The Hindu Business Line : Rollover benefits to avoid capital gains tax

Long-term capital assets suffer tax at a higher rate compared to short-term capital assets when they are transferred for a consideration resulting in taxable capital gains. Tax law allows rollover benefits for investment of sale proceeds in new assets. Certain conditions have to be satisfied for claiming benefit of exemption from capital gains tax when sale proceeds of old assets are invested.

Section 54B

Section 54B of the Income-Tax Act, 1961 lays down that when an assessee transfers agricultural land and within two years purchases agricultural land again, then the resultant capital gains from the transfer of his original holding will not be brought to tax to the extent of the investment in the new agricultural land.

Jai Narayan of Punjab sold agricultural land in his village to a private company for Rs 14,21,860. He invested the sale proceeds in purchasing similar agricultural land in the names of his son and grandson. He claimed exemption under Section 54B.

This was denied to him by the assessing officer (AO) on the ground that the sale proceeds were utilised for buying agricultural land that was not in his own name. The Punjab and Haryana High Court looked into the matter in some detail.

It observed that a reading of Section 54B nowhere suggested that the legislature intended to advance the benefit of the said section to an assessee who purchased the agricultural land in the name of a third person.

The Section referred to the assessee purchasing any other land for agricultural purposes. This meant that the new asset which is purchased has to be in the name of the assessee himself. Purchase of agricultural land by the assessee in the name of his son or grandson will not entitle him to exemption under Section 54B (306 ITR 335).

The Madras High Court had allowed exemption under Section 54 when the assessee sold his residential house and purchased another residential house in his wife’s name. This view of the Madras High Court was dissented by the Punjab High Court in the above ruling.

The AP High Court had also taken the view that the word ‘assessee’ must be given a wide and liberal interpretation and should also include legal heirs (165 ITR 228). Benefit was extended by the AP High Court in that case to investment in the joint names of legal heirs.

Section 54

Section 54 of the Act extends the benefit of exemption if a residential house is sold and another is purchased within the prescribed time. Rajesh Surana of Jodhpur constructed a boundary wall and a garage-cum-room on a plot and sold the same. Exemption was claimed for the resultant capital gains. The question for consideration was whether the plot with the garage constructed thereon, where a chowkidar of the assessee was residing, can be considered a residential house.

The Act does not define the expression ‘residential house’. Exemption is for a residential house and not for a mere residential building, which is merely a structure existing on land. It has been constructed with the intention of being used as a residential house.

Every residential building would not be a residential house, though every residential house has to be a residential building. The structure sold cannot be considered a dwelling unit though a chowkidar might have been residing there.

Nomads live in their mobile bullock carts, but the bullock carts cannot be said to fall within the expression “residential house”. A garage room, with no kitchen or toilet will not fall in the category of a dwelling unit.

According to the Section, the asset should be predominantly residential building and may have land appurtenant thereto and it may not be an open plot having some insignificant structure, which might under some constraints be used for residence by some employee or caretaker. The Rajastan High Court elaborately went into the definition of a residential house and denied the benefit of exemption [306 ITR 368].

In a wealth tax case, a Full Bench of the Madras High Court had held that a residential house does not necessarily require that it should be occupied for residential purposes (245 ITR 800). According to the Board, a flat can be considered a residential house (Circular No. 417 of October 10, 1982).

In the absence of a statutory definition, for purposes of income-tax and wealth tax laws, the circumstances surrounding the case will have to be considered in detail for coming to the conclusion whether the structure under consideration was a residential house or not.

Exemption is allowable even for purchase or construction of a portion of the house to be used for residence. Acquisition of an undivided share in a residential property will also be entitled to exemption.

(The author is a former Chief Commissioner of Income-Tax. blfeedback@thehindu.co.in)