Section 54 of Income Tax Act, 1961

Clipped from: https://taxguru.in/income-tax/section-54-income-tax-act-1961.html

Prior to Finance Act, 2019 there is a restriction in investment in one residential house under section 54 of Income Tax Act, 1961 on transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head ‘Income from house property’.

There is amendment in Finance Act, 2019, wherein provisos have been inserted after clause (ii) of sub-section (1) of section 54 by the Finance Act, 2019, w.e.f. 1-4-2020 and wherein restriction in a residential house has been amended, giving effect  this amendment the assessee can claim deduction u/s 54 by investing in two residential house properties, subject to capital gain does not exceed two crores. The extract of  relevant para of amendment in section 54 of Income Tax Act, 1961 is reproduced hereunder:-

[Provided that where the amount of the capital gain does not exceed two crore rupees, the assessee may, at his option, purchase or construct two residential houses in India, and where such option has been exercised,—

(a) the provisions of this sub-section shall have effect as if for the words “one residential house in India”, the words “two residential houses in India” had been substituted;

(b) any reference in this sub-section and sub-section (2)to “new asset” shall be construed as a reference to the two residential houses in India:

Provided further that where during any assessment year, the assessee has exercised the option referred to in the first proviso, he shall not be subsequently entitled to exercise the option for the same or any other assessment year.]

In view of the above, there is a question arising that the Assessee can claim deduction u/s 54 by selling more than one house property and investment made in one/two residential house property.

In this respect we may refer section 54 of Income Tax Act, 1961, the extract of same is reproduced hereunder:-

Section 54 of Income Tax Act, 1961

Profit on sale of property used for residence.

54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

 (i) if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain:

Provided that where the amount of the capital gain does not exceed two crore rupees, the assessee may, at his option, purchase or construct two residential houses in India, and where such option has been exercised,—

(a) the provisions of this sub-section shall have effect as if for the words “one residential house in India”, the words “two residential houses in India” had been substituted;

(b) any reference in this sub-section and sub-section (2) to “new asset” shall be construed as a reference to the two residential houses in India:

Provided further that where during any assessment year, the assessee has exercised the option referred to in the first proviso, he shall not be subsequently entitled to exercise the option for the same or any other assessment year.

(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,—

(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

On plain reading of provisions of section 54 of Income Tax Act, 1961, it will observed that there is no restriction that capital gain arising from sale of more than one residential house cannot be invested in one residential house.

Further in this respect we may refer to the ruling of Delhi and Mumbai ITAT, wherein it has been held that the  assessee can claim deduction u/s 54 by transferring more than one residential house can be invested in one house/two house property. The extract of ruling of Delhi and Mumbai ITAT is are reproduced hereunder:-

Vijay Kumar Wanchoo vs ITO [2021] 124 taxman.com 82 (Delhi ITAT)

Section 54 of the Income-tax Act, 1961 – Capital gains – Profit on sale of property used for residence (Allowability) – Assessment year 2009-10 – Assessee invested capital gains from sale of two flats in one residential house and claimed exemption under section 54 – Assessing Officer opined that there must be set of sale and purchase of one residential house to claim exemption under section 54 – He therefore, held that capital gains in respect of sale of one property could be treated exempt against purchased property and disallowed exemption in respect of capital gains from sale of second property – It was noted that Assessee had sold both flats through two separate deeds and purchased one residential flat against said sales within time period permitted as per section 54 – Whether since requirement of section 54 is that investment should be in one residential house, there is no bar on investing capital gains arising from sale of more than one residential house – Held, yes – Whether since assessee invested capital gains arising from sale of both flats in one residential house, assessee would be entitled for exemption under section 54 – Held, yes [Para 7.2] [In favour of assessee]

DCIT vs Ranjit Vithaldas [2012] 23 taxmann.com 226 (Mumbai)

Section 54 of the Income-tax Act, 1961 – Capital gains – Profit on sale of property used for residential house – Assessment year 1998-99 – Whether there is an inbuilt restriction that capital gain arising from sale of one residential house cannot be invested in more than one residential house; however, there is no restriction that capital gain arising from sale of more than one residential houses cannot be invested in one residential house – Held, yes – Whether, therefore, where two flats were sold in two different years and capital gain arising from sale of both flats was invested in one residential house, exemption under section 54 would be available – Held, yes [In favour of assessee]

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