A Delhi resident who earned substantial long-term capital gains from the sale of unlisted shares and invested a large portion of the proceeds in a residential property successfully won a legal battle against the Income Tax Department after his claim for exemption under Section 54F of the Income-tax Act was rejected.
The taxpayer, Mr. Bansal from Badarpur Khadar, Delhi, sold unlisted shares for Rs 7.88 crore, resulting in long-term capital gains of Rs 7.59 crore. He subsequently purchased a residential property in Delhi for Rs 5.65 crore and claimed exemption under Section 54F on the gains.
However, the Income Tax Department denied the exemption during assessment proceedings. The tax authorities argued that the investment was not made within the prescribed due date for filing the income tax return under Section 139(1). They also claimed that the unutilised amount had not been deposited in the Capital Gains Account Scheme (CGAS), alleged that the taxpayer owned more than one residential property, and contended that capital gains should be computed only after adjusting losses from other share transactions.
Aggrieved by the decision, Mr. Bansal first approached the Commissioner of Income Tax (Appeals). After his appeal was rejected, he challenged the order before the Income Tax Appellate Tribunal (ITAT), Delhi.
The tribunal examined the facts of the case and ruled in favour of the taxpayer. It held that Section 54F(4) requires deposit of funds in the Capital Gains Account Scheme only when the sale proceeds are not utilised before filing the income tax return. Since Mr. Bansal had already invested the money in the residential property before filing his return, the requirement to deposit the amount in the CGAS did not arise.
The ITAT further clarified that the reference to “Section 139” in Section 54F(4) includes not only Section 139(1) but also Section 139(4), which deals with belated returns. Therefore, utilisation of funds before filing a belated return can also satisfy the conditions for claiming exemption.
A tax expert said the ruling provides important clarity regarding the interpretation of Section 54F and confirms that taxpayers who utilise capital gains before filing a belated return may still qualify for the exemption without depositing funds in the Capital Gains Account Scheme.
The tribunal also addressed the department’s allegation that Mr. Bansal owned more than one residential property. The taxpayer owned only a one-third undivided share in a house located in Preet Vihar, Delhi, while the remaining shares were held by his brothers. The ITAT observed that the property constituted a single residential unit jointly owned by the brothers and therefore could not be treated as ownership of multiple residential houses.
As a result, the tribunal concluded that the taxpayer satisfied the condition under Section 54F that an assessee should not own more than one residential house, other than the new property acquired from the capital gains.
On the issue of capital gains computation, the tribunal held that each capital asset must be considered independently. It observed that Section 54F applies to gains arising from the transfer of any long-term capital asset and that gains from profitable transactions need not be compulsorily adjusted against losses from other transactions before granting exemption. According to the tribunal, loss-making assets fall outside the scope of the exemption calculation.
The tribunal also noted that in a similar case involving the taxpayer’s brother and substantially identical facts, exemption under Section 54F had already been allowed, which further supported the taxpayer’s claim.
Another expert said the judgment highlights an important distinction in the operation of Section 54F. According to the expert, while unutilised funds may have to be deposited in a specified account before the due date of the original return, taxpayers who are reasonably certain of utilising the amount for purchasing a new residential property before filing a belated return may not necessarily be required to make such a deposit.
The ruling is expected to provide relief to taxpayers claiming Section 54F exemption and offers important guidance on the treatment of capital gains arising from the sale of unlisted shares and their subsequent investment in residential property.
Source from: https://economictimes.indiatimes.com/wealth/legal/will/man-sold-unlisted-shares-bought-rs-5-65-cr-house-faced-income-tax-scrutiny-he-fought-back-and-won-in-itat-delhi-despite-low-income-declaration/printarticle/131531252.cms
