The High Court of Karnataka has held that property acquired in the spouse’s name is eligible for exemption under Section 54 of the Income Tax Act, which deals with profit on the sale of property used for residence.
However, the court said such property cannot be construed as owned by the income tax assessee for determining eligibility for exemption under Section 54F, which deals with capital gains on the transfer of certain capital assets not to be charged in case of investment for residential use.
The court noted that the newly acquired property for which the assessee was allowed exemption under Section 54 was registered in the name of his spouse.
Therefore, the residential house purchased in the spouse’s name cannot be construed as the property owned by the assessee while considering exemption under section 54F, the court said in its ruling on December 9 on a petition filed by a resident of Bengaluru.
It also referred to Section 14 of the Hindu Succession Act and observed that “the property standing in the name of a female heir becomes her absolute property. The income derived by that property could be the income in the hands of the assessee’s wife under the Act.”
Section 54 was amended with effect from April 1, 2020, and the benefit of exemption is now available for investments made in two residential house properties if the amount of long-term capital gains does not exceed Rs 2 crore. This option can be exercised only once by an assessee during his/her lifetime.
“In this particular case, the Karnataka high court has allowed an assessee’s appeal and permitted exemption under Sections 54 and 54F claimed by the assessee on two separate residential properties from the capital gains arising from transfer of house property and land, respectively, to the same buyer at different dates,” explained Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm.
Tax planning precedent
This ruling is expected to set a precedent for tax planning. In this case, the petitioner had gifted property to his wife through a valid gift deed in 2012. Although the property was gifted about 10 years ago, taxpayers may do the same six months in advance for effective tax planning, he added.
In this particular case, the petitioner had sold a plot of land in April 2012 and earned capital gains of Rs 49.08 lakh, which was used to construct a property in Tamil Nadu, for which exemption was claimed under Section 54F.
The individual also sold a house in October 2012 and claimed Rs 2.23 crore as exemption under Section 54 by purchasing a house in Bengaluru, which was registered in his wife’s name in December 2011. He also claimed exemption under Section 54EC for Rs 25 lakh. The assessee had gifted another house to his wife and child in January 2012.
Comparing the two sections, the high court observed that Section 54 deals with exemption from capital gains arising from residential house property. Section 54F deals with exemption from capital gains on transfer of other capital assets if the investment is made in property for residential use, provided the assessee does not “own” more than one residential house on the date of transfer, whereas no such condition exists under Section 54.
Ownership is key
The court noted that the objective of Section 54 was to provide impetus to construction activity and the word ‘assessee’ has been given a wide and liberal interpretation to include legal heirs. It held that the phrase “owns” plays a significant role. What is relevant is that an assessee should not own more than one residential house, other than the new asset, on the date of transfer of the original asset, whereas the word “owns” is conspicuously absent in Section 54.
“It has rightly been held that what is material is the investment of sale consideration in acquiring the residential premises or constructing the residential premises,” explained Vivek Jalan, partner at Tax Connect Advisory Services, a consulting firm.
“Once the sale consideration is utilised for the purpose mentioned under Section 54, the assessee is entitled to the benefit of the said provisions. It has been categorically observed that the assessee cannot be denied the benefit of deduction under Section 54 of the Act, notwithstanding the fact that the assessee has purchased the property jointly with his/her spouse.”Notwithstanding that the property standing in the name of the assessee’s wife was held to be eligible for exemption under Section 54, while considering the exemption under Section 54F, the residential house purchased in the name of the assessee’s wife cannot be construed as property owned by the assessee, he added.