Buying a home is usually a joint decision between a husband and wife. Or at least the investment is in joint names. Typically, the earning spouse is responsible for the entire financial investment including the repayment of the home loan; but the sale agreement and all other property papers record the joint ownership of the property. Any rentals or income earned from the property are also distributed between the two owners.
However, if a new property is bought (in joint names) by a spouse using the sale proceeds of another flat in order to claim the capital gains tax exemption; will the investment done in other spouse’s name be entitled to exemption under the Income Tax Act?
In one of the recent situations that came up before the Delhi [ Images ] High Court; an individual had sold an inherited flat and earned some long term capital gains. At the time of filing his income tax returns, the tax payer had claimed a deduction under section 54F of the Income Tax Act (‘the Act’) on the ground that the sale proceeds were invested in the acquisition of a residential home in the joint names of himself and his wife.
Section 54F of the Act provides that if a tax payer invests the sale proceeds received from the sale of any capital asset for buying a residential property; the long-term capital gains on sale of the property would be exempt.
The income tax officer, during the course of assessment, took the view that under Section 54F, the investment in the residential house should be made in the tax payer’s name and in as much as the residential house was purchased by the assessee in the name of his wife, the deduction was not allowable. He reduced the deduction and computed the capital gains accordingly.
At the second appellate level; the authority admitted the tax payer’s claim and allowed the exemption from capital gains accordingly. However, the Income Tax department preferred an appeal before the Appellate Tribunal. The honourable Tribunal, while relying on various judgements, was also of the opinion that the exemption under section 54 should be available to the tax payer. It also observed that section 54F being a beneficial provision, enacted for encouraging investment in residential houses should be liberally interpreted to include investment done in the spouse’s name too.
On a further appeal with the High Court by the Department, the High Court also agreed to the view adopted by the Tribunal. The High Court noted that the entire purchase consideration was paid only by the assessee and not a single penny was contributed by his wife. It held that a purposive construction of the legal provisions is to be preferred as against a literal construction.
Further, even if the provisions of section 54F are literally constructed, there is nothing in the section to show that the house should be purchased in the name of the tax payer only. The High Court observed that section 54F does not require that the new residential property should be purchased in the name of the tax payer; it merely says that the tax payer should have purchased / constructed a ‘residential house’.
It was observed that exemption under section 54 and 54F of the Act which relate to investment of capital gains in a new house property are on similar grounds. In this connection reliance was placed on an earlier decision by the Andhra Pradesh High Court where in it was observed that the object of granting exemption under section 54 of the Act is that a person who sells a residential house for the purpose of purchasing another convenient house must be given exemption so far as capital gains are concerned.
The word “assessee” must be given a wide and liberal interpretation so as to include his legal heirs also. Without the liberal interpretation, the object of granting the exemption would get frustrated.
Relying on this and other decisions by various judicial authorities, the High Court observed that for the purposes of section 54F, the new residential house need not be purchased by the tax payer in his own name nor is it necessary that it should be purchased exclusively in his name. The High Court further observed that the assessee in the said case has not purchased the new house in the name of a stranger or somebody who is unconnected with him.
The same has been purchased only in the name of his wife. The fact that the entire investment for the house has come out of the sale proceeds and that there was no contribution from the assessee’s wife is undisputed. In view of the same, the High Court allowed the exemption from long-term capital gains in favour of the tax payer.
It may be noted that section 54F of the Act requires that in order to claim exemption, the residential house should be purchased by the tax payer, but does not stipulate that the house should be purchased in the name of the tax payer only. Including wife’s name in the property for any other social / economic reasons should not stand in the way of exemption granted by the said provision of the Act. These sections promote impetus to house construction and as long as this purpose is served; other factors should not matter.
The writer is a financial planner