QUESTIONS & ANSWERS
Tax incidence of Capital Gains Account Scheme
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Capital gains on the sale of the flat in this case will have to be reckoned with reference to the cost of one-sixth part of the land and the superstructure value adopted for tax in the first stage of transaction.
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I had given my plot for development which, on conversion, could house six flats of which I was entitled to two flats. I have retained one flat and sold the other for Rs. 50 lakh and invested it under Capital Gains Account Scheme for two years with the intention that I can reinvest the same in another property within the permissible period. Now I am unable to purchase a property within two years, while my deposit matured in May 2009. What is the tax incidence?
An amount deposited under Capital Gains Account Scheme can be utilised either for purchase of a property within one year (not two years) or construction of a property within three years of date of transfer under proviso to Sec. 54F(1)(b), since what is sold is an asset other than residential house property. Since it is still possible to construct a house within the three-year period, the fixed deposit under the scheme could have been extended till the date of expiry of the outer time limit for construction, if it is feasible. As otherwise, the amount not utilised can be withdrawn in accordance with the scheme as provided under proviso to Sec. 54(2) of the Act. It further provides that the amount not so utilised will be taxed “in the previous year in which the period of three years from the date of transfer of the original asset expires” vide second proviso to Sec. 54F(2). In the reader’s case, even if he withdrew the amount in May 2009, before three years, which he could have done under the scheme after getting the necessary authorisation from the assessing officer, who has to be put on notice, he has violated the condition in the year of withdrawal without reinvestment, so that it is no longer possible for him to satisfy the condition. He becomes liable to tax on the third year from the date of transfer on the capital gains saved in the year of sale.
Incidentally, there was liability when the two-thirds part of the plot was converted into superstructure of two flats on one-third part retained by the reader at the first stage of transaction. The reader’s query is silent on this aspect of the transaction, which had probably been overlooked.
Capital gains on the sale of the flat will have to be reckoned with reference to the cost of one-sixth part of the land and the superstructure value adopted for tax in the first stage of transaction, so that capital gains on the superstructure part at the time of sale of the flat will be much smaller.
It is better that the reader gets professional assistance to set right his omission, if any, as regards liability at the first stage and work out the liability for capital gains at the second stage.
S. RAJARATNAM
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