The income tax authorities have uncovered instances of taxpayers exploiting the capital gains exemption provisions under section 54F of the Income Tax Act. The misuse, predominantly involving misrepresentation of commercial properties as residential houses, has prompted a deeper investigation by the Hyderabad income tax investigation unit.
These actions highlight an ongoing concern about tax evasion, particularly among high net worth individuals, including professionals such as doctors, who have attempted to evade taxes by falsely claiming exemptions meant for residential investments.
In one prominent case, a doctor who invested Rs 50 crore in a property declared as a residential house was found to have actually purchased a commercial establishment operating as a hotel. The income tax department’s investigation team gathered photographic and video evidence, interviewed tenants, and confirmed the commercial nature of the property. The doctor was subsequently issued a notice to either surrender the claimed exemption and pay the due tax or face potential legal action.
In another case, a taxpayer falsely claimed the section 54F exemption, stating that the capital gains were reinvested in a residential property. However, upon investigation, income tax officials discovered that the property in question housed a bar and other commercial activities. Such discrepancies are prompting the department to issue notices and intensify scrutiny of previous transactions, aiming to uncover more instances of exemption misuse.
Increased Scrutiny
Under section 54F of the Income Tax Act, individuals and Hindu undivided families (HUFs) are eligible for a capital gains tax exemption if they reinvest the proceeds from selling a long-term capital asset (excluding residential properties) into a new residential property. To qualify for the full exemption, the reinvestment must occur within the stipulated time frame, and taxpayers must not own more than one residential house at the time of the transfer. If the entire net sale proceeds are reinvested, a full exemption is granted; otherwise, the exemption is proportional.
In light of increasing abuse, the exemption cap under section 54F, which was previously set at Rs 50 crore, has now been lowered to Rs 10 crore to curb misuse. The tax department has ramped up efforts to review past transactions to identify cases where individuals have falsely claimed benefits under this section.
As a chartered accountant explained, “Many individuals purchase multiple residential properties, and thorough verification is required to ensure they do not exceed the eligibility limit for exemptions.” This increased vigilance is designed to prevent further misuse and ensure compliance with the tax laws.
Sec 54 under review
In addition to section 54F, income tax authorities are also scrutinising exemptions claimed under section 54 of the Income Tax Act. This section applies to individuals and HUFs who reinvest capital gains from the sale of a residential property into another residential property, offering similar tax relief. As part of their broader investigation into tax evasion, officials are ensuring that these claims are legitimate and not being used as a loophole for avoiding tax liabilities.
Source #TOI
