Quiz for the week (10 Mar 2025):

Rajesh sold a vacant land for Rs.90 lakhs on 10^th April,2024. It was acquired in April, 1998 for Rs.5 lakhs and its indexed cost of its acquisition at the time of sale was Rs.36 lakhs. He acquired a residential property along with his brother for a total price of Rs.100 lakhs in June, 2024 in which he has equal share of ownership. Rajesh already owns a house property which is self-occupied by him. On 1^st November, 2024 he sold another vacant land for Rs.110 lakhs whose indexed cost of acquisition was Rs.40 lakhs and original cost of acquisition was Rs.27 lakhs. He acquired yet another residential property wholly by himself for Rs.105 lakhs in March, 2025. How much would be the chargeable capital gain in the hands of Rajesh in respect of the above transactions?

Best Answer :

In the query given above, the assessee Rajesh has transferred 2 vacant lands and acquired one residential building with 50% ownership and another residential building with 100% ownership.  The eligibility for exemption under section 54F has to be decided.

The proviso to section 54F(1) says that nothing contained in sub-section (1) of section 54F would apply if the assessee –  

(i)               owns more than one residential house, other than the new asset on the date of transfer of the original asset; or

(ii)             purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or

(iii)            constructs any residential house, other than the new asset, within a period of 3 years after the date of transfer of the original asset; and

the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “income from house property”.

The assessee Rajesh already has a residential property which is self-occupied. He transferred a vacant site on 10^th April, 2024 for Rs.90 lakhs and acquired a residential property with 50% share for Rs.50 lakhs being his share. The long-term capital gain would be Rs.54 lakhs before deduction under section 54F (Rs.90 lakhs less Rs.36 lakhs). Since only Rs.50 lakh out of Rs.90 lakh was utilized for acquisition of residential building with 50% share, proportionate exemption / deduction under section 54F is possible. Therefore, the amount of exemption under section 54F would be Rs.30 lakhs (Rs.50 lakhs X Rs.54 lakhs / Rs.90 lakhs).

In November, 2024 the assessee sold yet another vacant land for Rs.110 lakhs and acquired another residential house property for Rs.105 lakhs. At the time of sale of this vacant land, the assessee owned one residential house (self-occupied) and another residential house in which he has 50% share along with his brother.

In CIT v. M.J.Siwani (2014) 366 ITR 356 (Karn) while interpreting section 54F it was held that ‘a residential house’ would include a house shared with any other person. Even if the residential house is shared by an assessee, his right and ownership in the house, to whatever extent, is exclusive and nobody can take away his right in the house without due process of law. In other words, co-owner is the owner of a house in which he has share and that his right, title and interest is exclusive to the extent of his share and that he is the owner of the entire undivided house till it is partitioned. The SLP was dismissed in M.J.Siwani v. CIT (2015) 53 taxmann.com 318 (SC).

Presently, clause (i) of proviso to section 54F(1) uses the expression ‘owns more than one residential house’. Therefore, when the second residential property was acquired the assessee has breached the condition. Clause (ii) of proviso to section 54F(1) says that the assessee must not purchase any other residential house other than the new asset, hence when the second house property is purchased, the eligibility for exemption for the first property is also lost.

Therefore, assessee Rajesh cannot claim exemption under section 54F in respect of both the residential properties acquired by him.

As regards taxable long-term capital gain the following may be useful.