Opinion Of Eminent Legal Luminaries On Controversial Issues

I borrowed funds to buy a new house u/s 54. Will the s. 54 exemption be denied to me?

QUERY: I sold my residential property and made a long-term capital gain of Rs. 50 lakhs. I used the sale proceeds to purchase a commercial gala. Subsequently, within two years of sale of the residential property, I purchased another residential property by borrowing funds from the bank and relatives. Can I claim that the long-term capital gain is exempt u/s 54 even though the sale proceeds of the old house were not used for purchase of the new house?
ANSWER: Provisions of the Income-tax Act:

Profit on sale of property used for residence.

54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head Income from house property (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,


(i) if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or


(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.

(2) 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:

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,

(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

As is evident, there is no requirement in s. 54 that the sale proceeds of the old house have to be utilized for purchase of the new house. The fact that the section permits a purchase of the new house one year before the sale of the old house itself makes it clear that such utilization is not even possible. All that the section requires is that the new house property should be purchased within the time period specified. The source of funds is irrelevant.

Judgements:

The direct judgement on this point is that of the Bombay High Court in CIT vs. Dr. P. S. Pasricha. In this case also, the assessee sold a house and used the sale proceeds to buy commercial property. Subsequently (but within the specified period) he borrowed funds and purchased a new house. The AO denied deduction u/s 54 on the ground that the new house had been purchased out of borrowed funds and not out of the consideration received for the old house. On appeal, the Tribunal and High Court upheld the claim on the ground that s. 54 merely required the purchase of the new house to be within the specified period. The source of funds for the purchase was irrelevant.

The same view has been taken by the Kerala High Court in K. C. Gopalan 162 CTR 566.

Conclusion:

The only requirement for availing deduction u/s 54 is that the new residential house must be purchased or constructed within the period specified in the section. The source of funds is irrelevant.
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5 comments on “I borrowed funds to buy a new house u/s 54. Will the s. 54 exemption be denied to me?
  1. alpana says:

    thnx for this clarification – very helpful

  2. rajeev says:

    in view of the above judgements if the sub section (2) requiring the unutilized capital gain on the old house be deposited in capital gain scheme a/c in a bank not irrelavant too?

  3. Vikas says:

    What about the requirement of depositing unutilized proceeds in capital gain scheme a/c in a bank?

  4. Sir
    I bought a house property in 2011 via housing loan, I sold my plot of land in 2014 and used the sales consideration to pay off that housing loan. Will i be eligible for claiming exemption u/s 54F.

    Your advice is highly required.

  5. SANDESH DUBEY says:

    AWESOME CLEARIFICATION WITH RELEVANT SUPPORTING. THANKS

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