This ruling is important, as for availing tax benefits, investment in a new house must be made within a specific period of time.To the extent of investment in the new house, the taxable component of long-term capital gains (which has arisen on sale of the old house) is reduced. This, in turn, results in a lower tax outgo.
According to this provision, the new house must be purchased within ‘one-year prior’ or ‘two-years after’ from date of sale of the old house. Or the new residential property can be constructed within three years from the date of sale of the original property.
In this case, which pertained to a non-resident couple, for financial year 2010-11, the I-T officer denied the exemption and determined taxable income of each to be nearly Rs 36 lakh. Penalties were also levied as the I-T officer held that claiming a wrongful deduction was ‘concealment of income or furnishing of inappropriate particulars of income’.
The non-resident couple had sold the old house on Feb 10, 2011. Thus, the new house could have been purchased from Feb 11, 2010 (one-year prior) till Feb 9, 2013 (two-years after). However, the I-T officer noted that the agreement with the builder for purchase of new house was made on July 25, 2009, and denied the tax benefit .
ITAT adjudicated in favour of the taxpayers. The bench held that by entering into an agreement to purchase, only the right to purchase had been acquired. It is the date of possession – Feb 2, 2011, which should be considered for the purpose of the tax benefit. This date fell within prescribed period.
