The Hindu Business Line : Taxing case about a `residential house'

I sold a large flat in Mumbai in April. I want to invest the proceeds in two small flats and claim exemption under Section 54. Will exemption be available on sale of one residential house and investment in two. Venu

The issue of whether the exemption under Section 54 will be available on investments in more than one residential house is a vexed one. Divergent views have been expressed by different Benches of the Tribunal.

The Bangalore Bench of the Tribunal in D. Anand Basappa v ITO [2004] 91 ITD 53 (Bangalore) has taken a view that the exemption can be claimed in respect of the investment made in more than one house. The Mumbai Bench of the Tribunal in Mrs.Gulshan Banoo R.Mukhi v JCIT [2002] 83 ITD 649 (Mumbai) has, however, expressed a contrary view. The confusion arises because of the use of the phrase "a residential house."

The Bangalore Bench of the Tribunal has taken a view that reference to the singular includes the plural under the General Clauses Act and that, therefore, the exemption can be claimed in respect of investment in more than one house.

The Mumbai Bench of the Tribunal has taken a different view on the basis that there is no ambiguity in the Section and, therefore, there is no need to resort to any form of interpretation.

You may, however, note that where there is more than one house, which is acquired and where it can be proved that different flats in the same place have been acquired for use by a large family etc., the exemption will be available without much difficulty by treating all the units as one residential house.

This view is supported by the Bombay Bench of the Tribunal in K.G.Vyas v Seventh ITO [1986] 16 ITD 195 (Bombay) and of the Delhi High Court in CIT v Sunita Aggarwal [2006] 284 ITR 20 (Delhi).

I sold a house and have a long-term capital gains arising from it. Section 54EC allows tax exemption where the investment is made in notified bonds of the Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI). Such bonds are, however, not available now since they have not been notified. I do not want to claim exemption under Section 54 by investing in another house. Where can I keep these funds until such time as these bonds are notified so as not to lose the exemption, which will otherwise be available under Section 54EC? Krishnaswami

It is correct that the exemption under Section 54EC can be claimed in respect of long-term capital gains on investment in notified bonds of the REC and NHAI. And such bonds had not been notified for an intermittent period. You may, however, note that the bonds have since been notified but there seems to be a catch that no person can invest more than Rs 50 lakh in such bonds.

This appears to be unfair with the Income-Tax Act granting an exemption while the bonds are either not notified or notified subject to ceilings. It is high time the Government considered this aspect and tried to remedy the hardship caused to assessees.

In any case, you would not have any difficulty in making the investment in bonds to claim the exemption under Section 54EC but if your capital gain is more than Rs 50 lakh you would have difficulty in claiming the exemption in excess of the same under Section 54EC.

You may also note that the investment in bonds for the purpose of claiming exemption under Section 54EC has to be made within six months from the date of transfer of the capital asset for the purpose of benefiting from the exemption under Section 54EC. Even if bonds are not notified and if you are unable to invest within the stipulated time due to this reason, the benefit of the exemption under Section 54EC would be lost.

I propose to gift to my wife the shares I received as bonus more than two years ago. What will the tax implication be on the dividend income and on the sale of these shares by my wife? What are the implications of my wife receiving more bonus shares and she selling them, having held them for less than 12 months? Sharad Hatekar

The shares that you gifted your wife will be treated as long-term capital assets in the hands of your wife since the period of holding for this purpose has to be taken into account, including the period for which these shares were held by you. This is provided for in Section 2(42A) of the Act. Since the gain is long term, if the shares are sold by your wife through a recognised stock exchange, STT will be payable and consequently the gain will be exempt. Therefore, the question of clubbing the same in your hands will also not arise. Dividend income being exempt under Section 10(34), the same will also not be clubbed and will not be taxed.

As regards the additional bonus shares received by your wife, the clubbing provisions will not be attracted on the sale of the same as they only contemplate of clubbing of income and not income arising therefrom.

Since the gain is short term the same will, however, be taxed in the hands of your wife. Such gain should be taxed at 10 per cent (as increased by the appropriate surcharge and additional surcharge) if the same is through a recognised stock exchange, where STT is paid on sale.

Otherwise, the tax will be at the normal rates applicable to an individual, which would be dependent on the slab in which your wife falls.

Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002.