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Capital gain exemption if Construction is done on the plot owned by spouse

~~TAX TALK-09.05.2016-THE HITAVADA

 

TAX TALK

 

CA. NARESH JAKHOTIA

Chartered Accountant


Capital gain exemption if Construction is done on the plot owned by spouse

 

 

Query 1]

A friend of mine, now settled in Karnataka, owns a flat in Nagpur and is free from encumbrances. His wife is thinking of constructing an independent house on the plot purchased by her 3 decades ago in Karnataka. My questions, on behalf of my friend, are

a.      Can my friend gift to his wife the sale proceeds of the flat, after paying LTCG?

b.     What are the options available to my friend for payment of minimum LTCG?

c.      Sir, the sale proceeds of the flat is the only source of funds would be available for them to construct a house in Karnataka. Please suggest. [Vishwanathan, Nagpur-ravi.asmita@gmail.com]

Opinion:

A good friend is a connection to life, a tie to the past, a road to the future, the key to sanity in a totally insane world- Lois Wyse

 

1.      If your friend sale the house property then the capital gain tax liability would accrue in his hands. Subsequent gift of the sale proceeds to wife and thereafter investment by her in the house property would not result in saving long term capital gain tax. The tax liability is affixed at the time of sale itself.

2.      Your friend can plan the transactions in any of the following ways so as to take the optimum benefit of exemption available under the Income Tax Act-1961:
 a] Let your friend first gift the Nagpur flat to his wife. The transactions of gift would be outside the tax net as the husband / wife relationship is covered within the meaning of “relative” given in section 56(2)(vii). Wife can subsequently sale the house property and invest the sale proceeds in the construction of house property within a prescribed period. Since, capital gain accrues in her hands and the investment is done by her in the prescribed way u/s 54, she would be able to claim an exemption u/s 54.
 b] Wife can gift the plot to her husband which would be tax free transaction for the reason mentioned above. Husband can sale the flat at Nagpur and can thereafter invest the sale proceeds towards construction of house property already owned by him by virtue of gift from his wife. Since the capital gain accrues in the hands of husband and investment in the house property is also done by him, he would be eligible for exemption u/s 54.
 c] Husband & wife can enter in to a long term (29 years or more) lease agreement or MOU whereby possession of plot would be handed over by wife to husband for allotted time frame and husband would invest the sale proceeds for construction of house over the land owned by his wife. In short, plot would be owned by wife & construction by husband. Since, husband have invested the amount for construction of house property, exemption claim would be within the four wall of section 54. [Income Tax Law recognizes the concept of dual ownership in respect of immovable property i.e., the ownership of plot/ Land by one person and building by another. However, proper documentations / records are to be kept to prove the separate ownership of the assets].

 The above views are backed by interpretation of exemption provision & few judicial pronouncements. However, though any of the options elaborated above could be exercised by your friend, in my considered opinion, option (b) would be better and would be devoid of any litigation and ambiguities because of following reasons:
 i] In the option (a), assessing officer may take the view that long term capital gain accrues in the hands of the wife which is subject to clubbing provision in the hands of the husband. Assessing officer may deny the benefit of the exemption u/s 54 to wife for the reason that clubbing provision applies first and resultantly income could be clubbed with the income of husband and since no investment is done by husband in the mode prescribed u/s 54, exemption could be denied.
 ii] In the option (c) given above, the concept of dual ownership may not be accepted by the assessing officer and may deny the benefit of exemption treating the transactions of MOU/ Lease as a colorable device to evade/ avoid tax. Though at higher hierarchy of judiciary, assessee would ultimately be granted the benefit of exemption u/s 54, the denial at the first level of assessment could not be overruled.

 In the option (b), no such possibility of litigation and ambiguities exists. So, in my opinion, assessee should prefer option (b) mentioned above for saving long term capital gain tax.

 

Query 2]

I am a lecturer in college and availed home loan of Rs. 15 Lacs. The interest charged by the bank for FY 2015-16 is Rs. 1,53,000/ and repayment installment paid is Rs. 16,400/.  My query is whether I and my wife who is school teacher can share the benefit of interest rebate under sec 24b. Pl clarify. [K.G. Ahuja-

bmnagp3908@centralbank.co.in]

Opinion:

Ownership in a house property is one of the first & foremost vital pre-condition for claiming deduction towards Interest on housing loan u/s 24(b) & towards Principal repayment u/s 80C of the Income Tax Act -1961. Second pre-condition is the availment of loan for house property. Without ownership in the house property, no right would emanate for deduction. If both the conditions are satisfied, then only deduction u/s 24(b) & u/s 80C would be admissible.

 

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at

SSRPN & Co

10, Laxmi Vyankatesh Apartment

C.A. Road, Telephone Exch. Square

Nagpur-440008

or email it at nareshjakhotia@ssrpn.com]

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