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Mumbai: Sold 2 flats to buy one? Can avail of tax benefit – Spectraa Real Estate Advisory

Mumbai: Sold 2 flats to buy one? Can avail of tax benefit

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT), in its recent order, has clarified that when a taxpayer sells two residential properties and re-invests in one residential house, he or she is entitled to tax benefit under section 54.

This ruling will be very helpful to several individuals. With work from home here to stay for longer than initially anticipated, several families are in search of larger flats. Investment professionals explain that several salaried employees had invested in a second house. Many are now selling the flat in which they currently reside and their second house, to finance a larger apartment.

In this case heard by ITAT, Sabir Mazhar Ali had sold two flats in Bandra (one of which was jointly owned with his wife) and purchased a new residential flat in Bandra.

During the financial year 2010-11, he had claimed deduction under section 54 of the Income Tax (I-T) Act, as he had purchased a new house, within the time period specified.

Under this section, if the long-term capital gains arising on sale of a house are reinvested in another house in India, within the stipulated period of time, then to the extent of such investment, the taxable component of capital gains is reduced. This results in a lower tax outgo. Thus, if the entire amount of long-term capital gains is reinvested, there is no tax payable.

This section requires that within a period of one year before or two years after the date of transfer of the old house, the taxpayer should acquire another residential house. Or the taxpayer should construct a residential house within a period of three years from the date of transfer of the old house.

However, as Ali had sold two residential properties and reinvested in one residential house, the I-T officer had concluded that he was not eligible for claiming the benefit under section 54. In the course of litigation, as the Commissioner (Appeals) ruled in favour of the taxpayer, the I-T department filed an appeal with the ITAT.

In its order, the ITAT states that the provisions of section 54 do not prohibit the taxpayer from selling more than one residential house and reinvesting in a residential property. Thus, it set aside the grounds of appeal raised by the tax department and ruled in favour of the taxpayer.

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