Rollover benefits on property

Real estate market knows no slump. Prices continue to be on a high. The temptation to buy new property faces price constraints. Who will not like to have a new residential house inspite of the prices being so high? If you own an old house, you can dispose it off and invest in a new house without attracting the provision for taxation of the resulting capital gains on the sale of the old house. This law applies even to agricultural lands.

Despite the law being in existence for more than 3 decades, certain areas still require clarification at the highest level. Is it mandatory that the new house should be purchased only in the name of the assessee seller of the old house?

Delhi HC View

Ravindra Kumar Arora sold his property for Rs 4.33 crore in 2006 and invested a major part of the sale proceeds in the purchase of a new house in 2009 in Safdarjung Enclave. He claimed abatement of capital gains to the extent of the investment into the new property. While the property sold was in Arora's own name, the purchase was made jointly in the names of the assessee and his wife.

He explained that in order to avoid litigation after his death, he had included his wife's name also though the entire investment flowed from him only. The Assessing Officer allowed exemption only to the extent of 50 per cent and taxed the balance as capital gains.

The Delhi High Court heard the Revenue appeal in the matter. It noted that stamp duty and registration charges and all other expenses were all borne by Arora. Arora was physically handicapped. He was the real owner of the house.

The Delhi High Court considered these facts and ruled that merely because Arora had included the name of his wife and made it joint property, roll over benefits cannot be denied. Such a conduct has rather to be encouraged. It gives empowerment to women.

Even the Supreme Court has accepted the theory of constructive ownership in Podar Cement's case. The Section nowhere insists that the house should be purchased by the assessee only. Joint purchase should not stand in the way of benefits.

The objective behind the provision is to provide impetus to the house construction. As long as this purpose is achieved, hyper-technicality should not impede the claim of deduction which has been allowed by the Parliament. Purposive construction is to be preferred as against the literal construction.

A beneficial provision should be interpreted liberally in favour of exemption and deduction to the taxpayer. The word ‘assessee' must be given wide and liberal interpretation so as to include legal heirs also. This was also the view of the Andhra (165 ITR 228) Madras High Court (287 ITR 271) and the Punjab High Court in 327 ITR 278.

ROLLOVER BENEFITS

The above liberal interpretation was not accepted by the Bombay High Court in 312 ITR 40. Purchase in the name of adopted son was considered not eligible for rollover benefits on transfer of the old property. Again the Punjab High Court itself chose to deny the benefit in 306 ITR 335 choosing to give a strict interpretation of the term ‘assessee'. The Bombay High Court specifically dissented from the views of the Madras and Andhra High Courts.

Rollover benefits are made available for residential house, agricultural land and even for construction and flats. Even investments in two flats will be permitted. It should however be shown that the two flats are meant exclusively for residence 309 ITR 329 (Kar).

The term ‘purchase' in Section 54 of the Income Tax Act, 1961 must be given its normal meaning. It will take in payment in kind such as adjustment towards an old debt. There is no stress in the Section on ‘cash and carry'. Release by three-brothers in favour of the eldest brother for a consideration will amount to purchase by the eldest brother of the share of each of the brothers for a price 120 ITR 46 (SC).

Date of taking possession is relevant for computing the time limit within which the roll over benefit has to be availed off. The date of registration is not so important for computing the prescribed time limit. Purchase of a portion of the self occupied house is also eligible for exemption even though the assessee was residing in the same house both before and after purchase.

Time limits are also laid down to take advantage of the capital gains exemption deposit schemes. Courts have held that the due date for such deposit can be the due date under the extended time limit given in Section 139(4).

The profits from the sale of the property must be utilised for specified purpose before the date given under Section 139(4). It is to be hoped that the conflict in interpretation of these provisions will be settled finally in the next Finance Bill.

(The author is a former Chief Commissioner of Income-Tax.)

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