In an article published in a tax journal, an advocate and tax consultant from Ahmedabad had expressed the view that exemption from capital gains can be availed of under Sections 54 and 54F of the Income-Tax Act, 1961 even when investment in house property is made abroad, say, in London.
The reasoning is that neither Section 54 nor Section 54F prescribes any restriction in regard to the location, where the investment in the residential house should to be made.
Thus, the house, to be purchased or constructed by the taxpayer for getting tax exemption on long-term capital gains (LTCG) investment can be either in India or overseas.
The view expressed has also been supported by the fact that the Foreign Exchange Management Act, 1999, having liberalised remittances by resident Indians for their annual overseas investment up to $1,00,000 and with the I-T Act enabling tax exemption of LTCG in case of an investment made in either the purchase or construction of a residential house, one can plan to sell one’s land and invest funds outside India so as to enjoy tax exemption. The view expressed does not seem to be correct for the following reasons:
Section 54 provides for exemption in respect of LTCG arising from the transfer of a residential house. This exemption is available only to an individual or a HUF and is subject to fulfilment of the under-mentioned conditions:
The capital gain should arise from the transfer of long-term capital asset, being buildings or lands appurtenant thereto, being a residential house, income wherefrom is assessable under the head ‘Income from house property’.
The transferor shall be an individual or an HUF.
The transferor assessee should have purchased a residential house a year before or two years after the date of transfer; or, in the alternative, the assessee should construct a residential house within three years from the date of the transfer of the original house.
Both Sections 54 and 54F require investment of the amount of capital gain only and not the amount of entire consideration or the net consideration flowing as a result of transfer of the long-term capital asset.
In view of this, the issue is whether the capital gain arising from the transfer of the residential house should be invested in India or whether exemption can be claimed even if the property is acquired or constructed in a foreign country.
The argument is that in both the sections, there is no requirement that the residential house, to claim exemption, should be acquired or constructed only in India.
Untenable argument
The argument does not seem tenable. For claming exemption, property is to be acquired in India. The Government foregoes revenue to achieve some avowed objective for the good of the country.
Section 54 exemption for capital gain is intended to give a boost to the construction of residential houses in the country and this objective will not be achieved if the property is acquired or constructed in a foreign country.
Hence, conceptually, there is no ground to give the benefit of Section 54 to a person, who acquires a house property or constructs it in a foreign country after selling a house in India.
This view gets support from the Supreme Court decision pronounced on May 9, 2008, in the American Hotel & Lodging Association Educational Institute vs CBDT (2008 170 Taxman 306 SC) case.
In this case, the assessee, a branch office of a non-profit organisation in the US carrying on educational activities, was enjoying tax exemption in the US.
It had been set up for carrying on educational activities of the head-office for the convenience of Indian students and institutions and the assessee used to collect charges for course materials, etc., to be supplied to them, on behalf of the head-office.
It made an application requesting for approval for purpose of Section 10(23C)(vi). This was rejected on the ground that the assessee had not applied its accumulated income for education in India.
‘In India’
The assessee’s case was that the third proviso to Section 10(23C)(vi) does not mention that income generated is required to be applied in India and, in fact, words ‘in India’ are totally missing and the Revenue had unnecessarily imported these into the third proviso to Section 10(23C)((vi).
The High Court had decided that the words ‘in India’ have necessarily to be read with the third proviso to Section 10(23C)(vi) to make it workable. The Supreme Court has decided that the plain words of the third proviso do not require application of income to be in India.
But it should not be understood to mean that the applicant has not to impart educational activities in India. If the applicant wants exemption under Section 10(23C)(vi) it has to impart education in India and only then it would be entitled to claim initial approval under that section.
That is the reason for saying that the ‘non-profit’ qualification has to be tested against Indian activities. The consideration is that impartation of education must be in India if the applicant desires exemption under Section 10(23C)(vi).
On this logic, for claiming exemption under Sections 54 and 54F, construction/acquisition of a house in India is a necessary condition. Reference to FEMA and its liberalisation has no relevance in the context of exemption of capital gains under the I-T Act.
Conceptually, there is no ground to give Section 54 benefit to a person who acquires a house property or constructs it in a foreign country after selling a house in India
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