpayer, the original completion date, delay at the end of builder beyond the assessee’s control and majority payments within the stipulated period. However, this too is fact-specific and not free from litigation.
You may take a position based on an analysis of the facts in your case and the available judicial precedents. In the event of any scrutiny, the onus would be on you to justify your case along with the relevant documentary evidences.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.