Key date of residence for tax benefits: ITAT

MUMBAI: The Mumbai bench of the Income-tax Appellate Tribunal (ITAT) has concluded recently that, in the instance of an under-construction property, the date of possession is what counts toward qualifying for a tax advantage under section 54 of the Income-tax (I-T) Act.

This decision is significant because it establishes a deadline for making an investment in a new home in order to qualify for tax benefits. Long-term capital gains (arising from the sale of the old property) have a taxable component that is reduced to the extent of investment in the new house.

Consequently, there is a reduction in the tax outflow. The new house must be bought either “one year prior” or “two years after” the old house’s sale date, per this clause. Alternatively, three years from the date of the original property’s sale, the new residential home may be built.

In this instance, involving a non-resident couple for the fiscal year 2010–11, the I-T officer rejected the exemption and found that each individual’s taxable income was close to Rs 36 lakh.

The I-T officer decided that making a claim for an erroneous deduction amounted to “concealment of income or furnishing of inappropriate particulars of income,” thus penalties were also assessed.

On February 10, 2011, the couple who didn’t live there sold the old house. As a result, the new home might have been bought between February 11, 2010 (a year earlier) and February 9, 2013 (two years later).

The tax benefit was declined by the I-T officer, who pointed out that the agreement for the purchase of the new house was established with the builder on July 25, 2009.

ITAT rendered a decision in support of the taxpayers. The bench determined that merely the right to purchase had been obtained by signing a purchase agreement. Regarding the tax benefit, the date of possession—February 2, 2011—should be taken into account. This date was inside the allotted time frame.