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Senior Associate, Direct Tax
There is a dispute whether exemption under section 54 or 54F to be allowed in regard to the amount invested in purchase or construction of the Residential House till the date of filing of return of Income under section 139(1) or section 139(4) of the Income-tax Act, 1961.
Let us discuss the provisions of section 54 and section 139 on this subject to get the answer.
Section 54 provides that long-term capital gains arising from transfer of a residential house is exempt from income-tax, if the amount of such capital gain is utilised to acquire/construct one residential house in India within specified period, subject to compliance of other conditions.
Section 54 exemption is allowed to an individual or HUF from the long-term capital gains arising from transfer of capital asset, being residential house property. This exemption is allowed if following conditions are satisfied:
(a) | The individual or HUF owns a long-term capital asset, being a residential house property or land appurtenant thereto. |
(b) | Such capital asset is transferred during the year. |
(c) | Long-term capital gains arise from transfer of such capital asset. |
(d) | The amount of capital gain is invested, by way of purchase or construction, in one residential house property. |
(e) | The purchase of new residential house should be made either within 1 year before the date of the transfer or within 2 years after the date of transfer of original capital asset. |
(f) | In case of construction, the new house should be constructed within 3 years after the date of transfer of old residential house. |
(g) | If the assessee has not utilized the capital gains by the due date of filing of return, then assessee should deposit the capital gains in Capital Gain Account Scheme. |
If above conditions are satisfied, the quantum of exemption shall be the amount of long-term capital gains or aggregate of amount invested in new house property and amount deposited in Capital Gain Account scheme, whichever is lower.
The exemption under section 54, in respect of two residential houses, shall be available if following conditions are satisfied by the assessee:
(a) | The individual or HUF transfers a long-term capital asset, being a residential house property or land appurtenant thereto, on or after April 1, 2019. |
(b) | Long-term capital gains, arising from transfer of such capital asset, do not exceed Rs. 2 crores. |
(c) | The amount of capital gains is invested, by way of purchase or construction, in two residential house properties. |
(d) | The purchase of new residential house should be made either within 1 year before the date of the transfer or within 2 years after the date of transfer of original capital asset. In case of construction, the new house should be constructed within 3 years after the date of transfer of old residential house. |
(e) | This option can be exercised only once during the lifetime of the assessee. Thus, if this option is exercised, the assessee cannot claim the same benefit in any other assessment year. |
As the time limit to buy a new residential house property begins one year before the date of transfer of original capital asset, the exemption under section 54 should be available even if two new house properties are purchased before this provision came into force. In other words, if two new house properties are purchased on or before March 31, 2019 but the original house property is transferred on or after April 1, 2019, the exemption should be available for the investment made in two house properties provided all other conditions are satisfied
The amount of capital gains, which is not appropriated by the assessee towards purchase of new asset made within 1 year before the date on which the transfer of original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the due date of furnishing the return of income u/s 139(1) in an account in any such bank or institution as may be specified in and be utilised in accordance with the Capital Gains Accounts Scheme, 1988.
Invariably, if a person is not able to utilize the entire amount of capital gains on or before the due date of filing of return for the year in respect of which such capital gains arose. Such a situation is addressed by sub-section (2) by providing for deposit of unutilized funds in a Capital Gains Account Scheme before the prescribed date so that an assessee may not lose upon the exemption of unutilized funds.
“The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset : ……”
Section 54(2) provides for an interesting proposition that the amount of capital gains which are not appropriated by the assessee for prescribed purposes within one year before; or on or before the due date of filing of return of income under section 139, shall be deposited in the capital gains account scheme. It needs to be emphasized that the literal reading of section 54(2) provides for the two dates i.e. the due date under section 139 and the due date under section 139(1). Pertinently, section 139 cannot be said to mean only section 139(1), but it means all sub-sections of section 139.
It may be noted that the aforesaid provision mandates that the period of utilization or appropriation of the capital gains in purchase or construction of the new residential house is to be considered till the due date under section 139[which also covers sub-section (4) and (5) of section 139].
However, for the purpose of taking the benefit of Capital Gains Account Scheme, the time limit for making such deposit has been prescribed to be till the due date under section 139(1).
The 6th proviso to section 139(1) was amended w.e.f. 1-4-2020 to provide that every person claiming deductions under section 54 or section 54B or Section 54D or Section 54EC or section 54F or section 54G or Section 54GA or Section 54GB shall, on or before the due date, furnish a return of income of his income on or before the due date specified 139(1), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed even if total income (before Chapter VIA deductions but after claiming these exemptions in respect of capital gains) does not exceed threshold exemption limit.
The sub section (2) of section 54 clearly provides a pigeonhole in the sense that the investment by way of purchase or construction, without resorting to Capital Gains Account Scheme, can be made till the date of belated return under section 139(4) or revised return under section 139(5) as the wordings used in section 54(2) is “section 139″ and not section 139(1), which covers all sub sections of section 139”.
The aforesaid provision mandates that the period of utilisation or appropriation of the capital gains in purchase or construction of the new residential house is to be considered till the due date under section 139 (which also covers sub-section (4) and (5) of section 139).
However, for the purpose of taking the benefit of Capital Gains Account Scheme, the time limit for making such deposit has been prescribed to be till the due date under section 139(1).
