About Capital Gains Taxability

An Interaction with
CA.S.Krishnan
Visit us @http://skrishnanca.in/
1
INDEX
CONTENTS Page No.
 Bird’s Eye View -- 2
1. What is Capital Gain? -- 7
2. Relevant Sections -- 9
3. Analysis of Relevant Provisions and cases- Sec 2(47)(v) -- 12
4. Analysis of Sec 48 and case laws -- 30
5. Analysis of Sec 49 and case laws -- 35
6. Sec 54 and Sec 54F -- 41
7. Interest paid on Amount Borrowed for the Purpose of Investment -- 44
8. Can Commencement of Construction precede sale of capital asset? -- 48
9. Land may belong to one person and the Building to another person -- 52
10. Expenses on providing Basic Facilities can be claimed as part of cost -- 55
11. Whether the same funds should be used while purchasing property? -- 60
12. Other cases of Relevance on this issue -- 62
13. Points to be noted -- 66
15. Cases of Importance may be gone through in detail -- 69
16. Analysis of Sec 54EC and case laws -- 87
17. Analysis of Sec 27 and 64 and case laws -- 91
18. Sections 195 and 197 -- 94
19. When NRI is the seller -- 97
20. Sec 194IA-TDS on purchase of Immovable Property -- 100
21. Further points to be noted -- 102
22. Tips for Tax Planning -- 103
23. Note of Caution -- 110
24. To Bear in Mind -- 112
25. FATCA Information for Individuals -- 113
26. Know about OCI -- 116
27. THANK YOU -- 121
BIRD’S EYE VIEW
This booklet entitled “What is Capital Gain and how can capital
gain tax liability be tackled?” covers capital gain issues arising out
of sale of residential properties and any other capital asset. The
issues common for residents and non-residents (which include
Overseas Citizens of India [OCI]) are covered first and then issues
pertaining to non-residents (which include OCIs) are covered.
2
As the subjects covered in this write-up are not static-in fact they
cannot be static in a developing economy-the issues covered in
this write-up have to be studied and understood based on the
prevailing Accounting Standards, law existing on the date of
transaction(s) and in the light of the latest pronouncements by
Courts and Income-tax Appellate Tribunal Benches and also
based on the Circulars issued by the Central Board of Direct
Taxes (CBDT) from time to time. Information for this write-up has
also been gathered from published materials in various journals
(articles penned by the author), pronouncements of various Courts
including Tribunal Benches, Circulars issued by CBDT from time
to time and provisions of law as understood by the author.

3
As materials involved in this write-up have been taken from published materials this
write-up is meant only for private circulation and the views/opinions expressed are the
views of the author as understood by him.
Moreover as the issues arising in respect of capital gains are likely to be unique and
may have far reaching consequences it is advisable to consult a competent
professional advisor in such issues.
A Brief write-up on guidelines to be followed when an NRI is the seller/transferor is

also attached together with latest tax deduction to be made to Resident Indian when
the sale consideration of the immovable property exceeds Rs.50 lakhs.
Write-ups on OCIs as well as on Foreign Account Tax Compliance Act(FATCA) also form
part of this booklet. The Foreign Account Tax Compliance Act (FATCA) is a US law
designed to prevent tax evasion by US citizens using offshore banking facilities. FATCA
is being implemented by all the Countries in the world. 4
The following five basic principles should always be borne in mind while dealing
with NRIs as well as OCIs. These principles are-
(i) Capital gain issues arising out of sale of capital assets give immense scope for tax
planning. By sheer tax planning what has not been prohibited can be claimed as
deduction provided that it-this claim- is within the framework of the relevant
provisions of the Income-tax Act dealing with such issues.
(ii) As first impression cannot be created second time it is better that issues
pertaining to capital gains are understood in the proper perspective and answered in
the best possible way.
(iii) What is being expressed in blogs is only opinion but what is being given in real
situation is what can be termed as "procedure" which has more value than opinion
as the "procedure" to be adopted in an actual live case is normally/usually rendered
after a deep study of facts presented and law applicable to the given situation. It is
further to be stood that understanding each issue and providing proper solutions is
like writing a software program which is normally undertaken after deep study of
issues involved. Rendering a proper opinion is not like readymade software available
in the market. 5
(iv) Chartered Accountants as representatives of assessee-clients have a crucial role to
play in respect of tax planning regarding capital gain issues as assessee-clients may not
totally be aware of tax implications in respect of capital gains. Though there is a
possibility of applying DRS for the second time in cricket in case of unsuccessful
attempt first time by the fielding team, there is no such second attempt before the
same authorities under the Income-tax Act.
(v) One another important aspect is adhering to time schedule each time while
completing various stages of professional work.
S.KRISHNAN
CHARTERED ACCOUNTANT,
NO.2, C.V. RAMAN ROAD
ALWARPET, CHENNAI – 600 018
TEL. NO.044-24671175 TELEFAX.044-24671437
MOBILE 098407 01449 E-MAIL Ids: ariyurkrish@gmail.com and krishnagesh2@eth.net
6
What is Capital Gain and how can capital
gain tax liability be tackled?
1. WHAT IS CAPITAL GAIN?
Capital gain is the difference between the selling price (total
consideration) and total sum up of indexed cost of acquisition and indexed
cost of improvement in respect of a capital asset(residential property
and/or land). Any expenditure incurred wholly and exclusively in
connection with transfer of such capital asset can be added to the total
figure of indexed cost of acquisition and indexed cost of improvement to
arrive at the total cost.
7
Capital Gain Cont…
 The nature of expenditure that can be claimed includes brokerage paid, travelling,
if any, advocate fees (paid for obtaining legal opinion, drafting of deeds etc) and
court expenses like in the case of obtaining probate of WILL etc.
 The indexed cost of acquisition is ascertained by multiplying
purchase/construction cost on the date of acquisition or market value of the
property as on 01-04-1981[if acquired prior to 01-04-1981] whichever is later, with
cost inflation index pertaining to the year of sale and divide it by cost inflation
index pertaining to the year of purchase/construction or if the
purchase/construction is made prior to 01-04-1981 by 100.
 If there had been any improvement to the property then indexed cost of
improvement can be calculated likewise and added to original indexed cost of
acquisition / purchase to arrive at the total indexed cost of acquisition.

8
2.Relevant Sections
 Sec 2(47)(v) - Dealing with transfer in relation to Capital asset
 Sec 45(1) - Dealing with capital gains
 Secs 2(29A),29B,
2(42A) and 2(42B) –Dealing with definition of what is a short-term asset,
long-term asset, short-term capital gains and long-term
capital gains
 Sec 48 - Dealing with mode of Computation of Capital Gains
 Sec 49 - Dealing with cost with reference to certain modes of
acquisition
 Sec 54 - Dealing with profit on sale of Property used for
residence
 Sec 54F - Dealing with capital gain on transfer of certain capital
assets not to be charged in case of investment in
residential house
 Sec 54EC - Dealing with Capital gain not to be charged on
investment in certain bonds
9
Relevant Sections Cont..
 Sec 50C - Dealing with Special provision for full value of consideration
in certain cases
 Sec 56(2)(b) - Dealing with Gift from Other than Relatives –
Immovable Property
 Sec 112(1) (a) - Dealing with Tax on Long term capital gains
 Sec 195 - Dealing with Payment to NRIs and PIOs
 Sec 197 - Dealing with Certificate for Deduction at Lower rate
 Sec 27 & 64(1) - Dealing with transfer of Asset for Inadequate Consideration
 Sec.194-IA - Dealing with deduction of tax @ 1% on transfer of
immovable property other than agricultural land whose
transfer value is more than Rs. 50 Lakhs.
10
11
3.Analysis of Relevant Provisions
 (A) As per the provisions of section 2(47) (v) “transfer” in relation to
a capital asset includes-
 Any transaction involving the allowing the possession of any
immovable property to be taken or retained in part performance of
a contract of the nature referred to in section 53A of the Transfer of
Property Act,1882.
 This section assumes importance as it deals with the definition of
the word “transfer” and not sale. All actions have relevance with
regard to date of transfer.
 This point ( the relevant date for computing/calculating capital gains
is the date of handing over of possession) has been reiterated by the
Madras High Court in the case of Madathil Brothers vs. Deputy CIT
(2008)-301-ITR-345(Mad).
12
Analysis Cont…
 The Supreme Court in the case of Rambhau Namdeo Gajre vs. Narayan Bapuji
Dhotra (dead) through Lrs. – 2004 (8) SCC 614 referred to the background with
regard to introduction of Section 53A enacted in 1929 by the Transfer of
Property (Amendment) Act 1929 by importing into India in a modified form the
equity of part performance as it developed in England over the years and
observed that doctrine of part performance as stated in Section 53A of the
Transfer of Property Act is an equitable doctrine which creates a bar of
estoppel in favour of the transferee against the transferor. The Supreme Court
in this case extracted at paragraph 8 of its order, from its earlier decision in the
case of Shrimant Shamrao Suryavanshi and another vs. Pralhad Bhairoba
Suryavanshi, 2002 (3) SCC 676, the essential conditions which are required to
be fulfilled if a transferee wants to defend or protect his possession under
section 53A of the Transfer of Property Act in the following words.
 There must be a contract to transfer for consideration of any immovable
property;
 the contract must be in writing, signed by the transferor, or by someone on his
behalf;
13
Analysis Cont…
 the writing must be in such words from which the terms necessary to construe
the transfer can be ascertained:
 the transferee must in part performance of the contract take possession of the
property, or of any part thereof;
 the transferee must have done some act in furtherance of the contract; and
 the transferee must have performed or be willing to perform his part of the
contract.“
 The Supreme Court also made the following observations at paragraph 9 of its
order-
 “If these conditions are fulfilled then in a given case there is equity in favour of
the proposed transferee who can protect his possession against the proposed
transferor even though a registered deed conveying the title is not executed by
the proposed transferor. In such a situation equitable doctrine of part
performance provided under Section 53-A comes into play and provides that
'the transferor or any person claiming under him shall be debarred from
enforcing against the transferee and persons claiming under him any right in
respect of the property of which the transferee has taken or continued in
possession, other than a right expressly provided by the terms of the contract."
14
Analysis Cont…
 Therefore it is obligatory on the part of the transferee – the developer in the case
of JDA – to do some act in furtherance of the contract. This further act starts with
applying to various authorities after possession is taken by the transferee and so
unless this further act is done it cannot be stated that provisions of section
2(47)(v) of the Income Tax Act apply so as to cover situation contemplated under
section 53A of the Transfer of Property Act 1882. Mere signing of Memorandum
of Understanding between the owner and the developer does not result in
transfer of property and therefore it could legally be argued based on the
decisions of the Supreme Court referred to above that unless the planning permit
is sanctioned by the Appropriate Authorities permitting construction subject to
fulfilment of certain conditions, it could not be said that some act in furtherance
of the contract has been done by the transferee so as to cover situations
contemplated under section 53A of the Transfer of Property Act read with
2(47)(v) of the Income Tax Act.
15
Analysis Cont…
 Though the decisions referred to above have been rendered in defining the rights
of the transferee under section 53A of the Transfer of Property Act 1882 the
general principle emanating out of these decisions, that unless some further act is
done by the transferee he cannot be said to have done some act in furtherance of
the contract resulting in part performance of the contract, can be taken advantage
of. So if adequate care is taken in drafting the development agreement at the time
when the owner executes General Power of Attorney authorizing the developer to
apply to Appropriate Authorities for sanctioning of plan etc., then it is possible to
postpone the capital gains liability to a later year if the sanctioning authority takes
a longer time in according permission.
 The Hyderabad Bench of ITAT in the case of Ms. K. Radhika v. Dy. CIT [2011] 13
taxmann.com 92 through a detailed and well-reasoned order has held that unless
provisions of section 53A of the Transfer of Property Act are satisfied transaction
relating to Development Agreement of a property cannot fall within the scope of
deemed transfer under section 2(47)(v) of the Income-tax Act.
16
Analysis Cont…
 The Hyderabad Bench of ITAT in a subsequent case in the case of S.Ranjith
Reddy vs.Deputy CIT [2013] 35 taxmann.com 415 (Hyd) through a detailed
and well-reasoned order has held that where nothing happened in relevant
previous year other than execution of agreement, whereby assessee
assigned his landed property in favour of joint venture between assessee
and developer, there was no transfer under section 2(47) as there was no
extinguishment of rights or receipt of consideration and where no progress
or construction had taken place in said landed property since date of signing
development agreement, it could not be held that developer had performed
its obligations as envisaged in section 53A of Transfer of Property Act, and
therefore, there was no transfer as per section 2(47) of the Income-tax Act.
 If it is possible for the assessee to part with possession of the property in
piece meal falling in different assessment years, then capital gains tax gets
distributed accordingly.
17
Analysis Cont…
 The Madras High Court in the case of Commissioner of Income Tax vs. K. Jeelani
Basha (2002) 256 – ITR – 282,following the decision of the Delhi High Court in the
case of Commissioner of Income Tax vs. Shakuntala Rajeshwar (1986) 160 – ITR –
840 (Delhi.) has held that if the assessee parts with possession of one third of
property on receiving part payment then the capital gains will have to be
calculated only on the basis of such part consideration received and not on total
consideration agreed upon.
 The Madhya Pradesh High Court in the case of Avtar Singh Vs. Income-tax Officer
[2004] 270 ITR 0092 has held that mere execution of general power of attorney by
the owner does not result in deliverance to the purchaser if there is nothing in the
agreement to indicate that possession was delivered to the purchaser. The matter
was remitted to the Tribunal for fresh adjudication with regard to the factum of
delivery of possession or enjoyment of property by the purchaser by any other
means.
18
Analysis Cont…
 Recently arguments are put forth by certain legal luminaries that if a clause is
added in the Joint Development Agreement (JDA) stating that the possession of
the property still lies with the owner and not handed over to the builder for
development purposes and the same shall be handed over to the developer only
after the flats are allotted to the owner and therefore the property does not get
transferred on mere signing of the JDA. This argument is put forth to get over the
definition of section 2(47)(v) of the Income Tax Act which defines the important
term “transfer”. But such a stand taken by such legal luminaries is against law and
the following decisions clearly explain the situation with regard to transfer
 G. Sreenivasan vs. Deputy CIT [2013] 140 ITD 235(Cochin)-The Cochin Bench has
observed that the substance shall prevail over the form. The Bench also observed
that “though it is mentioned in the agreement that the possession of land shall be
handed over only after handing over of the assessee's portion of constructed area,
yet the builder, under practical circumstances, cannot start construction unless the
physical possession of land is handed over to him.” The Bench went on to observe
that “ the impugned agreement, being a development agreement, a mere
mentioning in one of the clauses of the agreement to the effect that there is no
handing over of possession, shall not take away the actual fact that the physical
possession was handed over to the builder.”
19
Analysis Cont…
 Ravinder Singh Arora vs. Assistant Commissioner of Income-tax, Circle-10(1),
Hyderabad [2012] 24 taxmann.com 346 (Hyd.) –The Hyderabad Bench in this case
has held that “where a land owner has entered into an agreement for
development of property and certain rights were assigned to developer who in
turn has made substantial payment and, consequently, has entered into property
and, thereafter, if transferee (developer) has taken steps in relation to
construction of flats, then it is to be considered as transfer under section 2(47)(v)
attracting provisions of section 45; and the fact that legal ownership continued
with owner, which is to be transferred to developer at a future distant date does
not affect applicability of section 2(47)(v)”
 An interesting situation arose before the ITAT Hyderabad Bench in the case of Smt.
P. Prathima Reddy vs. ITO [2012] 25 taxmann.com 264 (Hyd.) wherein though the
joint development agreement was entered into during the assessment year 2006-
07 a Supplementary Agreement was entered into during the assessment year
2007-08 and the consideration receivable by the assessee was specifically
determined/fixed by such Supplementary Agreement.
20
Analysis Cont…
Under the above circumstances the Tribunal held that liability to capital gains
tax arose only for the assessment year 2007-08 and not earlier as ‘willingness to
perform' being the crux of section 53A of the Transfer of Property Act need to
be satisfied for a transaction to fall within the scope of deemed transfer under
section 2(47)(v) of the Income-tax Act and the same was satisfied only during
the assessment year 2007-08.
 It is to be noted that in this case the assessee contended that provisions of
section 2(47)(v) of the Income-tax Act, could not be applied because
deemed transfer as contemplated thereat applied only to cases where
possession was given in connection with a contract to transfer for
consideration as envisaged in section 53A of the Transfer of Property Act and
not otherwise.
 Since, in terms of joint development agreement and supplementary
agreement no event resulting in transfer of property took place in the
previous year relevant to assessment year 2007-08, capital gain so assessed
was to be deleted. It seems that the assessee tried to escape capital gain
liability by preparing two agreements in successive assessment years the
first one without mentioning consideration and the second one mentioning
consideration. The Tribunal repelled all these contentions raised on behalf of
the assessee.
21
Other cases of Relevance
 (i) In the case which arose before ITAT Hyderabad Bench in Mali Florex Ltd. vs.
Deputy Commissioner of Income-tax [2013] 32 taxmann.com 373 (Hyderabad -
Trib.) the assessee entered into agreement for sale of land for consideration of Rs.
2.24 crore out of which it received Rs. 8 lakh and had not parted with possession
of same. Under the above circumstances the Tribunal held that such transaction
could not be treated as transfer within meaning of section 2(47) of the Income-tax
Act.
 (ii) The Delhi High Court in the case of CIT vs. Delhi Apartments (P) Ltd.[2013] 352
ITR 322 has held that where assessee received advance in the year under
consideration for sale of land and conditions of execution of written agreement
and handing over of possession had not taken place in that year then there was
no transfer and, thus, nothing could be brought to tax in assessment year under
consideration.
 (iii) In the case of Sowcar Janaki vs. Income-tax Officer [2013] 27ITR (Trib)
226(Chennai) ground number 6 (para.3-page 229) raised by the assessee before
the Tribunal was as under-
 “The CIT erred in confirming the stand of the Assessing Officer that section 50C is
applicable and that the sale consideration for the land foregone to the developer is
the guideline value of the property as on 1.4.1981 instead of taking the cost of
construction of 9 flats allotted to the appellant as the sale consideration.” 22
Other cases of Relevance Cont…
 This issue was decided in favour of the assessee by the Tribunal at para.14 (page
237) by observing as under-
 “As far as ground of appeal no.6 is concerned i.e. invoking the provisions of section
50C and considering the guideline value of registration department for the
purpose of computing capital gains, we are unable to endorse the view of the
Commissioner of Income Tax (Appeals) in accepting the decision of the Assessing
Officer in invoking the provisions of section 50C of the Act. The Jodhpur Bench of
the Tribunal in the case of Navneet Kumar Thakkar Vs. ITO (110 ITD 525) held that
unless the property transferred has been registered by sale deed and for that
purpose value has been assessed and stamp duty has been paid by the parties
section 50C inserted by Finance Act, 2002 with effect from 1.4.2003 cannot come
into operation. Similar view has been taken by the co-ordinate Bench of this
Tribunal in the case of ITO Vs. Kumudhini Venugopal (5 ITR (Trib) 145), wherein the
Tribunal held that when the agreement is not registered, the provisions of section
50C have no application. A similar view has been expressed by the Lucknow Bench
of the Tribunal in the case of Carlton Hotel (122 TTJ 515) and Jaipur Bench of the
Tribunal in the case of Vijayalakshmi Dhadia (20 DTR365). Respectfully following
the above decisions, we reverse the order of the Commissioner of Income Tax
(Appeals) on this issue and allow the ground of appeal no.6 raised by the
assessee.” 23
 (iv) However 2 judicial decisions-one rendered by the Andhra Pradesh High Court
in the case of Potla Nageswara Rao vs. Deputy CIT. ITTA No. 245 OF 2014 (Order
dated 09-04-2014) and the other rendered by the Cochin Bench of ITAT in the
case of Smt. Jayasree Gopakumar Saranya v. ITO [IT Appeal No. 505/Coch/2009,
dated 9-5-2012] have to be got over in the following manner-
 (a) The Andhra Pradesh High Court in the case of Potla Nageswara Rao (supra)
held that “ in case of development agreements transfer completes on handing
over possession despite non receipt of payment” This observation was based on
the factual situation which was obtaining in that case to the following effect-(
copied from the order of the High Court)
 “In the instant case, on 07.03.2003 an agreement was entered into by the
assessee with M/s. Bhavya Constructions Pvt., Ltd., and the plan of the building
was approved on 31-.03.2003. These dates fall in the previous year 2002-03,
relevant to assessment year 2003-04. Thus, in this case, the land being capital
asset was transferred by the assessee to the developer during the assessment
year under consideration, viz., 2003-04, for construction and it is enough if the
assessee has received the right to receive consideration on a later date, so as to
attract eligibility to tax on capital gains during the year under appeal.”
24
 (b) The Cochin Bench in the case of Smt. Jayasree Gopakumar Saranya v. ITO [IT
Appeal No. 505/Coch/2009, dated 9-5-2012] held that granting of permission
would relate back to the date of agreement and as the possession of the property
was given to the builder on 16-09-2004 transfer took place during the previous
year, pertaining to the assessment year 2005-06 and not as contended by the
assessee.
 In this case it was contended by the assessee that as the permit was sanctioned
after 31st March 2005 in the financial year 2005-06 the transfer did not take place
during the financial year 2004-05 and reliance was placed by the assessee on the
decisions of the Hyderabad Bench of the ITAT in the case of Ms. K. Radhika v. Dy.
CIT [2011] 47 SOT 180 (URO)/13 taxmann.com 92 and of the Delhi Bench of the
ITAT in the case of ITO v. Finian Estates Developers (P.) Ltd. [2012] 23 taxmann.com
360 for the proposition that till such time, permission was granted by the
appropriate authority, transfer of property would not take place, even though the
property had been put in possession of the developer on an earlier date. But the
Cochin Bench held against the assessee by observing that in the case which arose
before the Hyderabad Bench of the ITAT in Ms. K. Radhika (supra), the Bench had
no occasion to consider clause (vi) of section 2(47) of the Act and in the case which
arose before the Delhi Bench of the ITAT in Finian Estates Developers (P.) Ltd.
(supra) no permission was obtained/received for construction of the building.
25
 The Cochin Bench of the ITAT in this case extracted the provisions of section 2(47)
of the Act and placed reliance on clause (vi) of section 2(47) of the Act which
states 'any transaction which has the effect of transferring or enabling the
enjoyment of any immovable property would come within the meaning of
transfer’. It is submitted, with respect, that the conclusion arrived at by the
Cochin of ITAT in this case, is faulty for the following reasons-
 (1)The Cochin Bench has overlooked the concept of “part performance” as
explained by the Supreme Court in a catena cases decided by the Supreme Court
starting with Sheth Maneklal Mansukhbhai v. Hormusji Jamshedji Ginwalla & Sons
AIR 1950 SC 1(all these cases extracted earlier in this write-up)
 (2)Moreover, if the time gap between the handing over possession of property
and granting of permission by the appropriate authorities is so large for whatever
reason and these two fall in two different assessment years separated say more
than 2/3 years how can the assessee file his return for the assessment year in
which property is put in possession of the developer treating it (handing over
possession of property) as transfer within the meaning of section 2(47) of the Act
without knowing about the outcome of the application made to appropriate
authorities for planning/building permit?
26
 What would happen if the assessment had been completed for the assessment
year in which the assessee had filed his return in the year of handing over of
possession of property treating it as transfer and the planning/building permit is
refused in a later year?
 (3) Moreover both the clauses (v) and (vi) of section 2(47) were inserted for
different reasons, as explained by Circular No. 495, dated 22nd September, 1987.
The relevant clause runs as under:
 "Definition of 'transfer' widened to include certain transactions:
 11.1 The existing definition of the word 'transfer' in section 2(47) does not include
transfer of certain rights accruing to a purchaser, by way of becoming a member
of or acquiring shares in a co-operative society, company, or association of
persons or by way of any agreement or any arrangement whereby such person
acquires any right in any building which is either being constructed or which is to
be constructed. Transactions of the nature referred to above are not required to
be registered under the Registration Act, 1908. Such arrangements confer the
privileges of ownership without transfer of title in the building and are a common
mode of acquiring flats particularly in multi-storeyed constructions in big cities.
27
 The definition also does not cover cases where possession is allowed to be taken
or retained in part performance of a contract, of the nature referred to in section
53A of the Transfer of Property Act, 1882. New sub-clauses (v) & (vi) have been
inserted in section 2(47) to prevent avoidance of capital gains liability by recourse
to transfer of rights in the manner referred to above.
 11.2 The newly inserted sub-clause (vi) of section 2(47) has brought into the
ambit of 'transfer', the practice of enjoyment of property rights through what is
commonly known as Power of Attorney arrangements. The practice in such cases
is adopted normally where transfer of ownership is legally not permitted. A
person holding the power of attorney is authorised the powers of owner,
including that of making construction. The legal ownership in such cases
continues to be with the transferor.
 11.3 These amendments shall come into force with effect from 1-4-1988 and will,
accordingly apply to the assessment year 1988-89 and subsequent years.“
28
 (4) Moreover, provisions of section 2(47)(vi) –on which reliance was placed by
the Cochin Bench in the case of Smt. Jayasree Gopakumar Saranya(supra)-
usually come into play whenever transfer of property takes place on account of
dissolution of a firm and one of the erstwhile partners takes over one of the
properties - refer to CIT v. Southern Tubes [2008] 171 Taxman 254 (Ker.)
 (v) The Hyderabad Benches of ITAT in the cases of M/s. Fibars Infratech Pvt.
Ltd. vs. ITO in ITA NO.477/Hyd./2013-Assessment Year 2007-08-Order dated 03-
01-2014 and Binjusaria Properties (P.) Ltd. vs. Assistant Commissioner of
Income-tax, Hyderabad [2014] 45 taxmann.com 115 (Hyderabad - Trib.) have
reiterated that where assessee entered into a development agreement of land
with a developer in terms of which developer had to develop property
according to approved plan and deliver a part of constructed area to assessee,
in view of fact that developer had not done anything to discharge obligations
cast on it, capital gains could not be brought to tax in year under appeal merely
on basis of signing of development agreement
29
 (B) Section 48 speaks of expenditure which can be deducted from the
value of full consideration to arrive at capital gains. One such
expenditure could be the sum paid by the assessee for discharge of
mortgage on the property inherited by him where the mortgage was
created by the previous owner from whom the property devolved on
the assessee. In this regard the decision of the Supreme Court in the
case of Arunachalam (Rm.) vs.CIT [1997] 227 ITR 222 may be referred
to.
30
 This is what the Supreme Court observed in this case-
 “We are unable to endorse the view of the Kerala High Court in Ambat
Echukutty Menon v. CIT [1978] 111 ITR 880 to which reference has been
made by the High Court in the impugned judgment. In that case, the
assessee, as one of the heirs, had inherited property from the previous owner
who had mortgaged the same during his lifetime and after his death the heirs,
including the assessee, had discharged the mortgage created by the
deceased. The said property was subsequently acquired under the Land
Acquisition Act and for the purpose of capital gains the assessee sought
deduction of the amount spent to clear the mortgage. The High Court held
that the capital asset had become the property of the assessee by succession
or inheritance on the death of the previous owner under section 49(1) of the
Act and the cost of acquisition of the asset is to be deemed to be the cost for
which the previous owner acquired it, as increased by the cost of any
improvement of the assets incurred or borne either by the previous owner or
by the assesse.
31
According to the High Court, having regard to the definition of the expression “cost of
improvement” contained in section 55(1)(b) of the Act, in order to entitle the assessee
to claim a deduction in respect of the cost of any improvement, the expenditure should
have been incurred in making any additions or alterations to the capital asset that was
originally acquired by the previous owner and if the previous owner had mortgaged
the property and the assessee his co-owners cleared off the mortgage so created, it
could not be said that they incurred any expenditure by way of effecting any
improvement to the capital asset that was originally purchased by the previous owner.
 This decision has been followed in subsequent decisions of the High Court in Salay
Mohamad Ibrahim Sait v. ITO [1994] 210 ITR 700 (Ker) and K. V. Idiculla v. CIT [1995]
214 ITR 386. A contrary view has been taken by the Gujarat High Court in CIT v.
Daksha Ramanlal [1992] 197 ITR 123. In taking the view that in a case where the
property has been mortgaged by the previous owner during his lifetime and the
assessee, after inheriting the same, has discharged the mortgage debt, the amount
paid by him for the purpose of clearing off the mortgage is not deductible for the
purpose of computation of capital gains, the Kerala High Court has failed to note
that in a mortgage there is transfer of an interest in the property by the mortgagor
in favour of the mortgagee and where the previous owner has mortgaged the
property during his lifetime, which is subsisting at the time of his death, then after
his death his heir only inherits the mortgagor’s interest in the property.
32
By discharging the mortgage debt his heir who has inherited the property
acquires the interest of the mortgagee in the property. As a result of such
payment made for the purpose of clearing off the mortgage the interest of the
mortgagee in the property has been acquired by the heir. The said payment
has, therefore, to be regarded as “cost of acquisition” under section 48 read
with section 55 (2) of the Act. The position is, however, different where the
mortgage is created by the owner after he has acquired the property. The
clearing off of the mortgage debt by him prior to transfer of the property
would not entitle him to claim deduction under section 48 of the Act because
in such a case he did not acquire any interest in the property subsequent to his
acquiring the same.
 In CIT v. Daksha Ramanlal [1992] 197 ITR 123, the Gujarat High Court has
rightly held that the payment made by a person for the purpose of clearing
off the mortgage created by the previous owner is to be treated as cost of
acquisition of the interest of the mortgagee in the property and is
deductible under section 48 of the Act”.
33
 However if the mortgage was created by the assessee himself then he
cannot claim it as an expenditure at the time of transfer. The Madras High
Court in the case of CIT vs. Bradford Trading Co. (P.) Ltd. [2003] 261 ITR 0222
had explained the decision of the Supreme Court in the case of
Arunachalam (Rm) in the following words-
 “The distinction pointed by the Supreme Court in R.M. Arunachalam’s case

(supra) is that where the assessee acquired property subject to mortgage
and later on it was discharged at the time of transfer by vendee, then, it
would become an expenditure incurred in connection with the transfer, and
where the assessee himself created the mortgage after acquisition of
capital asset, the amount would not go to reduce the full value of
consideration received by the assessee”
 It is to be noted that any expenditure incurred by the assessee to evict the

tenants at the time of transfer of property can be claimed as an expenditure
under section 48(i) of the Act as was held by the Delhi High Court in the
case of CIT vs. Eagle Theatres [2012] 205 Taxmann 449. The Delhi High Court
while arriving at a decision favourable to the assessee relied on number of
precedents on this issue.
34
 However when there was no obligation on the part of the assessee to settle
claims of tenants for getting vacant possession but the assessee pays
compensation to such tenants for delivering vacant possession then such
payment would partake the character of “cost of improvement” under section
48(ii) of the Act and not merely expenses on transfer under section 48(i) of the
Act thus enabling the assessee to claim indexation as provided under section
48(ii) of the Act [ see CIT vs. Spencers and Co.Ltd. (2013) 359 ITR 644(Mad)]
 (C) Section 49 is an important and interesting section and it deals with cost of
acquisition with regard to certain modes acquisition. In case of property
acquired through will, inheritance, settlement or gift the indexation relates back
to the year of acquisition of the property by the first owner. This view is
supported by the decision of the Bombay High Court in the case of CIT vs.
Manjula J. Shah (2012) 204 Taxman 691 (Bom) which while approving the
decision of the Mumbai Special Bench of ITAT in the case of Deputy
Commissioner of Income Tax vs. Manjula J. Shah (2010) 35 SOT 105 (Mum) has
held that indexation relates back to the year of acquisition of the property by
the first owner. The High Court of Bombay has followed the decision in the case
of Manjula J. Shah (Supra) in a subsequent decision in the case of CIT vs. Raman
Kumar Suri (2013) 29 taxman.com 231 (Bom) with regard to relating indexation
back to the year of acquisition of the property by the first owner.
35
 The High Court of Bombay in the case of Commissioner of Income-tax-18,
Mumbai vs. Ms. Janhavi S. Desai [2012] 24 taxmann.com 314 (Bom.) has
held that previous owner of property for purpose of sections 2(42A) and
49(1) does not include a person who acquired property by a mode of
acquisition referred to in sub-clauses (i) to (iv) of section 49(1).In other
words it refers to the first owner. In fact the Punjab & Haryana High Court
in the case of CIT vs. Sathish Kumar Arora in ITA No.633 of 2009(Date of
decision 20-09-2010) was the first High Court to hold that in case of
inheritance the date of acquisition by the present owner relates back to
the date of acquisition by the first owner. The Delhi High Court in the
case of Arun Shungloo Trust vs.CIT [2012] 205 Taxman 456 (Del) following
the decision of the Bombay High Court in the case of Manjula J.
Shah(supra) has held in favour of assessee by observing that benefit of
indexed cost of inflation is given to ensure that tax payer pays capital
gains tax on ‘real’ or actual ‘gain’ and not on increase in capital value of
property due to inflation; this is the object or purpose in allowing benefit
of indexed cost of improvement, even if the improvement was made by
previous owner in cases covered by section 49 of the Income-tax Act.
36
 The Gujarat High Court in the case of CIT vs. Rajesh Vitthalbhai Patel [2013]
37 taxmann.com 439(Guj) has held that where assessee's brother acquired
a property prior to 1-4-1981 and he had gifted said property to assessee on
23-5-1995 and subsequently assessee had sold property on 7-2-2006,
while computing capital gain indexed cost of acquisition was to be worked
out with reference to 1-4-1981 and not with reference to date on which
assessee acquired property by gift, i.e., 23-5-1995. The following
observations made by the Gujarat High Court at para.8 of its order are
worth noticing
 “Additionally in sub-section (1) of section 49 the legislature has provided

that cost of acquisition of the asset shall be deemed to be the cost for
which the previous owner of the property acquired it, as increased by any
cost of improvement of the asset incurred or borne by the previous owner
or the assessee, as the case may be. If the interpretation of the revenue
was correct, this later reference to the cost of improvement borne by the
assessee would not have been necessary, since section 48 itself would take
care of any improvement on the capital asset to be included for the cost of
acquisition.
37
 It is precisely because such improvement referred to in section 48 would have
reference only to that made by the previous owner that the additional provision
had to be made in the deeming fiction provided in sub-section (1) of section 49.
Further the interpretation sought to be given by the revenue would be
unacceptable because there is no provision under which the cost of acquisition in
the hands of the assessee in cases such as gift on the date of acquisition of the
property can be made and found in the Act. A serious road-block would be
created if such property is acquired through Will and would, therefore, have no
reference to its actual cost or the date of operation of the Will.”
 The Gujarat High Court in a subsequent decision in the case of CIT vs. Gautam
Manubhai Amin[2013] 38 taxmann.com42 (Guj) following the decision in the case
of Manjula J.Shah(supra) has reiterated the same principle by holding that period
of holding of inherited property would include duration of possession of asset by
previous owner.
 The ITAT, Chennai Bench in the case of Assistant Commissioner of Income-tax v.
Syed Maqbul Hussain [2010] 004 ITR (Trib) 0044 has also adopted the same view.
The first favourable view in favour of the assessee in this direction was expressed
by Chandigarh Bench of the Income-tax Appellate Tribunal in the case of Mrs.
Pushpa Sofat v. ITO [2002] 81 ITD 1 (Chd.) (SMC).
38
 The Karnataka High Court in the case of Commissioner of Income-tax, Mysore
vs. Smt. Asha Machaiah[2014] 48 taxmann.com 381 (Karnataka) has also held
that when an asset is acquired by way of inheritance, cost of acquisition of asset
should be calculated on basis of cost of acquisition to previous owner and said
cost of acquisition of previous owner has to be calculated on basis of indexed
cost of acquisition as provided in Explanation (3) to section 48
 The Karnataka High Court in a subsequent decision in CIT vs. Smt. Kaveri
Thimmaiah [2014] 49 taxmann.com 545 (Karnataka) has echoed the same
views.
 The Chennai Bench of ITAT in the case of Assistant Commissioner of Income-tax
vs. M.Sankar Trading and Consultancy Private Ltd. in ITA
No.2103/Mds/2012(order dated 26th March,2013) following number of
precedents on this issue has held that for the purpose of computation of long
term capital gains arising from the transfer of a capital asset which had become
property of the assessee under gift, the first year in which the capital asset was
held by the assessee had to be determined to work out the indexed cost of
acquisition, as envisaged in the Explanation (iii) of Sec. 48 after taking into
account the period for which the said capital asset was held by the previous
owner.
39
 The Chennai Bench of ITAT in the latest decision in the case of S.Krishnan vs.
Deputy Director of income Tax (International Taxation) (2015) 44 CCH 0132
ChenTrib(order dated 15th May 2015) following the decision of the Bombay
High Court in the case of Manjula J.Shah (supra)has also held that Capital
gains under section 48 of the Act had to be computed by applying the
deemed fiction and the indexed cost of acquisition had to be computed
with effect from 01.04.1981 or the date of acquisition if the property had
been acquired later (i.e. on or after 01-04-1981) when the first owner
acquired the property.
 In fact number of Tribunal Benches has adopted the same line of reasoning
while deciding the issue of cost and period of indexation in favour of the
assessee.
40
 (D) The three basic differences between the provisions of section 54 and 54F are-
 (i) In order to claim exemption under section 54 it is sufficient if only the capital
gains are invested in purchase of residential property( capital asset) and/or
investment in capital gain bonds whereas under section 54F the entire net sale
consideration (which, in effect, is a higher amount) has to be invested in purchase
of capital asset.
 (ii) As per provisions of section 54F the assessee who has transferred the asset
(property other than the residential property) should not own more than one
residential house property on the date of transfer of the property whereas there
is no such restriction under section 54.
 (iii) As per provisions of section 54F the assessee loses exemption under this
section if he 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 constructs
any residential house, other than the new asset, within a period of three years
after the date of transfer of the original asset; There is no such restriction in
section 54 of the Act.
 So when a residential building with an extensive piece of land is sold the

advantage would be plenty if the transfer of property falls under section 54. 41
 In fact section 54 opens with the following-
 “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)”.
 The decision of the Andhra Pradesh High Court in the case of Commissioner
of Income-tax vs. Zaibunnisa Begum [1985] 151 ITR 0320(A.P.) may be
referred to in this regard. The Cochin Bench of ITAT in the case of Tony J.
Pulikal [2013] 37 taxmann.com 221 (Cochin), after referring to number of
case laws cited at the time of hearing including that of Zaibunnisa
Begum(supra), has held that for allowing deduction under section 54/54F,
extent of land appurtenant to residential house has to be determined with
regard to locality where residential house is situated, social status and
profession of individual and other factors for proper and convenient
enjoyment of residential house
42
 PLEASE NOTE
Where, however, before entering into development agreement and
handing over residential property, assessee himself demolished the
same, he could not claim benefit of deduction under section 54 as has
been held by the High Court of Karnataka in the case of Commissioner
of Income-tax, Central Circle vs. Ved Prakash Rakhra [2012] 26
taxmann.com 166 (Kar.)
43
INTEREST PAID ON AMOUNT BORROWED FOR
THE PURPOSE OF INVESTMENT
 INTEREST PAID ON AMOUNT BORROWED FOR THE PURPOSE OF INVESTMENT IN
CAPITAL ASSET CAN ALSO BE ADDED TO THE COST OF SUCH CAPITAL ASSET AND
THIS TOTAL SUM CAN BE SET OFF AGAINST SALE (TRANSFER) PRICE OF CAPITAL
ASSET
 The following discussion buttresses this point

 (a). Interest paid during the period of holding, if the liability had been incurred for
acquiring the property or holding on to the same has to be included in the cost of
acquisition as was held in CIT v. Mithlesh Kumari [1973] 92 ITR 9 (Delhi) ; Addl. CIT
v. K. S. Gupta [1979] 119 ITR 372 (AP) and CIT v. Maithreyi Pai [1985] 152 ITR 247
(Kar).
 (b)(i) CIT v. K. Raja Gopala Rao (2001) 252 ITR 459 (Mad)
 “4. Here, there can be no doubt that the cost of acquisition to the assessee was
not merely the amount that he had paid to the vendors but also the cost of the
borrowing made by him for the purpose of paying the vendor and obtaining the
sale deed… Without the money borrowed, the assessee would not have been in a
position to buy the property... Payment of consideration for the sale indisputably
having been made with the borrowed funds, the borrowing directly related to the
acquisition and, interest paid thereon would form part of the cost of acquisition.”
(emphasis supplied)”
44
 The head note of this case –as taken out from ITR-runs as under-
 “The assessee purchased immovable property for Rs. 5,45,349 on December 6,
1970. On the same day he mortgaged the property to secure a loan of Rs. 4
lakhs and this loan was raised solely for the purpose of paying his vendor and
for meeting the cost of the stamp duty on the sale deed. He sold the property
partly in the assessment year 1973-74 and partly in the assessment year 1974-
75. He claimed that for computing the capital gains the cost of execution of the
mortgage and the amount of interest paid to the mortgagee till the date of sale
of the property would require to be added to the purchase price for arriving at
the cost of acquisition. This claim was disallowed by the Assessing Officer and
the first appellate authority, but was allowed by the Appellate Tribunal. On a
reference:
 Held, that the cost of acquisition to the assessee was not merely the amount
that he had paid to the vendor, but also the cost of the borrowing made by him
for the purpose of paying the vendor and obtaining the sale deed. The fact that
the mortgage was executed after the sale deed was obtained even though both
the documents were signed and registered on the same day did not render the
mortgage and the borrowing made thereunder irrelevant to the task of
determining the cost of acquisition. As the assessee had not made the purchase
with his own funds he was required to pay interest for the borrowed fund and
secure the borrowing by creating a mortgage.
45
 Such a mortgage could not have been created earlier as he had to first acquire
title before encumbering the same. Payment of consideration for the sale
having been made with the borrowed funds, the borrowing directly related to
the acquisition and the interest paid thereon would form part of the cost of
acquisition.
 Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) relied on.”
 (ii) CIT and ITO v Hariram Hotels (P) Ltd. (2010) 229 CTR 455 (Kar)/(2010) 325
ITR 136(Kar)
 “The Tribunal is justified in granting the relief to the assessee since the property
has been purchased out of the loan borrowed from the Directors and any
interest paid thereon is to be included while calculating the cost of acquisition
of the asset..”
 The head note of this case –as taken out from ITR-runs as under-
 The assessee borrowed loans from some of its directors and purchased an
immovable property in order to put up a hotel building but it could not
materialize on account of various reasons. Ultimately, the assessee sold the
property and while filing the return for computation of the capital gain, it
claimed a sum of Rs. 37,45,042 towards interest paid to the directors on the
loan borrowed from them in order to purchase the property. The Assessing
Officer disallowed the claim made by the assessee, but the Tribunal allowed it.
On appeal to the High Court:
46
 Held, dismissing the appeal that since the property had been purchased out of
the loans borrowed from the directors any interest paid thereon was to be
included while calculating the cost of acquisition of the asset.
 CIT v. Maithreyi Pai [1985] 152 ITR 247 (Karn) relied on.
 (c) The ITAT Pune Bench in the case of S. Balan alias Shanmugam vs. Deputy
Commissioner of Income-tax, Circle 3, Pune[2009] 120 ITD 469 (PUNE) has held
that interest paid on acquisition of capital asset can be added to the cost of the
capital asset.
 (d). The ITAT Chennai Bench in the case of Assistant Commissioner of Income-tax,
Business Circle – IV vs. C. Ramabrahmam[2012] 27 taxmann.com 104 (Chennai -
Trib.) has gone to the extent of holding that an assessee can include interest paid
on housing loan for computation under section 48 even though said amount has
already been deducted under section 24(b) while computing income from 'house
property‘
 (e).The ITAT, Ahmedabad Bench in the case of INCOME-TAX OFFICER vs.
Smt.PUSHPABEN B. WADHWANI[1986] 16 ITD 704 (AHD.) has held that interest
paid on loan taken for construction of a flat, would form part of cost of
acquisition of flat for purposes of computation of capital gains
47
CAN COMMENCEMENT OF CONSTRUCTION
PRECEDE SALE OF CAPITAL ASSET?
 The issue for discussion now is whether commencement of construction of new
building can be made before sale. The Karnataka High Court in the case of CIT vs.
Subramanya Bhat [1987] 165 ITR 571 has held that where commencement of
construction of new building was started before sale of old building but
completed after sale of old building the assessee is entitled to claim exemption
under section 54 of the Income-tax Act. Following this decision of the Karnataka
High Court, the Allahabad High Court in the case of CIT vs. Kapoor(H.K)
(Deceased) [1998] 234 ITR 753 held that assessee is entitled to exemption under
section 54 of the Act and commencement of construction of new building
before sale of old building is immaterial. The Ahmedabad Bench of ITAT in the
case of in the case of Asstt.CIT vs. Subhash Sevaram Bhavnani,[2012] 23
taxmann.94 (Ahd.) following the ratio of the decision in the case of Subramaniya
Bhat (supra) has held that where construction commenced before transfer of old
house and completed after transfer within the three year time-limit the assessee
is entitled to benefit of deduction under section 54 of the Act. The Ahmedabad
Bench allowed the entire amount invested in construction without making a
distinction between amount spent before sale of the house and after the sale of
the house.
48
 However the Hyderabad Bench of ITAT in the case of Smt. Nimmagadda Sridevi
vs. Deputy Commissioner of Income-tax , Circle-3(3), Hyderabad [2013] 33
taxmann.com 306 (Hyderabad - Trib.) has held that investment in new
residential property made by assessee is not entitled to deduction under
section 54F to extent the same is made before sale of existing residential
property following the decision of the Tribunal in the case of Chandru L. Raheja
v. ITO [1988] 27 ITD 551 (Bom.). It is to be stated at this juncture that the
decision of Chandru L. Raheja(supra) which was rendered on 15th February
1988 ( relied by the Hyderabad Bench in Smt. Nimmagadda Sridevi) did not
refer to the decision of the Karnataka High Court in the case of CIT vs
Subramanya Bhat(supra) which was rendered on 9th June 1986.It is further to
be noted that the decision of the Ahmedabad Bench of ITAT in the case of
Subhash Sevaram Bhavnani,(supra) was not brought to the notice of the
members of the Hyderabad Bench who decided this case.
 However it is to be noted that when the construction of new house is complete
before transfer of old house then the assessee is not entitled to deduction
under section 54 of the Act as was held by the Gujarat High Court in the case of
Smt. Shantaben P. Gandhi v. CIT 129 ITR 218.
49
 In the case which arose the Delhi High Court in the case of CIT vs. Ashok Kumar
Ralhan [2014] 46 taxmann.com 416 (Delhi) the assessee had sold a property in
Oct. 2006 and declared capital gains of Rs. 51, 71,994.He had purchased a
property in December 2004 on construction of which he claimed to have spent
Rs. 59,98,451 and claimed benefit under section 54F.
 The Assessing Officer denied benefit under section 54F to assessee on ground
that there was no need for the assessee either to reconstruct or to renovate
the purchased property as it was already fully constructed. The Commissioner
(Appeals), relying on certificate issued by the architect who had stated that the
earlier structure was demolished and thereafter, new construction was made
on the plot, held that it was a case of new construction after demolition and,
therefore, the assessee was entitled to exemption under section 54F.When the
issue ultimately reached the Delhi High Court made the following observations
at para.7 of its judgment-
 “The word "construction" in Blacks' Law Dictionary, 6th Edition at page 312 has
been defined to mean to build; erect; put together; make ready for use. The
word "construct" is distinguishable from maintenance, which means to keep
up, to keep from change, to preserve. The word "construction" for the purpose
of the section has to be given realistic, practical and a pragmatic meaning
keeping in mind the object and purpose of the provision. Section 54F is a
beneficial provision as an earlier capital asset, which is sold, is replaced by a
new capital asset in the form of a residential house, which should be purchased
or constructed within the time period stipulated.”
50
 The Delhi High Court ultimately held in favour of the assessee by dismissing
the appeal preferred by the Revenue.
 However the Mumbai Bench of ITAT in the case of Farida A Dungerpurwala vs.
ITO in I.T.A. No.5169/Mum/2010-order dated 12th September, 2014[2014] 35
ITR (Trib.) 205(Mumbai) has held that “ booking of a flat which is going to be
constructed by a builder is to be considered as a case of “construction of flat”
and deduction under section 54 is available to only if the assessee constructs
a new house within three years after the date of transfer”
 The Mumbai Bench relied on the observations rendered by a Co-ordinate
Bench in the case of CIT(Asst.) vs. Sunder Kaur Sujan Singh [2005] 3 SOT
206(Mum) for arriving at distinction between construction and purchase.
However neither the decision rendered by the Delhi High Court on 22-11-
2013 in the case of Ashok Kumar Ralhan(supra) nor other decisions rendered
by other High Courts were brought to the notice of the members who
decided this case.
 One redeeming feature is that another Mumbai Bench in the case of Income-
tax Officer- 21(2)(4), Mumbai vs. Saroja S. Mekal[2014] 49 taxmann.com 270
(Mumbai - Trib.)(decision dated 21st May 2014) has held that “investment
made for purchase of new residential house within a year even prior to sale of
capital asset raising LTCG would be entitled to section 54F exemption.”
51
LAND MAY BELONG TO ONE PERSON AND THE BUILDING
TO ANOTHER PERSON
 It is to be noted that land may belong to one person and building to
another person. The Madras High Court as early as 01-05-1934 vide its
decision in CIT v. The Madras Cricket Club [1934] 2 ITR 209(Mad) held
that that in order that a person may be assessed as the owner of a
building under section 9 of the Indian Income-tax Act, 1922, it is not
necessary that he should also be the owner of the land on which the
building stands. There are number of case laws available on this issue.
 Land and building are 2 separate assets. This splitting of land and
building into long-term capital asset and short-term capital asset based
on the period of holding of the respective assets was recognized by the
Madras High Court in the case of CIT v. Dr. D. L. Ramachandra Rao
[1999] 236 ITR 51 (Mad) following the decision of the Rajasthan High
Court in the case of CIT v. Vimal Chand Golecha [1993] 201 ITR 442
(Raj).The same view has been taken in a subsequent decision by the
Madras High Court in the case of CIT v. T. C. Itty Ipe [2001] 249 ITR 591
(Mad).
52
 The Supreme Court as early as 1967 in the case of CIT v. Alps Theatres [1967] 65
ITR 377 has held that superstructure has to be treated distinctly from the land,
even where such superstructure is married to the land. The decision of the
Karnataka High Court in the case of CIT v. C. R. Subramanian [2000] 242 ITR 342
(Kar) has also fallen in tune with the decision of other High Courts.
 The need for treatment of land and superstructure as distinct assets was also
recognized in CIT v. Citibank N. A. [2003] 261 ITR 570 (Bom) following the decision
of the Madras High Court in CIT v. Dr. D. L. Ramachandra Rao [1999] 236 ITR 51
(Mad)
 The Bombay High Court in the case of CIT Vs Hindustan Hotels Ltd. and
ITAT(2010)-TMI-78206(Bombay High Court) has held at para.11 of its order as
under-
 “It is well settled by now that, unlike in England, in India, the concept of dual
ownership is recognised in the sense that the land may belong to one person and
the building standing thereon may belong to another. Reference may be made in
that connection to the decision of the Supreme Court in Dr. K. A. Dhairyawan V/s
J. R. Thakur, AIR 1958 SC 789 and a decision of the Division Bench of this Court in
CIT V/s Fazalbhoy Investment Co. Pvt. Ltd. (1977) 109 ITR 802.”
 The Karnataka High Court in the case of C.N. Anantharam v. Assistant
Commissioner of Income-tax, Circle 6(1) Bangalore[2015] 55 taxmann.com 282
(Karnataka) reversing the decision of the Bangalore Bench of ITAT in the case of
C.N. Anantharam v Asstt. CIT(order dated 28th January,1999)
53
has held that the assessee is entitled to deduction under section 54(1) of the Act
as applicable to a long-term capital asset in respect of transfer of land even though
the building erected on it was held for a period of less than 36 months.
 From the order of ITAT Chennai in the case of Assistant CIT v. V. Ram Mohan
[2013] 24 ITR (Trib.) 50 (Chennai)
 The assessee entered into a Joint Development Agreement with a builder and
was entitled to 42.5% of built-up area and transferred 57.5% of the area to the
builder. It was agreed between them that the buildings would be sold at an
agreed rate at the end of the construction period by the builder and the
amount due to the assessee-owner would be paid after adjusting advance paid
to him. The assessee claimed that gains from transfer/sale of land which was
done in 2 instalments-once at the time of entering into the Joint Development
Agreement and second time when building constructed by the builder was sold
on behalf of the assessee- should be assessed as long-term capital gains and
profits from sale of super structure should be assessed as short-term capital
gains. The assessee submitted detailed workings before the authorities and the
same was approved by the Tribunal. The assessee had adopted guideline
valuation in respect of land transferred at the second stage with indexation
benefits and the same was accepted by the Tribunal. With regard to value of
superstructure the value as per the agreement was adopted as the cost of
acquisition. In other words the Tribunal agreed with all the contentions of the
assessee with regard to capital gain issues and held in his favour.
54
 EXPENSES ON PROVIDING BASIC FACILITIES CAN BE CLAIMED AS PART OF COST
IN THE CASE OF JDA/ WHEN A HOUSE IS PURCHASED AND CERTAIN
NECESSARY BASIC CAPITAL EXPENSES ARE INCURRED
 Basic facilities such as interior décor including wood work, fitting of air
conditioners in bed rooms and drawing room, modular kitchen etc. would form
part of investment in residential property for the purpose of claiming exemption
under section 54 or section 54F of the Income-tax Act (the Act).
 The Kerala High Court in the case of Dr. P.A. Varghese vs. Commissioner of
Income-tax [1971] 80 ITR 180 (Ker.) has held that no building would be fit for
habitation without some of the necessary amenities and that it is not possible
to treat a building separate from the fittings therein which go along with it as
part thereof. The High Court also observed that the extent of the amenities may
vary, depending upon several considerations The facilities agreed to be provided
in that case were partitions, lavatories, air-conditions, closets, fluorescent
tubes, water and electric metres etc.and the issue arose whether these fittings
formed part of building and the court answered in the affirmative.
 The Mumbai Bench of ITAT in the case of Saleem Fazelbhoy Vs. Deputy
Commissioner of Income-tax [2007] 291 ITR (A.T.) 0169/ (2007)-106-ITD-
167(Mum) has held that investment in residential house would not only include
the cost of purchase of the house but also the cost incurred in making the
house inhabitable subject to the condition that the payment was made during
the period specified in section 54F of the Act.
55
The beneficial provisions of section 54F and section 54 of the Act are similar except
that under section 54F of the Act the assessee can hold only one residential
property other than the one transferred in order to get exemption and the entire
sale consideration (and not the capital gains alone unlike under section 54 of the
Act) will have to be invested.
 It is to be noted that the words “inhabitable” and ‘habitable” carry the same
meaning and are interchangeably used by the judicial authorities.
 The Mumbai Bench of ITAT in this case in Saleem Fazelbhoy Vs. Deputy
Commissioner of Income-tax(supra) while deciding the issue in favour of the
assessee referred to the following observations made by the Supreme Court in
the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 so far applicability of
beneficial provisions is concerned.
 “The provision in a taxing statute granting incentives for promoting growth and
development should be construed liberally; and since the provision for
promoting economic growth has to be interpreted liberally, restriction on it too
has to be construed so as to advance the objective of the provisions and not to
frustrate it.”
56
 To the similar effect is the decision of Mumbai Bench of ITAT in the case of Mrs.
Sonia Gulati v. ITO [2001] 115 Taxmann 232 (Mum.)(Mag.).wherein it was held
that the investment in house would be complete only when such house
becomes habitable. In fact this decision in Mrs. Sonia Gulati v. ITO (supra) has
been followed in Saleem Fazelbhoy vs. Deputy Commissioner of Income-tax
(supra).
 The Mumbai Bench of ITAT Mrs. Gulshanbanoo R. Mukhi vs. Joint
Commissioner of Income-tax [2002] 83 ITD 649 (Mum.) has held that “ the
words used about the amount spent on purchase of new asset are “cost
thereto” and not “price thereto”. The cost includes purchase as well.
Consequently, we are of the view that the word used signifies that the amount
of purchase will include other necessary expenditure in this behalf to make a
residential house habitable and taken together will be the cost of the new
asset.” The benefit in this case was claimed under section 54 of the Income-tax
Act.
 The ITAT Mumbai Bench in the case of Meher R. Surti v. ITO [2013] 27 ITR-
Trib.340 (Mum) has observed that residential house means proper habitable
house and not mere structure. The Tribunal in this case thereafter went on to
hold that when an assessee purchases an old house and incurs expenditure on
its renovation then he is entitled to exemption for expenditure made for
making old house habitable under section 54 of the Income-tax Act.
57
 To the same effect is the decision of the ITAT Ahmedabad Bench in the case of
Shrinivas R. Desai vs. Assistant Commissioner of Income-tax (OSD) [2013] 35
taxmann.com 170 (Ahmedabad - Trib.) wherein it has been held that where
assessee incurred bona fide construction expenditure after purchasing new house
property, additional expenses so incurred would be eligible for qualifying
investment under section 54 after due verification.
 The Chennai ITAT Bench in the case of S. P. Balasubramaniyam v. ITO [2013] 24 ITR
(Trib.) 47 (Chennai) has held that while computing capital gains alterations to
buildings has to be added as cost of improvement when assessee purchased semi-
finished building and made alterations by paying to contractors deducting tax at
source.
 The Karnataka High in a recent decision [5th January, 2015] in the case of Mrs.
Rahana Siraj vs.CIT [2015] 58 taxmann.com 333 (Karnataka) has held that where
asset acquired by assessee is habitable, cost of any addition or improvements
made on that asset is eligible for deduction under section 54F of the Act.
 It is also to be noted that the definition of a word or phrase as found in the
dictionary can be adopted, has been reiterated by the Constitution Bench of the
Supreme Court in the case of Sunrise Associates vs. Government of NCT of Delhi &
others (and other appeals, special leave petitions and writ petitions) [2006] 145
STC 0576 wherein at para 42-page 594 of STC the Court referred to the definition of
a ticket as found in Webster’s Words & Phrases, permanent edition vol 25A
supplement and para.42 is reproduced below-
58
 “Webster's Words and Phrases, permanent edition, volume25A supplement defines
a "ticket" as "a printed card or a piece of paper that gives a person a specific right,
as to attend a theatre, ride on a train, claim or purchase, etc." (The definition-
para.42-can be found at page 1907-2nd Edition-WEBSTER’S NEW TWENTIETH
CENTURY DICTIONARY UNABRIDGED EDITION).
 The Court basing its observations on this definition and on its earlier decision in the
case of H. Anraj (3) (1986) 1 SCC 414 held that “a lottery ticket has no value in itself.
It is a mere piece of paper. Its value lies in the fact that it represents a chance or a
right to a conditional benefit of winning a prize of a greater value than the
consideration paid for the transfer of that chance. It is nothing more than a token
or evidence of this right.”
 This decision of the Supreme Court goes to show that reliance can be placed on the
dictionary meaning whenever necessity arises to decide an issue. So when
reference to the word “Habitable” is made to Webster’s New Twentieth Century
Dictionary (unabridged –Second Edition –Deluxe Colour) it is defined as “capable of
sustaining human beings” and the word “habitation” means place of abode; a
settled dwelling house; a house or other place in which to live in.(page 815)
 Hence basic facilities such as interior décor including wood work, fitting of air
conditioners in all bed rooms and drawing room, modular kitchen etc.would form
part of investment made in new house(residential) property eligible under section
54 or section 54F of the income-tax Act.
59
WHETHER THE SAME FUNDS SHOULD BE USED WHILE PURCHASING NEW
PROPERTY?
 The next issue which normally arises is whether same funds received on sale of
old capital asset (whether be residential property or other capital asset) should
be utilized in purchase of new residential property. There are decisions taking
stand on either way. Some of these decisions are-
 (A) Those taking a favourable view are
 (i) Bombay Housing Corporation vs. Assistant Commissioner of Income Tax
(2002) 81 – ITD – 545 (Mum) (14.02.2001)
 (ii) Prema P. Shah vs. Income Tax Officer (2006) 100 – ITD – 60 (Mum)
(29.11.2005)
 (iii) Nipun Mehrotra vs. Assistant Commissioner of Income Tax (2008) 110 – ITD
– 520 (Bang.) (29.03.2007)
 (iv) Assistant Commissioner of Income Tax vs. Dr. P.S. Pasricha (2008) 20 – SOT –
468 (Mum) (11.01.2008)
60
 (v) Lalit Marda vs. Assistant Commissioner of Income Tax (2008) 23 – SOT – 250
(Kol) (29.02.2008)
 (vi) Ishar Singh Chawla vs. Deputy Commissioner of Income Tax – 2010 – 130 –
TTJ – 108 (Mum) (UO) (04.03.2010).
 (vii) P. Thirumoorthy vs. Income-tax Officer [2011] 007 ITR (Trib) 0010 (Chennai)
- (14-10-2010)
 (viii) J.V. Krishna Rao vs. Deputy Commissioner of Income-tax, Circle 3(3),
Hyderabad [2012] 24 taxmann.com 104 (Hyd.)
 Those cases where a contrary view was expressed-
 (i) Smt. Shasikala Rajkumar Kabra vs. Income Tax Officer (1999) 64 – TTJ – 754
(Nag.) (SMC) (31.08.1998)
 (ii) Milan Sharad Ruparel vs. Assistant Commissioner of Income Tax (2009) 27 –
SOT – 61 (Mum) (16.10.2008)
61
 OTHER CASES OF RELEVANCE
 The decision of the Madras High Court in the case of Commissioner of Income-tax
vs. R.Srinivasan (2010)-235-CTR (Mad) 588(12-04-2010) is worth noticing.
 The assessee, in this case, sold goodwill for a price of Rs.56 lakhs during the
assessment year 2000-01 to a company in which he was a director but no
consideration in cash was received by him as book adjustment was made through
a journal entry by crediting the director’s account with a corresponding debit to
goodwill account for the aforesaid sum of Rs.56 lakhs in the books of the
company. The assessee thereafter purchased a property for a sum of Rs.56,23,740
and the registration of the property was done 18th August,2000 and therefore
made a claim under section 54F of the Act.
 The High Court, on appeal by Revenue, after referring to the observation of the
assessing officer that “as the property has been purchased by the assessee not
out of consideration received on account of transfer of the capital asset deduction
under section 54F is not allowed” noted that “no such pre-condition to that effect
is imposed by the provision. Only the Assessing Officer assumed that there is a
pre-condition which is not contemplated by the provision. Section 54F is clear,
unambiguous and plain. It is only a mere presumption and assumption of the
Revenue”.
62
 The High Court then referred to the oft quoted famous observations of Rowlatt J.
in the case of Cape Brandy Syndicate vs.IRC(1921) 1KB 64 (at page 71) which were
to the following effect-
 “In a taxing statute one has to look mainly at what is clearly said. There is no room
for any intendment. There is no equity about a tax. There is no presumption as to
a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at
the language used.”
 and held at para.10 as follows-
 “Section 54F encourages investment in residential house and the same is required
to be interpreted in such a manner as not to nullify the object. Therefore, we are
of the view that the assessee is entitled to the relief under section 54F and
confirm the concurrent findings given by both the appellate authorities. The
learned counsel appearing for the Revenue is also unable to furnish any material
or evidence or case law or compelling reason to take a contrary view of the
Tribunal”
 However the Kerala High Court in the case of Commissioner of Income Tax
vs.V.R.Desai (2011) 197 Taxman 52 (Ker) (26.11.2009) struck a different note.
 The assessee was the managing partner of a firm which was engaged, among
other things, in real estate business including construction and sale of flats.
During the assessment year 1995-96, the assessee transferred certain land to the
partnership firm treating it as his contribution to the capital of the firm. The firm,
in turn, credited capital account of the assessee with the full value of the land 63
Thereafter, the assessee availed loan from bank for the construction of a house
and within three years from the date of transfer of land to the firm got the new
house constructed.
 In the return filed for the relevant assessment year, the assessee claimed
exemption on the capital gains arising from transfer of the land under section
54F of the Act. The assessee succeeded in the second appeal filed before the
Tribunal
 The Revenue filed an appeal before the High Court. This is what the High Court
held at para. 3 of its judgment
 “3. On going through section 54F, particularly sub-section (4), we are of the
view that in order to qualify for exemption on capital gains, before the last date
for filing return, the net sale consideration should have been deposited in any
bank account specified by the Government for this purpose. In fact, the
requirement of sub-section (4) of section 54F is that the assessee should
produce along with the return, proof of deposit of the amount under the
specified scheme in a Nationalised Bank. Admittedly, the assessee allowed the
firm to which the property was transferred to retain and use it as a business
asset and towards consideration he got only credit of land value in his capital
account. In other words, sale consideration was not received by the assessee in
cash or deposited the same in terms of clause 4 of section 54F with any
Nationalised Bank or institution.
64
Consequently the assessee did not have the sale proceeds available for investment
in terms of scheme under section 54F(3) of the Act.
 In our view, in order to qualify for exemption under section 54F(3), the
assessee should have first deposited the sale proceeds of the property in any
bank account and the construction of the house to qualify for exemption under
section 54F should have been completed by utilising the sale proceeds also
available with the assessee. In this case, though the assessee constructed new
building within the period of three years from the date of sale, it was with
funds borrowed from HDFC. In our view, the assessee is not entitled to
exemption under section 54F because the assessee neither deposited the sale
proceeds for construction of the building in the bank in terms of sub-section
(4) before the date of filing returns nor was the sale proceeds utilised for
construction in terms of section 54F(3) of the Act. So much so, the assessee
was not entitled to claim exemption on capital gains under section 54F of the
Act which the Assessing Officer rightly declined.”
 The High Court also held that as the exemption claimed under section 54F of
the Act was prima facie inadmissible the assessing officer was justified in
making disallowance under section 143(1) (a) of the Income-tax Act.
65
POINTS TO BE NOTED
 (i) It is therefore clear that barring two Tribunal decisions and one High Court
decision there is a positive view in favour of the tax payer as the object of
introduction of beneficial provisions like sections 54 and 54F of the Act is to aid
the tax payer. However there is no straight jacket formula to be adopted in
each case. The peculiarities of each case have to be studied in the light of the
facts obtaining in such case and they to be properly analyzed before applying
case laws. In other words the facts of the case obtaining in a given situation
should be compared with the facts that arose in earlier decisions and the case
should be properly presented with full facts before the Assessing Officer as it
will help the assessee either at the first appellate stage or before the Tribunal
when the issue comes up for hearing, in case the assessing officer does not
agree with the views projected in that case.
66
 (ii) The fact that sections 54 and 54 F of the Act are beneficial provisions has also
been recognized by the Punjab &Haryana High Court in the case of
Commissioner of Income-tax-II, Chandigarh vs. Ms. Jagriti Aggarwal [2011] 15
taxmann.com 146 (Punjab and Haryana) where following the decision of the
Karnataka High Court in the case of Fathima Bai vs. ITO [2009] 32 DTR 243(Kar.)
and CIT vs. Rajesh Kumar Jalan [2006] 286 ITR 274/157 Taxman 398 (Gau.) the
Court has held that for purposes of section 54 of the Act due date for
furnishing return of income as provided under section 139(1) of the Act is
subject to extended period as provided under sub-section (4) of section 139 of
the Act. The Tribunal Benches following these decisions have also held in favour
of the assessees on this issue.
 (iii) Following the decision of the Madras High Court in the case of CIT vs.
Sardarmal Kothari reported in [2008] 302 ITR 286(Mad) [which has been
affirmed by the Supreme Court vide preliminary hearing in CC Nos.3953-
3954/2009 decided on 6.4.2009] the Karnataka High Court in the case of
Commissioner of Income-tax vs. Sambandam Udaykumar by judgment dated
15th February 2012 and reported in [2012] 19 taxmann.com 17 (Karnataka) has
held that if assessee has invested money in constructing a residential house,
benefit under section 54F cannot be denied merely because construction is not
complete in all respects or house was not fit to be occupied within stipulated
period of 3 years. 67
 So it can beneficially be said that if proper care is taken in analyzing
the facts of the case on hand and proper advice is tendered before
occurrence of any event such as sale or transfer of house property or
any other capital asset lot of litigations could be avoided and in case of
litigation the required benefit can be achieved at the second appeal
stage itself [(i.e.) before the Income Tax Appellate Tribunal].
 (iv) The Pune Bench of ITAT in the case of Chetan Vithal Tupe vs.
Assistant Commissioner of Income Tax (2011) 12 taxmann.com 125
(Pune) [31-05-2011] has held that when there is adjustment by way of
book entries without physical receipt of sale consideration –i.e. in
cases of exchange of property- beneficial provisions of 54F read with
section 54 would be applicable.
68
 THE FOLLOWING CASES OF IMPORTANCE MAY BE GONE THROUGH IN DETAIL
 (i) Where long-term capital gain arose from sale of two distinct and separate
assets, viz., residential house and plot of land, and assessee had invested entire
capital gain in purchase of a new residential house, he was entitled to claim
exemption under sections 54 and 54F of the Income-tax Act. It was so held in
Venkata Ramana Umareddy vs. Deputy Commissioner of Income-tax, Circle-3(3),
Hyderabad [2013] 32 taxmann.com 157 (Hyderabad - Trib.)
 (ii) 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. It was so held in the case of Deputy Commissioner of
Income-tax, Central Circle-32 vs. Ranjit Vithaldas [2012] 23 taxmann.com 226
(Mum.)
 (iii) The issue which arose before ITAT,Chennai Bench in the case of Ifthiqar Ashiq
vs.ITO-in ITA No.232/MDS/2013-Order dated 11th June 2013 was whether the
assessee was entitled to claim exemption under section 54F of the Act if he was
owner of a residential as well as commercial property on the date of transfer of
landed property.
69
 It was argued on behalf of the assessee that though the income was returned
under the head income from house property it was still a commercial property
and in support of this submission placed reliance on the rental agreement
entered into with the tenant, water supply bills, planning permit issued by the
Madras Metropolitan Development Authority etc.
 It was also submitted before the Tribunal that rental income from both
residential and commercial properties have to be declared only under the same
head “Income from house property” and both the lower authorities were of the
opinion that as income from both the properties was returned under the same
head the other property could not be considered as a commercial property. The
Tribunal referred to the provisions of section 22 of the Act and observed that no
distinction has been provided between rental income from house property and
rental income from commercial property. The Tribunal after observing that the
term ‘building’ used in section 22 is not qualified by the word “commercial” and
after referring to the decision of the Supreme Court in the case of Shambhu
Investment P. Ltd. v. Commissioner of Income-tax [2003] 263 ITR 0143 for the
proposition that income from letting out of commercial
buildings/warehouses/factory premises is assessable under section 22 of the
Act, held in favour of the assessee
70
 (iv) The Hyderabad Bench of ITAT in the case of Sri Prasad Nimmagadda
vs. Deputy Commissioner of Income-tax, (International Taxation)-II,
Hyderabad [2013] 32 taxmann.com 5 (Hyderabad.) has held that where
amount of capital gain claimed as exempt under section 54 is not utilised
in construction of residential house within 3 years, it will be charged to
capital gain in year in which period of 3 years expires; however,
exemption already granted shall not be denied.
 However while calculating cost inflation index the indexation point

pertaining to the year in which capital gains arose should be adopted and
not in the later year in which the exemption is withdrawn as was decided
by the Kerala High Court in the case of CIT vs. Thomy P.Chakola [2011] 200
Taxman 74. The Chennai Bench in the case of Joint Commissioner of
Income-tax (OSD), Company Circle-I(1), Chennai vs. B. Shivkumar[2012]
27 taxmann.com 305 (Chennai) echoed the same views.
71
 (v) The Mumbai Bench of ITAT in the case of Kishore H. Galaiya vs. Income-
tax Officer, Ward 8(2)(3) [2012] 24 taxmann.com 11 (Mum.) has held that
booking of flat with a builder, is a case of 'construction' for purpose of
claiming exemption under section 54; if construction is complete within 3
years. Section 54 exemption would be available even if possession was not
taken within three years. It is to be noted that the Delhi High Court in the
case of CIT v. Smt. Brinda Kumari [2002] 253 ITR 343/[2001] 114 Taxman
266 has held that when amount was advanced to builder for specific
purpose of construction of flats in new building and the Tribunal had also
held that construction could be treated as construction by the assessee
that finding of fact was binding on the Court and the Tribunal was right in
holding that the assessee was entitled to exemption under section 54(1).
 (vi) The assessee had claimed abatement of capital gains for reinvestment
in a residential house property under section 54F but could not complete
construction within the time limit because of the restraint order from the
court. The assessee had however purchased the plot well within the time
but the construction was impossible in view of the court order. In fact, the
entire sale consideration was utilised by the assessee in purchase of the
land itself.
72
The condition that the assessee has not completed construction because of
the impossibility of compliance, it was held by the Tribunal, should not stand
in the way of relief in the circumstances of the case as was decided by the
Tribunal in Smt. V. A. Tharabai v. Deputy CIT [2012] 14 ITR (Trib) 15
(Chennai).
 (vii) Where assessee purchased old residential house and demolished it

within 2 years, deduction under section 54F would be withdrawn-
Assistant Commissioner of Income-tax-21(3) vs. Dilip Manhar Parekh
[2013] 31 taxmann.com 386 (Mumbai - Trib.)
 (viii) The ITAT Chennai Bench in the case of Asstt. CIT v. Ms. Sultana Nazir
[2012] 21 taxmann.com 385 (Chennai - Trib.) has held that when an
assessee has availed of exemption under section 54F by acquiring a
residential house and, subsequently, transfers the same within three
years and acquires another residential house, the forfeiture of
exemption for the sale can be nullified by the subsequent investment in
the second residential house.
73
 (ix) The Jaipur Bench of ITAT in the case of Assistant Commissioner of
Income-tax, Circle-2, Ajmer vs. Om Prakash Goyal [2012] 24 taxmann.com
67 (JP.) has held that residential house constructed on agricultural land
would be eligible for exemption under section 54F
 (x) The Kolkata Bench of ITAT in the case of Deputy Commissioner of

Income-tax, Circle-8, Kolkata vs. Rajeev Goyal [2012] 22 taxmann.com 34
(Kol.) has held that in case of clubbing of income of minor child, deduction
under section 54EC is to be allowed on minors' income from LTCG
separately and only net income is to be clubbed.
 (xi) The Kerala High Court in the case of Pushpa vs. Income tax Officer
[2013] 31 taxmann.com 33 (Kerala) has held that section 54F does not
provide for exemption in case of renovation or modification of an existing
house and what gains exemption is only construction of a new house. The
decision of the Madras High Court in the case of CIT vs.Pradeep Kumar
[2007] 290 ITR 90 was followed.
74
 (xii) The ITAT Mumbai Bench in the case of Jatinder Kumar Madan vs.
Income-tax Officer, Ward 19(1)(3) [2012] 21 taxmann.com 316(Mum)has
held that acquisition of new flat under a development agreement in
exchange of old flat amounts to construction of new flat for purpose of
claiming deduction under section 54 of the Income-tax Act.
 (xiii) The Mumbai Bench of ITAT in the case of Assistant Commissioner of

Income-tax-19(2) vs. Jaimal K. Shah [2012] 24 taxmann.com 91 (Mum.) has
categorically held that where assessee land owner, under a development
agreement, received some flats as consideration and later on sold same,
period of holding of such flats is to be considered taking into account date
of possession of flats and not date of development agreement. Though this
decision runs counter to the decision of the Kolkata Bench in the case of
Income-tax Officer vs.Vikash Behal and reported in (2010)-36-DTR (Kol)
(Trib) 385, it is submitted with respect, that this decision of the Kolkata
Bench requires reconsideration by a Special Bench. The Kolkata Bench in
this case held that while calculating period of holding in respect of sale of
flats which were allotted by the builder as a result of JDA the period of
holding in respect of such flats should be reckoned from the (earlier) date of
handing of land for development.
75
The Kolkata Bench had no occasion to consider an earlier decision given by a
co-ordinate bench in the case of Statesman Ltd v. Assistant Commissioner of
Income-tax, Circle-1, Kolkata [2008] 114 ITD 595 as it was not cited at the time of
hearing nor was it noticed by the Bench. In the earlier case capital gain was split
up into long term for land and short-term for building depending upon the period
of holding.
 (xiv) The Chennai Bench of ITAT in the case of Asstt. CIT Vs. Dr. S. Balasundaram
(ITAT – Chennai), ITA No. 1832/Mds/2012,( Date of pronouncement:
27.05.2013 ) has held that benefit under 54B of the Act can be claimed even if
new agricultural land is purchased prior to transfer of previously owned
agricultural land.
 (xv) With regard to dates which are relevant the catchwords from the decision
of the Punjab & Haryana High Court in the case of Smt. Shail Moti Lal vs.
Commissioner of Income-tax, Chandigarh [2013] 35 taxmann.com 46 (Punjab
& Haryana) may be gone through-
76
 Section 54, read with section 2(47), of the Income-tax Act, 1961 - Capital
gains - Profit on Sale of Property Used for Residence - Assessment year
2005-06 - Appellant entered into agreement to transfer rights in property
'A' on 27-12-2002 after receipt of earnest money of Rs. 15 lakhs - Sale
deed was executed on 24-9-2004 when entire sale consideration of Rs.
1.32 crores was received - Appellant purchased property 'B' on 30-4-2003
and claimed deduction under section 54 - Whether since there was
delivery of possession and receipt of entire sale consideration was on date
of execution of sale deed on 24-9-2004, it was date of transfer of property
A and date of agreement to sell on 27-12-2002 could not be treated as
date of transfer of this property - Held, yes - Whether, resultantly, date of
purchase of property B being prior to one year of transfer of right in
property A, assessee was not entitled to deduction under section 54 -
Held, yes
 (xvi) The Mumbai Bench of the ITAT in the case of Rajesh Keshav Pillai
vs.ITO (2011)-44-SOT-617(Mum) has held that if there are sales of more
than one residential house, exemption has to be computed with reference
to each set of sale of residential house and the corresponding investment
in one residential house.
77
The Tribunal went on to hold that aggregation is not permitted and the
principle of one to one has to be followed meaning thereby that surplus
(difference between investment in new house property and capital gains), if any,
arising out of sale of one residential property cannot be adjusted against deficit
(difference between capital gains and investment in new house property) arising
out of sale of other property.
 (xvii) Where a taxpayer had sold the residential house and acquired only
15% interest in another house, where such other house was already used for
residence prior to purchase, it was held that the benefit should be available
to the taxpayer in CIT v. Chandanben Maganlal [2000] 245 ITR 182 (Guj). In
coming to the conclusion, the High Court followed its own earlier decision in
CIT v. Tikyomal Jasanmal [1971] 82 ITR 95 (Guj). In that case, what was
purchased was a unit of house property, while in the present case before the
High Court; it was a limited interest in the property.
 (xviii). The Pune Bench of ITAT in the case of Income-tax Officer, Ward- 1 (3),
Nashik vs. Anirudha Ashok Jajoo[2015] 56 taxmann.com 221 (Pune - Trib.)
has held that where assessee fulfilled all conditions prescribed for claiming
deduction under section 54, claim could not be denied for mere fact that he
raised claim inadvertently under wrong of section 54D in return of income
78
 (xix). The Calcutta High Court in the case of Commissioner of Income-tax v.
Smt. Bharati C. Kothari [2000] 244 ITR 0352(Cal) has held that “if the
assessee has invested the sale proceeds received from a house in another
house, which is being constructed by the third party the assessee would be
entitled for the benefit or the exemption under section 54(1) of the
Income-tax Act. If the benefit is not given to the assessee, though she has
invested the sale proceeds in the house which is being constructed for her,
that view may not be in conformity with the object behind the provision.
The purpose behind this exemption is that when the assessee sells her
residential house and if she purchased any new house or acquired the new
house from those sale proceeds, the assessee is exempted from the capital
gain tax.”
 (xx).The Calcutta High Court in this case referred to the following
observations of the Supreme Court in the case of J.H.Gotla [1985] 156 ITR
323,339 (S.C)
 “Where the plain literal interpretation of a statutory provision produces a
manifestly unjust result which could never have been intended by the
Legislature, the court might modify the language used by the Legislature so
as to achieve the intention of the Legislature and produce a rational
construction. The task of interpretation of a statutory provision is an
attempt to discover the intention of the Legislature from the language
used. It is necessary to remember that language is at best an imperfect
instrument for the expression of human intention.
79
 It is well to remember the warning administered by Judge Learned Hand
that one should not make a fortress out of the dictionary but remember
that statutes always have some purpose or object to accomplish and
sympathetic and imaginative discovery is the surest guide to their meaning.”
 The Calcutta High Court then went on to hold -
 “Keeping in view the above observations of the apex court, where the plain
literal expression of the statutory provisions produces manifestly unjust
result, which could never have been intended by the Legislature, the court
can modify the language to achieve the intention of the Legislature and
produce a rational construction. The purpose behind the exemption under
section 54(1) is that if any assessee sells his residential house and purchases
a new house against those sale considerations that capital gains tax arising
out of the sale of the earlier house should not be taxed. Whether the
assessee himself constructs the house or he gets it constructed by a
contractor or a third party that does not make any difference. The basic
requirement for the purpose of relief under section 54(1), is that the
assessee should invest the sale proceeds in the construction of a residential
house, which has been constructed for the assessee. Keeping in view the
above observations and reasons given by the Tribunal, no case is made out
for interference. In the result, we answer the question in the affirmative,
i.e., in favour of the assessee and against the Revenue.”
80
 (xxi).The Bombay Bench of ITAT in the case of Mukesh G. Desai (HUF) vs.
Income-tax Officer [2010] 122 ITD 212 (Mum) has held that investment
made in flat under construction to take advantage of provisions of section
54F of the Income-tax Act amounts to investment in construction of a
residential house and time available for investment is 3 years from date of
sale.
 (xxii)The Bangalore Bench of ITAT in the case of Smt. Sajida Begum vs.
Income-tax Officer, Ward 15 (2), Bangalore [2015] 56 taxmann.com 269
(Bangalore - Trib.) has held that exemption cannot be denied under
section 54F of the Act under the pretext that the assessee had owned two
houses when the assessee had already gifted one of the houses under
Muslim Law.
 (xxiii).The Karnataka High Court in the case of Commissioner of Income-
tax, Bangalore v. K Ramachandra Rao[2015] 56 taxmann.com 163
(Karnataka) has held that where the assessee had already started
construction within one year prior to date of sale of land and invested the
entire sale consideration in construction of a residential house within
three years from date of transfer of capital asset, then he could not be
denied exemption under section 54F of the Income-tax Act(the Act)
merely on the ground that he did not deposit the said amount in capital
gains scheme account before the due date prescribed under section
139(1) of the Act.
81
 (xxiv).The Hyderabad Bench of ITAT in the case of Sumathi Gedupudi
vs.Dy.CIT (2015) 44 CCH 0092 Hyd Trib has held that capital gains earned
by the assessee can be utilized for other purposes, and as long as the
assessee fulfils the condition of investment of the equivalent amount in
the asset qualifying for relief under section 54F, by securing the money
spent out of the capital gains from other sources available to it, either by
borrowing or otherwise, it is eligible for relief under section 54F in
respect of the entire amount of capital gains realized.
 (xxv).The Visakhapatnam Bench of ITAT in the case of Koganti Venkata
Ramaiah v. Assistant Commissioner of Income-tax, Circle 2 (1),
Vijayawada[2015] 56 taxmann.com 88 (Visakhapatnam - Trib.) has held
that assessee is entitled to exemption under both sections 54B and 54F
and they are not mutually exclusive and independent of each other.
 (xxvi).The Karnataka High Court in the case of Commissioner of Income-

tax, Bangalore v. Anandraj[ 2015 ] 56 taxmann.com 176 (Karnataka) has
held that where even before sale of agricultural land, assessee borrowed
housing loan and started construction on site belonging to him and after
sale of agricultural land, amount spent towards construction of house
was more than consideration received, assessee was entitled to benefit
of section 54F of the Act.
82
 (xxvii) It has been held by the High Court of Punjab & Haryana[2015] 57
taxmann.com 19 (Punjab & Haryana) in the case of Deputy Commissioner of
Income-tax, Circle - I, Bathinda v. Sushil Kumar that on sale of asset acquired
after partition of HUF, cost inflation index had to be taken of the year in which
asset was acquired by HUF.
 (xxviii) The Madras High Court in the case of CIT vs. C.Sugumaran [2015] 57
taxmann.com 20(Mad) has held that where owner of property executed power
of attorney in favour of assessee without any consideration and thereafter
property was registered in name of assessee's wife for certain sum, since
property rights had not been handed over to assessee, he could not be treated
as owner of property for computing capital gain in his hands.
 (xxix).The ITAT Bangalore Bench in the case of Abdul Wahab vs. Deputy CIT
[2015]57 taxmann.com 27(Bang-Trib.) has held that where there was nothing
to show that possession was ever delivered by assessee to purchaser in part
performance of agreement for sale, there was no transfer within meaning of
section 2(47)(v) of the Act.
 (xxx) The Delhi Bench of ITAT in the case of Bharat Bhushan Panchal,vs.
Asstt.CIT and vice versa in ITANos. 4914 and 5326/Del/2012.-Order dated 30th
March 2015-reported in [2015] 40 ITR (Trib) 361(Del) has held that if the
assessee had bifurcated his plot into two parts and sold the same on two
different dates and acquired two different residential properties he was well
within his rights to claim exemption under section 54F of the Income-tax Act so
long as he was not owning more than the stipulated number of properties as
set out in section 54f OF THE Act.
83
The assessee,in such a case, will not be hit by clause (a)(ii) of the proviso
to section 54F of the Act according to which exemption cannot be allowed in
case of purchase of any residential house other than the new capital asset
within a period of one year after the date of transfer of the original asset( in
this case a plot).
 (xxxi)The ITAT Mumbai in the case of Income-tax Officer, 21(3)(1), Mumbai
vs Bhagwan T. Fatnani[2015] 58 taxmann.com 227 (Mumbai - Trib.) has held
that property illegally encroached by the assessee would not be considered
as 'Capital asset' under section 2(14) and, consequently, gain arising from
transfer of such property could not be assessed as capital gain but as
income from other sources
 (xxxii) The Karnataka High Court in the case of Commissioner of Income-tax,
Bangalore vs. Anandraj[2015] 56 taxmann.com 176 (Karnataka) has held
that where even before sale of agricultural land, assessee borrowed
housing loan and started construction on site belonging to him and after
sale of agricultural land, amount spent towards construction of house was
more than consideration received, assessee was entitled to benefit of
section 54Fof the Act.
84
 (xxxiii)The ITAT Mumbai Bench in the case of Smt. Pramila R. Wadhawan vs.
Assistant Commissioner of Income-tax, Circle-19 (2), Mumbai [2014] 50
taxmann.com 101 (Mumbai - Trib.) has held that where assessee had
purchased residential house again after purchasing earlier residential unit
within a period of one year from date of transfer, exemption under section
54F was rightly denied in view of violation of sub-clause (ii) of clause (a) of
section 54F (1) of the Act
 (xxxiv)The ITAT Hyderabad Bench in the case of New Vistas Constructions,
Hyderabad vs Income Tax Officer-II (International Taxation),
Hyderabad[2015] 59 taxmann.com 213 (Hyderabad - Trib.) has held that a
resident-firm which buys house property from NRI cannot escape
consequences of non-deduction of TDS u/s 195 from payments to NRI-
vendor by claiming that long-term capital gains from sale of house property
by NRI are tax-exempt under Chapter-XIIA contrary to the provisions of
section 115E especially when NRI himself offered the amount as taxable in
his income-tax return and paid tax thereon
 (xxxv) Though in the following cases it has been held that subsequent
change in usage of property does not disentitle assessee to relief under
section 54F, if what was acquired was originally a residential property.
85
 Shyamlal Tandon vs. Income-tax Officer, Ward -7(4), Hyderabad[2014] 43
taxmann.com 155 (Hyderabad - Trib.)
 Deputy CIT vs. Subramanyeshwara Reddy (HUF) in ITA Nos. 1014/Hyd./2009 and
others-Order dated 27th December,2011 and
 Smt .K.Pratibha vs.ITO [2014] 44 taxmann.com 282[Hyderabad-Trib.]
 it is not advisable to do so as case-laws on certain contentious issues can only be
used as shield and not weapon.
 (xxxvi) From the decision of the Calcutta High Court in the case of Sarkar (B.B.) v.
Commissioner of Income-tax [1981] 132 ITR 0150(Cal) –Headnote-
 “The expression used in a statute should ordinarily be understood in the sense in
which it is best harmonious with the object of the statute and which effectuates
the object of the legislature. It is, therefore, necessary to read s. 54 of the I.T.
Act, 1961, in the context of the subject-matter and its setting in the scheme of
capital gains and the object of the exemption and to ascertain its true import.
The main purpose of s. 54 is to give relief in respect of profit on the sale of a
residential house.
86
If an assessee is entitled to relief on the fulfilment of either of the two
conditions, that is to say, either purchasing a house property within one year or
constructing the house within two years (the law as it stood then), it would be
improper to hold that on fulfilment of both the conditions he would be disentitled
to that relief. It is the fulfilment of two alternative conditions that is contemplated
by s. 54. But, where both the conditions are fulfilled within the time stipulated, the
assessee will be entitled to the relief under the section.”
 (E) If provisions of section 54EC are analyzed then investment in capital gain
bonds has to be made within a period of 6 months from the date of receipt.
However the Kolkata Bench of ITAT in the case of Chanchal Kumar Sircar vs. ITO
(2012) 18 taxmann.com 304 (Kol) has held that in case of receipt of sale
consideration in instalments, period of six months for claiming deduction
under section 54EC has to be calculated from date of actual receipt of amount.
The Pune Bench of ITAT in the case of Mahesh Nemichandra Ganeshwade vs.
Income-tax Officer [2012] 21 taxmann.com 136 (Pune) has also echoed the
same views.
 But the Gujarat High Court in the case of Jyotindra H. Shodhan vs. Income-tax
Officer [ 2015 ] 54 taxmann.com 342 (Gujarat) affirming the decision of the
Special Bench in the case of Jyotindra H Shodhan v. ITO [2003] 87 ITD 312
(Ahd.) (SB) has held that the investment in capital gain bonds has to be made
within 6 months from the date of transfer and the period of 6 months cannot
be calculated from the receipt of final instalment.
87
 As the decision rendered by a non jurisdictional High Court will prevail over
even the decision rendered by the jurisdictional Tribunal it is advisable to
invest within 6 months from the date of transfer in capital gain bonds without
waiting for receipt of actual consideration however difficult financially it may
be for the assessee.
 The following cases may also be noted-
 (i) It is even possible to invest in capital gain bonds out of any
advance/earnest deposit (to be) received from the builder even before
transfer of property as specified in Section 2(47)(v) of the Income Tax Act. It
has been so held by the High Court of Bombay in the case of Mrs. Parveen P.
Bharucha vs. Deputy Commissioner of Income-tax, Circle 2, Pune [2012] 28
taxmann.com 274 (Bom.). In the light of this decision it can therefore be
stated, that the order of the Ahmedabad Bench of ITAT in the case of Smt.
Dakshaben R. Patel vs. Assistant Commissioner of Income-tax, Circle-2(1),
Baroda which held that where assessee purchased REC Bonds prior to date of
sale of property, exemption under section 54EC was not available, is no
longer good law.
 (ii) The High Court of Bombay in the case of Commissioner of Income-tax,
Central III, Mumbai vs. Cello Plast[2012] 24 taxmann.com 111 (Bom.) has held
that if bonds of assessee's choice are not available throughout period of six
months as provided under section 54EC, time to invest in bonds would get
automatically extended till bonds are available in market. In other words
extension of time is available in such cases 88
 (iii) When no evidence was forthcoming to show that assessee had ever
applied for bonds but due to their non-availability, failed to invest within
time, the assessee was not entitled to deduction under section 54EC of the
Income-tax Act.-It has been held so by the Chennai Bench of ITAT in the
case of Smt. Anuradha Venkatesan vs. Income-tax Officer, Business Range
1(1), Chennai [2013] 29 taxmann.com 68 (Chennai - Trib.)
 (iv) Deduction under section 54EC cannot be denied on ground that
assessee has availed exemption under section 54F also in respect of a part
of capital gains- Assistant Commissioner of Income-tax, Cr. 23(2), Mumbai
vs. Deepak S. Bheda[2012] 23 taxmann.com 159 (Mum.)
 (v) The Ahmedabad Bench of ITAT in the case of Aspi Ginwala, Shree Ram
Engg. & Mfg. Industries vs. Assistant Commissioner of Income tax, Circle-5,
Baroda [2012] 20 taxmann.com 75 (Ahd.) has held that where investment in
eligible bonds was temporarily closed and by time it was reopen time limit
of six months had expired, investment made on date of reopening was
eligible for exemption under section 54EC
 (vi) The Mumbai Bench of ITAT in the case of Yahya E. Dhariwala vs. Deputy
Commissioner of Income-tax, Circle-15(2) [2012] 17 taxmann.com 159
(Mum.) has held that for purpose of section 54EC, period of six months has
to be reckoned from end of month in which transfer took place.
89
The Tribunal held that in accordance with language in section 54EC six
months period should be reckoned from end of month in which transfer took
place. The Mumbai Bench in its order dated 19th June 2013-[2013]36 CCH
167(Mum) Trib. in the case of Aquatech Engineers vs. Additional CIT –ITA
No.8029/Mum/2011 has echoed the same views.
 The Special Bench of ITAT in the case of Alkaben B. Patel vs. Income-tax
Officer, Ward -14(2), Ahmedabad[2014] 43 taxmann.com 333 (Ahmedabad -
Trib.) (SB) adopting the reasoning which found favour with ITAT Mumbai
Bench in the case of Yahya E. Dhariwala(supra) has held that time limit of 'six
months' in sec 54EC means 'six British Calendar months' in view of the
General Clauses Act, 1897.The Special Bench also observed that in the
absence of any definition of the word 'month' in the Act, the definition of
the General Clauses Act,1897 will be applicable. Legislature in its wisdom
has chosen to use the word 'month' and this was done keeping in view the
definition in section 3(35) of the General Clauses Act, 1897. The Special
Bench rejected the Revenue's interpretation that 'month' should be
understood in the ordinary sense-i.e. the month is a period from a specified
date in a month to the date numerically corresponding date in the following
month
90
 The following observations from the above referred decision of the Special
Bench are worth noticing-
 “The subtle question is that whether the word "month" refers in this
section a period of 30 days or it refers to the months only. Section 54EC,
prescribes that an investment is required to be made within a period of six
months. Whether the intention of the legislator was to compute six
calendar months or to compute 180 days. To resolve this controversy, one
has to be guided by a decision of Allahabad High Court pronounced in the
case of CIT v. Munnalal Shrikishan [1987] 167 ITR 415 where answering the
dispute in respect of law of limitation the Court has clearly held that there
is nothing in the context of section 256(2) to warrant the conclusion that
the word 'month' in it refers to a period of 30 days, therefore, refers to six
months in section 256(2) is to six calendar months and not 180 days. [Para
6]”
 (F) Capital Gains vis-à-vis sections 27 and 64 of the Act
 When capital assets are transferred to spouse for inadequate consideration
so as to be caught by the provisions of section 27 of the Act and the
spouse transfers the capital asset the resultant capital gains will be
included only in the total income of the transferor. It was so held by the
Madras High Court in the case of Commissioner of Income-tax vs. Ganesan
(G.S.) [1995] 215 ITR 0334.
91
The Madras High Court opined that any provision subject to another
provision is understood to incorporate the other provision and to exclude matters
which fall under the said provision or to expand and provide for matters in
addition to what is found in the said provision and a provision subject to the other
provisions of the Act or any other law necessitates a combined reading of such
provisions.
 The High Court, reversing the decision of the Tribunal, held that proviso to
section 53 (now deleted) of the Income-tax Act which placed restriction with
regard to ownership of more than one property at that time, would be
applicable to the donor even after transfer of property for inadequate
consideration. In other words the exemption under section 53 of the Income-
tax Act was denied as the assessee-transferor had one more property
disentitling him to exemption even though the transferee (wife) had no
property other than the property sold.
 It is to be noted that the assessee-transferor is otherwise entitled to claim all
deductions as are applicable in accordance with provisions of sections. 22 to
27 of the Income-tax Act as was held by the Madras High Court in the case of
Siddique (S.M.A.) v.CIT (1984)-148-ITR-307.
92
 However in the following cases it has been held that where there is no transfer
of property for inadequate consideration or an intention to live apart and the
assessee, either being a minor or spouse, earns income by way of capital gains
generated out of his /her own assets then the minor or the spouse is entitled
separate deduction under section 54F or section 54 of the Income-tax Act.-
 (a) Assistant Commissioner of Income-tax VS. Madan Lal Bassi [2004] 88 ITD
557 (CHD.)
 (b) Joint Commissioner of Income-tax, S.R.44 v. Govind Rohira alias Srichand
Rohra [2005] 95 ITD 77 (MUM.)
 (c) Deputy Commissioner of Income-tax, Circle-8, Kolkata vs. Rajeev Goyal
[2012] 22 taxmann.com 34 (Kol.)/[2012] 52 SOT 335 (Kol)
 But in all these cases, as stated earlier, there was no transfer of assets. In fact
in the case of Assistant Commissioner of Income-tax vs.. Madan Lal
Bassi(supra) one of the points which weighed favourably with the Tribunal
was that there was no transfer by the assessee-father to the minor child for
inadequate consideration and the income of the minor was being added in
the income of the father as a matter of policy and not on account of any
evasion or avoidance of tax. This is what the Tribunal observed at para.17 of
its order by distinguishing the decision of the Madras High Court in the case of
CIT v. G.S. Ganesan (supra)
93
 “17. The ld. D.R. also relied on the decision of Hon'ble Madras High Court in
the case of CIT v. G.S. Ganesan [1995] 215 ITR 334. In that case, capital gain
arising on transfer of assets which were earlier received in transfer by wife
from her husband without adequate consideration was held to be taxable in
the hands of the assessee husband without allowing benefit of section 53 of
the Act as the husband held property worth more than Rs. 50,000 on the
relevant date.”
 So no attempt should be made to transfer a portion of the property by the
assessee to his wife or vice versa for inadequate consideration as such a
transaction would be hit by the decision of the Madras High Court in the
case of Commissioner of Income-tax vs. Ganesan (G.S.)(supra) in the sense
that the transferee –either husband or wife as the case may be- will not be
able to claim deduction under section 54EC of the Act.
 G.SECTIONS 195 and 197 OF THE ACT
 As per provisions of section 195 any payment made to an NRI attracts tax
deduction @30% unless the NRI gets a certificate under 197(1) from the
Income-tax Officer, International Taxation directing the transferee (payer) to
deduct tax at the appropriate tax. Though the transferee (payer) can make
an application under section 195(2) of the Act to the Income-tax Officer,
International Taxation if he (the payer) is of the opinion that the whole
payment made to an NRI would not be chargeable to tax, this seldom
happens as the payer would not like to take any chance.
94
 Even an NRI purchaser was not spared by ITAT Bangalore Bench in the case
of Syed Aslam Hashmi vs. Income-tax Officer, (International Taxation), Ward-
2(1) [2012] 26 taxmann.com 6 (Bangalore - Trib.). The ITAT Bangalore Bench
in this case has categorically held that if the NRI purchaser fails to take
recourse to section 195(2) of the Act then he would be required under
section 195(1) to deduct tax on entire sale consideration payable to the NRI
seller and in the absence of such deduction he would be treated as an
assessee-in-default exposing himself to interest under section 201(1A) of
the Act on the amount of tax not deducted. So it is better to adopt a safe
and cautious approach.
 The ITAT (Chennai Special Bench) in the case of Income-tax Officer vs.
Prasad Production Ltd. [2010] 003 ITR (Trib) 0058 has summarized the
various situations that can arise for the applicability of section 195 as
under-
 (a) In case of a bona fide belief by the payer that no part of the payment
bears income character, it is not mandatory for him to undergo the
procedure of section 195(2) before making any payment to a non-resident.
However, if the Department is of the view that the payer ought to have
deducted tax at source, it will have recourse under section 201 of the Act.
Thus, here the interest of the Revenue is protected. In the proceedings
under section 201, the Assessing Officer will determine the portion
chargeable to tax according to the provisions of the Act and determine the
tax payable by the payer.
95
The Assessing Officer is bound to determine the income chargeable to tax in
accordance with the provisions of the Act. In any case, the liability of the payer
cannot exceed that of the payee and if the payer is dissatisfied with the order
under section 201, he will have recourse to appeal against the said order. Thus,
the interests of both the parties are protected.
 (b) If the payer believes that whole of the payment is chargeable to tax and if
he deducts and pays the tax, no problem arises.
 (c) If the payer believes that only a part of the payment is chargeable to tax,
he can apply under section 195(2) for deduction at appropriate rates and act
accordingly. No interest is jeopardised.
 (d) If the payer believes that a part of the payment is income chargeable to
tax, and does not make an application under section 195(2), he will have to
deduct tax from the entire payment. Thus, the interests of the Revenue stand
protected.
 (e) If the payer believes that the entire payment or a part of it is income
chargeable to tax and fails to deduct tax at source, he will face all the
consequences under the Act. The consequences can be the raising of demand
under section 201, disallowance under section 40(a)(i), penalty, prosecution
etc. The interests of the Revenue stand protected.
96
 (f) If the payee wants to receive the payment without deduction of tax, he can
apply for a certificate to that effect under section 195(3) and if he gets the
certificate, no one is adversely affected.
 (g) If the payee fails to get the certificate, he will have to receive payment net
of tax. No interest is jeopardised.
WHEN NRI IS THE SELLER
You in this write-up refers to an NRI
 The following can be stated as ACTION PLAN for NRI (transferor-seller) in this
regard
 Apply in Form No.13-the prescribed form to be signed by you and submit the
same to the Income-tax Department, International Taxation Section Chennai
along with the following documents.
 Copy of all parent documents – the documents through which the property
was purchased/ inherited through WILL/devolved through Settlement or
Family Arrangement etc.
 Details of any improvements / additions made in respect of the property with
copies of bills etc.
 Copy of the proposed sale agreement/Joint Development Agreement
97
 Copies of returns for the last 5 years.
 Copy of your PAN card.
 Copy of your passport for the last 8 years to substantiate about your residential
status-i.e.-You were a non-resident during these years.
 g. Copy of the Capital Gain workings-to be prepared by your Chartered
Accountant (at his end) to indicate the capital gain and as to how the capital
gain tax (liability) would be discharged.
 An authorization in favour of the Chartered Accountant to present these
documents and obtain deduction certificate at an appropriate rate – certificate
from the Income Tax Officer, International Taxation. In this case the certificate
may be issued for withholding (deduction) of tax by the purchaser @ 20.6%. (In
the absence of a certificate tax withholding would be @ 30.9%)
 All these documents shall be filed by the Chartered Accountant along with an
affidavit signed by you with regard to capital gain workings and his letter and
the Chartered Accountant will attend to this matter of processing at the Income
Tax Office, International Taxation Section and will normally obtain the certificate
within 20 to 25 working days from the date of application made before the
Income Tax Officer, International Taxation. The Income-tax Officer, through this
certificate, would issue necessary instructions to the transferee-purchaser with
regard to withholding of tax on behalf of you as the transferor-seller-i.e.-at what
rate tax has to be deducted and remitted on behalf of the transferor-seller by
the transferee-purchaser. 98
 The intention of obtaining a certificate from the Income Tax Department is
to save withholding of tax at full rate of 30% by the purchaser (of residential
property). By undertaking this exercise the final assessment in your case will
be very smooth as the Income Tax Department would have gone through all
the documents submitted by you before issuing the necessary certificate
now.
 Adhere to the following for smooth completion of the work in entirety.
 (a) Chalk out a plan with meticulous care with the help of a competent
professional and adhere to that schedule without any deviation.
 (b) Kindly preserve all documents right from purchase of property in respect
of original asset including improvements. Documents to be preserved
include income-tax certificate (to be) obtained (now) by NRI from Income-
tax Officer, International Taxation. All necessary/required documents have
to be filed with the income-tax returns in the year in which the property is
sold/Jointly developed and in the year in which new property is purchased if
both fall in different financial years. If investment in new property is(to be)
made for taking advantage of provisions of section 54 of the Income-tax Act
then preserve a copy of the purchase document carefully and if any basic
facilities are required to be provided preserve such bills as the cost of such
basic facilities can be taken as part of cost of investment in new property. If
investment in Capital Gain Bonds is required to be made kindly preserve
proof for having made investment in Capital Gain Bonds.
99
 (c) Kindly preserve all bills pertaining to transfer of property and these bills
include tickets purchased by NRI on his /her trip to India to sign the sale
deed in person. Brokerage slip/bill given by the broker has to be preserved
as this is an expenditure which can be claimed against sale consideration.
Advocate fees is an allowable deduction.
 (d) Ensure filing of income-tax returns in the year of transfer of old property
and subsequent years
 (e) Kindly do not hesitate to take professional advice at the time of need
from a Competent Professional.
 H.TDS ON PURCHASE OF IMMOVABLE PROPERTY (SEC. 194-IA)
 Section 194-IA has been inserted with effect from June 1, 2013
 Who is responsible for tax deduction – Any person (being a transferee)
responsible for payment (other than the person referred to in section
194LA) to a resident transferor any sum by way of consideration for transfer
of any immovable property (other than agricultural land in rural areas in
India), is liable to deduct tax at source under section 194-IA.
 Time of deduction – Tax shall be deducted at the time of payment (in cash or
by issue a cheque or drafts or by any other mode) or at the time of giving
credit to the transferor (in the books of account of the transferee),
whichever is earlier.
100
 Rate of tax deduction – Tax is deductible at the rate of 1 per cent. If,
however, the recipient does not furnish his PAN to the deductor, tax will
be deducted (by virtue of section 206AA) at the rate of 20 per cent.
 Threshold limit – No tax is deductible where the consideration paid or
payable for the transfer of an immovable property is less than
Rs.50,00,000/-.
 Provisions of TAN not applicable – Provisions of section 203A (pertaining
to TAN) shall not apply in respect of tax deducted under section 194-IA.
 Other points – The following points should be noted –
 The above provisions of section 194-IA are not applicable if a person
acquires rural agricultural land in India. For this purpose, the definition of
section 2(14) will apply
 Immovable property means any land or any building or part of the
building. Such property may be situated in India or may be situated
outside India. If the transferor is resident in India, TDS provisions of
section 194-IA will apply. However, as mentioned earlier, if a person
acquires an agricultural land in a rural area in India, TDS provisions will
not be applicable.
101
FURTHER POINTS TO BE NOTED
 These provisions are not applicable in the case of sale of residential and
landed properties to Non-Resident Indians who are covered under
provisions of section 195 read with section 197 of the Income Tax Act.
However these provisions are applicable if Non-Resident Indians sell
property to Resident Indians.
 As provisions stand today there is no way by which a certificate can be
obtained from the Jurisdictional Assessing Officer with regard to less
deduction or nil deduction. In other words tax deduction has to be
made statutorily (compulsorily) by the purchaser of the property or a
developer in the case of Joint Development of Property.
 It is to be noted that the threshold limit of Rs.50 lakhs is applicable
property wise irrespective of share of the sellers in such property.
 Section 194LA deals with payment of compensation on acquisition of
certain immovable property.
 The tax deducted at source has to be remitted to the credit of the
Central Government before the 7th of the following month.
102
 4. TIPS FOR TAX PLANNING
 (a) By resorting to genuine Family Arrangement no transfer as contemplated
in section 2(47)(v)of the Act is involved and there is no question of any
liability to capital gains tax. A family arrangement is an agreement between
members of the same family, intended to be generally and reasonably for
the benefit of the family either by compromising doubtful and disputed
rights or by preserving the family property or the peace and security of the
family by avoiding litigation or by saving its honour (Halsbury’s Laws of
England, 4th Edn. Vol 16, para 301). But where share in property is released
against receipt of cash, instrument of release cannot be called a family
settlement and would be covered by term 'transfer' and exigible to capital
gains tax as was held by the Chandigarh Bench of ITAT in the case of Mrs.
Lalitha Rathnam vs.ITO [2013] 35 taxmann.com 37(Chandigarh). However it
has been held by the Punjab & High Court in the case of CIT vs. Ashwani
Chopra [2013] 30 taxmann.com 299 (P& H) that amount of owelty i.e.
compensation deposited to settle inequalities in partition, represents
immovable property and would not attract capital gain tax.
103
 (b) When property to be transferred by an assessee is very extensive with
huge value then the assessee can settle the property on his family
members( refer to the definition of relative appearing in section 56(2)
(vii) of the Act) -may be the ultimate beneficiaries on the happening of
the event- and all these beneficiaries and the assessee can jointly enter
into JDA or sale agreement as the case may be for transfer of the
property by which capital gains would get distributed and each one of
them will be entitled to claim basic exemption and available benefits
under sections 54/ 54F and 54EC of the Act
 (c) Retaining Life Interest in the property by the assessee-settlor when
property is settled on relatives is one way by which settlor’s interest in the
property is protected in the sense that the property cannot be sold
without his consent and at the same time capital gain gets distributed and
when the property is ultimately sold a portion of sale consideration can be
allocated to the assessee towards life interest and exemption provisions of
section 54F and 54EC can be availed in respect of capital gains pertaining
to life interest arising out of transfer of such property.
104
In this regard the decisions of Madras High Court in the case of CIT vs.
C.V.Soundararajan [1984] 150 ITR 80(for understanding what is life interest) and
that of the ITAT Pune Bench in the case of Smt. Nargis A. Irani vs.ITO[2006]
102ITD 297(for calculation of life interest) may be referred to. A life interest is
some form of right which lasts only for the lifetime of the person benefiting
from that right. A person with a life interest is known as a life tenant. A life
interest ends when the life tenant dies.
 (d) Sometimes an assessee may have to give guarantee to bank or other
financial institutions for his close friends and/or relatives for proper
discharge of loan taken by them and guarantee may be in the form of
shares and securities or immovable property. If by misfortune such persons
do not repay the loans and the financial institution disposes of the property
towards satisfaction of the amounts owed to it and no amount is received
by the assessee out of such guaranteed property, then he cannot be held
liable to pay capital gains tax. The Delhi Bench of ITAT in the case of Addl.CIT
vs. Glad Investments (P) Ltd.[2006] 102 ITD 227 has held that when no
consideration is received by or accrues to the assessee on sale of assets no
liability to pay capital gains tax arises.
 (e) The possibilities of tax planning can be explored by the representatives
as had been done in the following cases The assessee was able to escape
from the rigours of section 54F so far as ownership in more than one
property was concerned by sheer proper tax planning.-
105
 (i) The issue which arose before ITAT,Chennai Bench in the case of Ifthiqar
Ashiq vs.ITO(supra)-in ITA No.232/MDS/2013-Order dated 11th June 2013
was whether the assessee was entitled to claim exemption under section 54F
of the Act if he was owner of a residential as well as commercial property on
the date of transfer of landed property. It was argued on behalf of the
assessee that though the income was returned under the head income from
house property it was still a commercial property and in support of this
submission placed reliance on the rental agreement entered into with the
tenant, water supply bills, planning permit issued by the Madras
Metropolitan Development Authority etc. It was also submitted before the
Tribunal that rental income from both residential and commercial properties
has to be declared only under the same head “Income from house property”
and both the lower authorities were of the opinion that as income from both
the properties was returned under the same head the other property could
not be considered as a commercial property. The Tribunal referred to the
provisions of section 22 of the Act and observed that no distinction has been
provided between rental income from house property and rental income
from commercial property. The Tribunal after observing that the term
‘building’ used in section 22 is not qualified by the word “commercial” and
after referring to the decision of the Supreme Court in the case of Shambhu
Investment P. Ltd. v. Commissioner of Income-tax [2003] 263 ITR 0143 for the
proposition that income from letting out of commercial buildings or
warehouses or factory premises is assessable under section 22 of the Act,
held in favour of the assessee 106
 (ii) Gift of house to spouse cannot be disregarded for the purpose of
assessee's eligibility for deduction under section 54F of the Act as was
held in the case of Smt. Maya A. Ajwani v Income-tax Officer-7(2)(4),
Mumbai[2015] 56 taxmann.com 255 (Mumbai - Trib.).In this case the
assessee had gifted residential property to her husband before the
transfer of original capital asset (other than any residential house).The
fact that the assessee stayed with her husband after transfer of such
residential property will not operate to nullify gift and would operate
only to club income from gifted house in hands of donor. However it
should be noted that the assessee’s spouse-husband in the case before
the Mumbai Bench of ITAT will not be able to claim deduction under
section 54/54F/54EC of the Act when he transfers such property as the
capital gains would not arise out of his independent source of income
but only out of transferred assets from his wife which had been made
without adequate consideration.
 (f) Though an assessee cannot sell the newly acquired capital asset- a
residential property- within a period of 36 months from the date of
purchase/allotment/acquisition nothing prevents the assessee from
settling the newly acquired property at an appropriate time in favour of
his relatives and for this the holding period for this new asset need not
be 36 months as explained below-
107
 When reference to Section 47 of the Income-tax Act is made, it begins
with the non-obstante clause “nothing contained in section 45 shall
apply to the following transfers” and has not made any section as an
integral part of it to be controlled by that section. It is to be noted that
one of the exempted transfers listed out in clause (iii) of section 47 is
“any transfer of a capital asset under a gift”. This implies that this
section (47of the Act) overrides section 45 of the Act in the sense that
“a transfer is deemed to be not a transfer” as it is an exempted one.
 It is to be noted that definition of transfer as per section 2(47) of the
Act is applicable to all situations and in all places of the Act unless the
context otherwise requires as could be seen from the heading of
section 2 of the Act which deals with definitions. Section 45 of the Act
refers to situations arising out of transfer of a capital asset and transfer
referred to in this section is therefore transfer as defined in section
2(47) of the Act. The term “Capital asset”refered to in section 45 of the
Act takes its root from section 2(14) of the Act where it has been
defined. Though definition of transfer as per section 2(47) of the Act is
a broad one encompassing all situations including relinquishing of the
asset and extinguishment of any rights in the asset it is still outside the
purview of section 47 of the Act.
108
 To reinforce the point it is submitted that, though section 47 refers to
section 45 and section 45 in turn refers to transfer –so section 2(47)-
,yet as section starts 47 with a non-obstante clause having no tag of any
other section attached so far as restriction of claim is concerned, the
transfers specified in section 47, out of which gift is also a mode of
transfer of a capital asset, shall not give raise to taxable capital gains
though they are very much transfers within the meaning of section
2(47) of the Act.
 It is also possible to settle the property by reserving the Life Interest for
the settlor as reserving Life Interest is only a part of settlement which
itself is exempt under section 47(iii) of the Act.
 (g) It is always better to know the other side i.e. what is not permitted
by law. The ITAT Mumbai Bench in the case of ACIT Vs. Sagar Nitin Parikh
(ITAT Mumbai), ITA No. 6399/MUM/2011, Date of Decision: 03.06.2015
has held that when the assessee had booked a flat and paid an advance
in pursuance of that agreement entered into with the builder then it
would amount to construction and if the assessee had booked a new
flat and paid advance more than 1 prior to sale of the old capital
asset(residential house then he was not entitled to deduction under
section 54 of the Income-tax Act.
109
Section 54 of the Act permits deduction only if the new capital asset-
residential house – is purchased within 1 year prior to date of sale. In the case
decided by the Mumbai Bench the advance for the new flat was paid on 1st
December 2004 and the balance was paid by the assessee in instalments after
a sizable amount was agreed to be paid before November, 2004. The flat was
handed over only on 30th June, 2007. The old flat was sold on 27th March
2008. Though the possession of the new flat was taken within 1 year prior to
sale of old flat yet the Tribunal held that date of booking of flat should be
considered as date of purchase and as that date was beyond 1 year prior to
date of sale of the old flat i.e.27th March,2008 the assessee was not entitled
to exemption under section 54 of the Act. It is to be noted that the amount
involved here in this case was a large sum and the assessee had to forfeit
exemption available for long term capital gains and had to pay a huge tax
because of faulty tax planning.
5. NOTE OF CAUTION
 It is important to bear in mind the following observations of the Supreme
Court in the case of CIT v. Sun Engineering Works (P.) Ltd. [1992] 198 ITR
297/64 Taxman 442 -
 "It is neither desirable nor permissible to pick out a word or a sentence
from the judgment of the Supreme Court divorced from the context of the
question under consideration and treat it to be the complete law declared
by the court.
110
The judgment must be read as a whole and the observations from
the judgment have to be considered in the light of the questions which
were before the court. A decision of the Supreme Court takes its colour
from the questions involved in the case in which it is rendered and, while
applying the decision to a later case, courts must carefully try to
ascertain the true principle laid down by the decision."
 It is also advisable to remember the following words of Lord Denning
in the matter of applying precedents which have become locus
classicus:
 [Refer to Sarva Shramik Sanghatana (KV) v. State of Maharashtra
[2008] 1 SCC 494 as quoted in para. 48 in the case of CIT vs. Happy
Home Enterprises[ 2014 ] 51 taxmann.com 281 (Bombay)]
 “'Each case depends on its own facts and a close similarity between
one case and another is not enough because even a single significant
detail may alter the entire aspect, in deciding such cases, one should
avoid the temptation to decide cases (as said by Cardozo) by
matching the colour of one case against the colour of another. To
decide therefore, on which side of the line a case falls, the broad
resemblance to another case is not at all decisive.”
111
TO BEAR IN MIND
 There is no – in fact there can be no- straight jacket formula for any given
(ideal or otherwise) situation as factual happenings may differ and even
one small difference in facts may completely alter the ready made answer
situation. Basic principles taught to us indicate that before analyzing a live
situation and comparing it with an assumed situation or a decided case-
law first find out as to the facts based on which earlier case was decided
and what are the facts obtaining in the live situation and what was the
point of law then and what is the point of law now-by point of law what is
meant is whether any higher authority has decided the case other way
after earlier ruling was given or a decision has been given by a
jurisdictional High Court now either way or has there been any
amendment subsequent to date of last decision or is there any change in
assessment year meaning thereby change in law? The point to be
considered is – Any change in the thinking of the persons who matter
most-the judicial authorities?
 Kindly note that what is being expressed in blogs is only opinion but what
is being given in real situation is what can be termed as “procedure” which
has more value than opinion as the “procedure” to be adopted in an
actual live case is normally/usually rendered after a deep study of facts
presented and law applicable to the given situation.
112
FATCA Information for Individuals
FATCA Current Alerts and Other News
 U.S. citizens, U.S. individual residents, and a very limited number of non-
resident individuals who own certain foreign financial accounts or other
offshore assets (specified foreign financial assets) must report those assets
 Use Form 8938 to report these assets
 Attach Form 8938 to the annual income tax return (usually Form 1040)
 Taxpayers with a total value of specified foreign financial assets below a certain
threshold do not have to file Form 8938
 If the total value is at or below $50,000 at the end of the tax year, there is no
reporting requirement for the year, unless the total value was more than
$75,000 at any time during the tax year
 The threshold is higher for individuals who live outside the United States
 Thresholds are different for married and single taxpayers
 Taxpayers who do not have to file an income tax return for the tax year do not
have to file Form 8938, regardless of the value of their specified foreign
financial assets.
 Penalties apply for failure to file accurately
113
 Alert: The reporting requirement for Form 8938 is separate from the
reporting requirement for the FinCEN Form 114, Report of Foreign
Bank and Financial Accounts (“FBAR”) (formerly TD F 90-22.1). An
individual may have to file both forms and separate penalties may
apply for failure to file each form. See the Comparison of filing
requirements for further information.
 Third-party reporting: Foreign financial institutions may provide to the
IRS third-party information reporting about financial accounts,
including the identity and certain financial information associated with
the account, which they maintain offshore on behalf of U.S. individual
account holders.
 Application to domestic entities: The IRS anticipates issuing regulations
that will require a domestic entity to file Form 8938 if the entity is
formed or used to hold specified foreign financial assets and the total
asset value exceeds the appropriate reporting threshold. Until the IRS
issues such regulations, only individuals must file Form 8938. For more
information about domestic entity filing, see Notice 2013-10.
114
 It is to be noted that Mr. Shaktikanta Das, Revenue Secretary of
India and Mr. Richard Verma, U.S. Ambassador to India signed on
9th July,2015 an Inter Governmental Agreement (IGA) to implement
the Foreign Account Tax Compliance Act (FATCA) to promote
transparency between the two nations on tax matters. The
agreement underscores growing international cooperation to end
tax evasion everywhere. The text of the signed agreement is being
made available on the website of the Indian Income Tax
Department (www.incometaxindia.gov.in) and the website of U.S
Treasury (www.treasury.gov).
115
Know about OCI
OCI
An Overseas Citizen of India is a lifetime visa status. It is the closest thing to
dual citizenship that India offers.
Who can be an OCI?
 (This list was expanded as of 9 January 2015)
 A person who used to be an Indian citizen
 A person with at least one parent, grandparent, or great-grandparent
who is/was an Indian citizen
 A person married to an Indian citizen or an existing OCI for at least two
continuous years
 The following groups of people cannot have OCI status:
 Anyone who was ever a citizen of Pakistan or Bangladesh
 Anyone whose parents or grandparents were citizens of Afghanistan,
Pakistan, Bangladesh, China, or Sri Lanka
 Anyone who served in a foreign military or worked in a foreign defense
department
116
What are the benefits of being an OCI?
 Lifelong multiple entry visa to India
 You never have to report to the FRRO regardless of the length of your stay
 You can eventually become a citizen of India if you remain an OCI for 5 years and
live in India for at least 1 year (short breaks are now allowed)
 You can use special counters during immigration
 You don’t need a student visa to study in India
 You don’t need an employment visa to get a job
 You can open a special bank account in India, just like an NRI
 You can make investments in India
 You can buy non-farm property and exercise property ownership rights
 You can use your OCI card to apply for a driver’s license, open a bank account, or
get a PAN card
 You get the same economic, financial, and education benefits as NRIs (e.g.
reserved admission quotas), and you can adopt children like an NRI
 You pay the Indian resident fee when visiting a national parks, monuments,
museums or wildlife sanctuary (of course it is ultimately up to the discretion of
the man issuing tickets)
117
What are the drawbacks?
 You may not purchase agricultural land or farm houses
 You may not vote
 You may not hold a government job
 You may not be elected to a political position
 You may not travel to restricted areas without permission
How do you become an OCI?
 You can apply through the Indian embassy in your country of residence or
within India at the local FRRO.
 Here is a sample of documentation you will need (see your local consulate for a
specific list):
 Proof of present citizenship
 Proof of former Indian citizenship (for you or your relative)
 Proof of renunciation of Indian citizenship (if applicable)
 Proof of relationship to an Indian citizen
118
FRRO-FOREIGNER REGIONAL REGISTRATION OFFICER
Person of Indian Origin (PIO) Card
 The Government of India has announced vide Gazette Notification
No.26011/01/2014IC.I dated 09.01.2015, all PIO cards issued till 09.01.2015
are deemed to be OCI card. As such the PIO Card scheme has been
withdrawn. Henceforth, applicants may apply for OCI card ONLY, as PIO
card scheme is no longer in existence.
 Transfer of PIO card to OCI card is optional. One can apply for OCI card in
lieu of valid PIO card free of any charges. However the applicant will have
to pay the service charges for the outsourcing agency as well as postal
charges.
 Existing PIO cards are valid for travel to India and are valid for life. An
endorsement to this effect could be made in the existing PIO cards at the
first immigration point of India with which the card holder comes into
contact, be it at High Commission of India or an immigration check-point
in India. (It is not mandatory to have this endorsement.)
 In the event of change of passport of PIO card holder, he/she can travel to
India on the basis of new passport with the valid PIO card and the
old passport on which PIO card number is endorsed. Applications for
conversion of PIO cards into OCI cards have to be made at the same place of
issuance of PIO card i.e. the High Commission of India, London can convert
PIO cards issued in London only. 119
S.KRISHNAN
CHARTERED ACCOUNTANT
NO.2, C.V. RAMAN ROAD
ALWARPET, CHENNAI – 600 018
TEL. NO.044-24671175
TELEFAX.044-24671437
MOBILE 098407 01449
E-MAIL Ids: ariyurkrish@gmail.com and krishnagesh2@eth.net
120
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About Capital Gains Taxability

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An Interaction with

of sale of residential properties and any other capital asset. The

issues common for residents and non-residents (which include

pertaining to non-residents (which include OCIs) are covered.

cannot be static in a developing economy-the issues covered in

this write-up have to be studied and understood based on the

prevailing Accounting Standards, law existing on the date of

transaction(s) and in the light of the latest pronouncements by

Courts and Income-tax Appellate Tribunal Benches and also

based on the Circulars issued by the Central Board of Direct

also been gathered from published materials in various journals

(articles penned by the author), pronouncements of various Courts

including Tribunal Benches, Circulars issued by CBDT from time

to time and provisions of law as understood by the author.

A Brief write-up on guidelines to be followed when an NRI is the seller/transferor is

Capital gain is the difference between the selling price (total

consideration) and total sum up of indexed cost of acquisition and indexed

cost of improvement in respect of a capital asset(residential property

and/or land). Any expenditure incurred wholly and exclusively in

figure of indexed cost of acquisition and indexed cost of improvement to

arrive at the total cost.

court expenses like in the case of obtaining probate of WILL etc.

 The indexed cost of acquisition is ascertained by multiplying

purchase/construction cost on the date of acquisition or market value of the

property as on 01-04-1981[if acquired prior to 01-04-1981] whichever is later, with

index pertaining to the year of purchase/construction or if the

purchase/construction is made prior to 01-04-1981 by 100.

improvement can be calculated likewise and added to original indexed cost of

acquisition / purchase to arrive at the total indexed cost of acquisition.

 “The distinction pointed by the Supreme Court in R.M. Arunachalam’s case

 It is to be noted that any expenditure incurred by the assessee to evict the

 “Additionally in sub-section (1) of section 49 the legislature has provided

 So when a residential building with an extensive piece of land is sold the

 “Subject to the provisions of sub-section (2), where, in the case of an

 The following discussion buttresses this point

 However while calculating cost inflation index the indexation point

 (vii) Where assessee purchased old residential house and demolished it

 (x) The Kolkata Bench of ITAT in the case of Deputy Commissioner of

 (xiii) The Mumbai Bench of ITAT in the case of Assistant Commissioner of

 (xxvi).The Karnataka High Court in the case of Commissioner of Income-

NO.2, C.V. RAMAN ROAD

ALWARPET, CHENNAI – 600 018

MOBILE 098407 01449

E-MAIL Ids: ariyurkrish@gmail.com and krishnagesh2@eth.net

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