My 74-year-old mother-in-law sold her house. Now she wants to buy a block of three row houses constructed as one unit. The seller is willing to register them as one block in her name. Since she has 3 daughters , she wants these three houses to be registered as one house. Can this be done to avoid capital gains as these houses cost Rs 1,00,00,000 and the amount to be considered for capital gains is also Rs 1,00,00,000 . Can we claim tax relief by buying this?

— Rangish

According to provisions of the tax law, if the individual transfers a long-term capital asset (LTCA), being a residential house, the long term capital gains (LTCG) shall be exempt from tax if the individual has either invested in a new residential house within one year before or two years after the date of sale of the old residential house. Alternatively, the individual can construct a new house within three years from the date of sale.

On a plain reading of the above provision an issue that arises is the interpretation of the word ‘a’ residential house. In a situation such as yours, in some of the decided case laws including judgments from High Court, it has been held that the word ‘a’ has to be construed widely and hence if an assessee reinvests such gains in acquiring three adjacent flats or even in the same building, according to the needs of the assessee and his family to make ‘one’ residential house, exemption should not be denied.

We understand that all three row houses will be considered as one unit for all legal purposes, hence exemption u/s 54 may be claimed. However, the said claim may be subject to litigation.

In 1988, I constructed a house in Delhi on land gifted by my mother with mutual understanding among four brothers to have equal share in the property. The cost of construction was borne by me. My mother had this property in her name since 1986. I am planning to sell the house which may fetch good amount. Since the property is in my name and sale proceeds will be received in my name and I will be sharing it with my brothers my questions are:

What will be the capital gain tax or any other tax liability on me?

Can I show the amount given to brothers as gift?

Is any gift tax payable by me or my brothers?

All brothers will be purchasing four separate houses in their own name of the shared sale amount of above mentioned property within 6 months. Please advise.

— Dinesh

According to the provisions of the domestic tax laws, gains (if any) arising from the sale of a house (held for more than 36 months) shall be chargeable to income-tax.

We understand that the land was gifted to you by your mother through proper documentation and not to all four brothers and also there is no written agreement to the mutual understanding for sharing the property. The house which you intend to sell was constructed in 1988 and you hold the legal title to the house. It is being presumed that your records (including the assessment records) show the above position. Hence, gains derived from the sale shall be taxable in your hands as LTCG. According to the plain reading of the Act, the cost indexation benefit shall be available to the assessee from the year the asset was first held by him. However, reference can be drawn from various case laws to support the view that the benefit of cost indexation shall be available from the year in which such property was acquired by the previous owner i.e. the cost of the land to your mother. Further, the indexed cost of improvement (construction cost) shall also be deductible. Based on the above, the tax on the LTCG shall be your liability.

Yes, you can gift the sale proceeds to your brothers.

According to the tax laws, any sum of money received from a relative is exempt from tax. The term relative includes brothers and sisters. Hence, the sum gifted by you to your brothers shall be tax exempt in their hands.

We understand that you intend to purchase a house within 6 months from the date of sale of the ancestral house. Hence, you shall be eligible to claim tax exemption subject to other conditions mentioned in the tax law. The exemption can be claimed only in respect of one house property purchased/constructed in your name.

In case the land was gifted to all the brothers and the construction cost was borne equally, the LTCG would be taxed individually in the hands of each brother and each one could claim the tax exemption for the separate houses purchased.

Mail your queries to >taxtalk@thehindu.co.in

(The author is a practising chartered accountant.)

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