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Reinvestment in another property

CHENNAI: I had inherited an ancestral house and some land in Chennai. My family is of my wife, a married son and a married daughter. The son has two sons and the daughter a son and a daughter. All my grand children are minors.

I have sold the land, jointly with my son and daughter and they have taken their shares of the proceeds. My son now wants his share of the property which consists of only the house. This can be satisfied only by selling the house, which I am reluctant to do for sentimental reasons. I have a flat in Delhi, which has been purchased through a Group Housing Society. The purchase of this flat has been made by me from house building advance, provident fund withdrawals and some personal savings. Thus, this flat is a self-earned property and has no liability like mortgage and is free from any encumbrance. I understand that if a residential property is sold and the proceeds are used to purchase another residential house, no capital gains tax is liable on the purchase value of the latter house. On this analogy, if I sell my self-earned flat and utilise the proceeds to purchase my son’s and daughter’s shares of the ancestral house, whether I can claim capital gains tax exemption for such view of my children’s shares.

The assessee being a Hindu, capital gains on sale of ancestral house should be assessable in his hands as a karta of a Hindu Undivided Family. Merely because the sale deed is made jointly in the name of the son and the daughter, it does not become a sale by co-owners, unless there was a partition prior to the sale. If the Hindu Undivided Family had been assessed at any time before, partition is required to be done by metes and bounds and recognised by the Income-tax Officer under Sec. 171 of the Income-tax Act. The subsequent division of the sale proceeds between the family members does not avoid a single assessment in the hands of the HUF in such cases. This aspect of the law has to be borne in mind, though the query raised is different.

As for the reader’s flat in Delhi, it is acquired by his personal earnings, so that such property would be his individual property. If he sells the property, he can avoid capital gains tax to the extent of sale proceeds deployed in acquiring son’s undivided share. Such a course of action has the support of the decision of the Supreme Court in CIT v T.N. Arvinda Reddy (1979) 120 ITR 46 (SC), subject to the condition as to time limit for such reinvestment. Incidentally, t he son cannot require sale of ancestral house, but can demand partition under the Hindu law, which may be possible without sale.

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