There are some useful roll-over provisions in the Income-Tax Act, 1961 for exempting capital gains. Section 54 exempts capital gains made on sale of a residential house where the profit is re-invested in purchasing another residential house, subject to fulfillment of certain stringent conditions. The second provision is under section 54-F which requires investment of sale proceeds of any capital asset in a residential house, again subject to stringent conditions.
The third roll-over provision is under section 54-EC which permits exemption of capital gains which are invested in certain notified bonds. While the third form of exemption is relatively simple, requiring the capital gains in respect of any long-term capital asset to be invested in notified bonds within six months of its sale, the first two provisions bristle with onerous conditions and the non-fulfillment of even one of them would deprive the tax-payer of a very valuable exemption.
Some of the common conditions applicable both under sections 54 and 54-F are discussed hereafter. The first condition is that the exemption is available only in respect of capital assets which are sold. Therefore, if business assets, trading assets, current assets like raw materials, stock-in-trade are sold, the benefit of the capital gain exemption would not be available because profits arising on sale of these business or current assets would be taxable under the head "profits or gains from business or profession". The second condition is that the capital asset must be transferred. The word "transfer" must fall within the scope and ambit of section 2(47) of the Income-tax Act, 1961.
The third common condition is that the capital asset must be a long-term asset as defined under section 2(29-A), read with section 2(42-A). The fourth condition under both sections 54 and 54-F is that the new residential property should be purchased one year before or two years after the date on which the old asset was transferred. The fifth condition would apply where residential property is not purchased but is constructed, for which a period of three years is allowed after the date of transfer of the old capital asset.
It is important to note that under both sections 54 and 54-F, the new asset must be a residential house. Therefore, it cannot be a pure commercial or industrial property. Of course, if the residential house is partially used for commercial purposes, but the predominant use is for residential purpose, the condition would be satisfied.
The sixth condition under both sections 54 and 54-F is that until the residential property is purchased or constructed within the stipulated time, the amount is required to be deposited in a special account with a nationalised bank and the amount needed to purchase or acquire the residential property should be withdrawn only from such account. The last condition common to both sections 54 and 54-F is that the residential house purchased or constructed should be retained for atleast three years.
Needless to add, to claim exemption under sections 54 and 54-F it is necessary that the tax-payer who has sold his long-term capital asset must purchase or construct the residential property in his own name. If he purchases the residential property in the name of any of his family members, the exemption would not be available to him. In other words, gifts to family members should be made by the tax-payer only after three years of holding the property, after which the property may be gifted, transferred or sold.
Turning to the distinguishing features, section 54 applies only where a residential property is sold which has been held for three years. On the other hand, section 54-F applies where any other long-term capital asset is sold like land, jewellery, shares, gold ornaments, etc. In case of shares and securities which are listed on a recognized stock exchange, the period for being treated as long-term capital asset is reduced to one year as against three years in the case of other capital assets. Of course, if the shares are held as stock-in-trade by a person who carries on the business of buying and selling shares, the benefit of section 54-F would not be available because such shares will be treated as business assets and not capital assets under section 2(14).
Under both sections 54 and 54-F, the amount of capital gains or the sale consideration respectively has to be utilised for the purchase or construction of a residential house which could of course be a second-hand property as well. In other words, a residential house need not be newly constructed.
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