Is a capital gain tax-free if new house is not in India?

By Amitabh Chaturvedi and Utkarsh Tewari, Mine & Young
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Long-term capital gains tax is levied under section 45 of the Income Tax Act, 1961 (ITA), if assets such as shares and securities are held by the assessee for a period exceeding 12 months or exceeding 36 months in the case of any other assets. Sections 54 and 54F of the ITA exempt capital gains which are invested in a residential house within a year before or two years after the sale, or used to construct a residential house within a period of three years after the transaction took place.

Amitabh Chaturvedi
Amitabh Chaturvedi

Non-residents

These sections apply equally to non-resident Indians (NRIs). NRIs can claim the exemption under sections 54 and 54F of the ITA as neither section mentions that the new house property should be located in India. Thus if an individual or a Hindu undivided family (HUF) sells any long-term capital asset to purchase a new property outside India, exemption can be claimed under section 54 (sale of a residential house property) or under section 54F (sale of any long-term capital asset other than a residential house property).

Both of these sections restrict the exemption to an individual or a HUF, but do not decline the exemption on the basis of residential status. Thus an NRI, residing outside India and having foreign income, can claim exemption under sections 54 and 54F on the proceeds arising from the sale of any long-term capital asset in India.

Conflict resolved

The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT), in its 2005 decision in the case of Leena J Shah v Assistant Commissioner of Income Tax, took a different view, holding that the benefit under section 54 of the ITA is not allowable for a residential house purchased or constructed outside India, in this instance in the US. In contrast, the Mumbai bench of the ITAT, in its 2005 decision in the case of Mrs Prema P Shah v Income Tax Officer, held that the assessee – an NRI who sold her house in India and bought a property in London – was entitled to an exemption from capital gains tax under section 54 of the ITA.

Leena J Shah subsequently appealed the levy of a penalty by the tax authorities, partly on the ground that “the benefit of sections 54 and 54F was intended to be available to both the categories of assessee i.e. residents and non-residents without any discrimination”, as held by the Mumbai bench in the Prema Shah case. The Ahmedabad bench held in 2010 that “merely because property acquired is in a foreign country, section 54 does not exclude right of an assessee to claim benefit in respect of such property if all other conditions laid down in that section are satisfied”.

In a judgment in October 2012, in the case of Vinay Mishra v Assistant Commissioner of Income Tax, the Bangalore bench of the ITAT endorsed the conclusions of the Mumbai bench in the Prema Shah case after a thorough review of earlier judgments, including the first decision of the Ahmedabad bench in the Leena Shah case.

In the Mishra case, the assessee sold certain shares which resulted in a long-term capital gain. The assessee invested the entire capital gain in the acquisition of a residential house in the US and claimed exemption under section 54F of the ITA.

The assessing officer rejected the claim of exemption under section 54F on the ground that the newly purchased house property had to be situated in India. The Commissioner (Appeals) confirmed the order passed by the assessing officer.

Utkarsh Tewari
Utkarsh Tewari

On further appeal by the assessee, the Bangalore bench of the ITAT held that on a plain reading of section 54F of the ITA, there was nothing to suggest that the new residential house acquired should be situated in India. Citing the 2012 judgment of Karnataka High Court in the case of Director of Income Tax (International Taxation) v Mrs Jennifer Bhide, the Bangalore bench stated: “The jurisdictional High Court … has held that introducing a word which is not there into a section amounts to legislating when Parliament has not used these words in the said section. In view of this decision, we are precluded from reading the words ‘in India’ into section 54F of the Act, when Parliament in its legislative wisdom has deliberately not used the word ‘in India’ in section 54F of the Act.”

The Bangalore bench therefore chose to follow the decision of the Mumbai bench in the case of Prema Shah. Although that decision involved section 54, the tribunal held that it was “equally applicable while considering the exemption under section 54F”. Therefore, the assessee’s claim for exemption under section 54F was to be allowed since all the conditions laid down in the section for availing of the exemption were satisfied.

Conclusion

In view of the above, it is now clearly established that the benefit of exemption under sections 54 and 54F of the ITA will be available to an assessee even if the newly acquired residential house is situated outside India.

Amitabh Chaturvedi is the managing partner of Mine & Young, where Utkarsh Tewari is a partner.

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