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Sold a depreciable property? You can claim section 54F tax benefit

ITAT decision will aid taxpayers who invest capital gains proceeds in a new residential house after selling commercial property where depreciation has been claimed.

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Updated: Oct 17, 2018, 02.57 PM IST
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A few provisions of Income Tax Act provide a benefit when LTCG arising on sale of certain assets are invested in acquiring a new house property.
(This story originally appeared in on Oct 17, 2018)
A recent decision of the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) will come to the aid of those taxpayers who sell a commercial property or other assets (on which depreciation has been claimed) and then make an investment in a new residential house within the specified period. The ITAT has held that benefits of section 54F would be available in such cases.

The matter came up for litigation as the capital gains that arise on sale of an asset on which depreciation has been claimed by the taxpayer are ‘deemed’ to be short-term in nature, under section 50 of the Income Tax (I-T) Act. Short-term capital gains are taxed according to the individual’s tax slab (the lowest basic slab rate is 5% and the highest is 30%).

It is commonly understood that a few provisions of the I-T Act provide a benefit when long-term capital gains arising on sale of certain assets are invested in acquiring a new house property. To the extent of the investment in the new property, the taxable component of the long-term capital gains is reduced, which results in a lower tax outgo.

However, the ITAT rightly pointed out that section 54F of the I-T Act covers investment of capital gains on transfer of a ‘long-term capital asset’ (say office or commercial property) in a new residential house. Any immovable property held for more than two years is a long-term capital asset. For periods prior to the financial year 2017-18, the holding period was 36 months.

The tax tribunal referred to a Bombay HC decision in the case of ‘Ace Builders’, where the court had held that under section 50, it is only the capital gains that are deemed as short-term. Section 50 does not convert long-term capital assets into short-term and thus exemption under section 54F would be available even if depreciable assets were sold. So, if the cost of the new residential house was more than the net consideration on sale of the depreciable asset, no capital gains would arise in the hands of the tax payer.

In the case before the ITAT, the tax payer Jaya Deepak Bhavani was a business woman, engaged in manufacture and export of garments. During the financial year 2011-12, she sold a building for Rs 1.33 crore, on which depreciation had been claimed earlier over several years. Owing to the depreciation claims, the written-down value of the asset was quite low, resulting in significant capital gains of Rs 1.28 crore.

She invested Rs 1.45 crore in a new house property and claimed exemption under section 54F. This section provides for a tax benefit if a new house is purchased within two years from the date of sale of the original asset (in this case — the commercial building). If the cost of the new residential house is more than the net consideration, then the capital gains are not taxable.

Accordingly, Bhavani claimed the capital gains of Rs 1.28 crore to be exempt. While the lower tax authorities had denied her this exemption on the grounds that the capital gains arising on sale of a depreciable asset were short-term, the ITAT decided in her favour.

Ameet Patel, tax partner at CA firm Manohar Chowdhry & Associates, states the ITAT took the right view. “In many cases, any other interpretation would give rise to absurd situations. For example, a widow inherits an office property on which depreciation has been claimed by her husband for 40-odd years. When the wife sells the office property, it would be unfair and irrational to disallow exemption under section 54F if all other conditions are met. One hopes that as and when the new I-T Code is introduced, section 50 is done away with.”

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