Tax benefits on investments in another home will still be available to joint owners of the current apartment: ITAT

MUMBAI: It is not unusual for a spouse’s name to appear on a flat title. Many people may find value in a recent ruling made by the Income-tax Appellate Tribunal’s (ITAT) Mumbai branch.

The Income-tax (I-T) Act’s section 54-F, which deals with long-term capital gains, states that a spouse who co-owns an asset and then sells it and reinvests the earnings in another apartment will not be ineligible for tax benefits under this section.

If a taxpayer sells any asset (other than real estate) and makes long-term capital gains, they can invest the net sale proceeds in residential real estate and avoid paying capital gains tax. The amount of the exemption is based on the money spent on the new home. The exemption is proportionate if the amount invested is less than the net sale consideration.

Certain requirements must be satisfied to claim this exemption. One of them is that on the date of the original asset’s sale, the taxpayer cannot be the owner of more than one residential property (apart from the new home in which the investment is being made).

The ITAT recently ruled in the S. Singh case that a taxpayer’s ability to claim a deduction under section 54F of the Income-tax (I-T) Act is not impaired by joint ownership of two residential properties at the time of the sale of the original asset.

In this instance, the taxpayer made long-term capital gains of Rs. 61.6 lakh during the 2012–13 fiscal year by selling agricultural land in Bhopal, which was the initial asset. She sought an exemption under section 54F since she invested in a new home within the allotted time.

When her case was examined, information provided by her revealed that, as of the land’s selling date, she was the owner of two residential homes. She held both properties jointly—one with her spouse and the other with the HUF of her father. The I-T officer rejected her claim of a deduction of Rs. 61.6 lakh since she owned multiple houses.

Singh said that she and her husband jointly owned the residential property on which they were living and that her husband was repaying the debt. Regarding ownership of the HUF-held property, she reiterated that she was only a co-owner at the time the agricultural land was sold.

Despite the existence of conflicting high court rulings, the ITAT maintained that the Supreme Court had established the rule that, in cases where two opinions are feasible, the one that is more advantageous to the taxpayer must be chosen. Singh was therefore permitted to receive this tax benefit, it was decided.

This is a controversial topic, according to Amarpal Singh-Chadha, tax partner at EY-India. “I-T authorities may not allow the deduction claimed by a taxpayer given that there are also contrary rulings on the matter, such as that of the Karnataka high court.”

Taxpayers in a comparable circumstance who are under the jurisdiction of a jurisdictional body or court that is holding a favorable view may rely on the favorable decision to support their claim, he recommends.

Additionally, taxpayers should be completely transparent in both their tax returns and their responses to tax letters to reduce the possibility of penalties.