Exceptions

Applicable Under
Capital Gains:
A
PROJECT REPORT
ON
Exceptions applicable SECTION 54
Under capital gains:
Section 54

SUBMITTED BY
NEHA A. KHOT
PRAMILA K. WAGH
SONALI V. CHALKE
SWATI G. CHOPDE
SONALI GOANKAR
PRIYANKA GOSAVI
 UNDER THE GUIDANCE OF
PROF. SANJEEV GOKHALE
KET’ V.G VAZE COLLEGE

KET’S V.G VAZE COLLEGE OF

SCIENCE, ART’S AND COMMERCE
MULUND (E), MUMBAI
(2010-2011)

GROUP MEMBERS

NEHA A. KHOT……….……...16
PRAMILA K. WAGH…......….08
SWATI G. CHOPDE…….…...10
 SONALI V. CHALKE……..…06
SONALI.GOANKAR…………09
PRIYANKA GOSAVI….……..32

INTRODUCTION

Any profits or gains arising from the transfer of a capital asset effected  in the previous year shall, save
as otherwise provided in sections 54, be chargeable to income-tax under the head “capital gains ”, and
shall be deemed to be the income of the previous year in which the transfer took place.
(1A) notwithstanding anything contained in sub-section (1), where any person receives at any time
during any previous year any money or other assets under insurance from an insurer on account of
damage to, or destruction of, any capital asset, as a result of—
           (i)  Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
          (ii)  Riot or civil disturbance; or
         (iii)  Accidental fire or explosion; or
         (iv)  Action by an enemy or action taken in combating an enemy (whether with or without a
declaration of war),
then, any profits or gains arising from receipt of such money or other assets shall be chargeable to
income-tax under the head “capital  gains” and shall be deemed to be the income of such person of the
previous year in which such money or other asset was received and for the purposes of section 48,
value of any money or the fair market value of other assets on the date of such receipt shall be
deemed to be the full value of the consideration received or accruing as a result of the transfer of such
capital asset.
Explanation.—For the purposes of this sub-section, the expression “insurer” shall have the meaning
assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938).]
(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the
transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-
trade of a business carried on by him shall be chargeable to income-tax as his income of the previous
year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes
of section 48, the fair market value of the asset on the date of such conversion or treatment shall be
deemed to be the full value of the consideration received or accruing as a result of the transfer of the
capital asset.
(2A)  Where any person has had at any time during previous year any beneficial interest in any
securities, then, any profits or gains arising from transfer made by the depository or participant of
such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the
beneficial owner of the previous year in which such transfer took place and shall not be regarded as
income of the depository who is deemed to be the registered owner of securities by virtue of sub-
section (1) of section 10 of the Depositories Act, 1996, and for the purposes of—
           (i)  section 48; and
          (ii)  provison to clause (42A) of section 2,
the cost of acquisition and the period of holding of any securities shall be determined on the basis of
the first-in-first-out method.
Explanation.—For the purposes of this sub-section, the expressions “beneficial owner” 
“depository” and “security”  shall have the meanings respectively assigned to them in clauses (a), (e)
and (l) of sub-section (1) of section 2 of the Depositories Act, 1996.

(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other
association of persons or body of individuals (not being a company or a co-operative society) in which
he is or becomes a partner or member, by way of capital contribution or otherwise, shall be
chargeable to tax as his income of the previous year in which such transfer takes place and, for the
purposes of section 48, the amount recorded in the books of account of the firm, association or body
as the value of the capital asset shall be deemed to be the full value of the consideration received or
accruing as a result of the transfer of the capital asset.

(4) The profits or gains arising from the transfer of a capital asset by way of distribution
of capital assets on the dissolution of a firm or other association of persons or body of individuals (not
being a company or a co-operative society) or otherwise , shall be chargeable to tax as the income of
the firm, association or body, of the previous year in which the said transfer takes place and, for the
purposes of , the fair market value of the asset on the date of such transfer shall be deemed to be the
full value of the consideration received or accruing as a result of the transfer.

(5)Notwithstanding anything contained in sub-section(1), where the capital gain arises from the

transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a
transfer the consideration for which was determined or approved by the Central Government or the
Reserve Bank of India, and the compensation or the consideration for such transfer is enhanced or
further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the
following manner, namely
          (a)  the capital gain computed with reference to the compensation awarded in the first
instance or, as the case may be, the consideration determined or approved in the first
 instance by the Central Government or the Reserve Bank of India shall be chargeable as 
[income under the head “capital gains” of the previous year in which such compensation or
part thereof, or such consideration or part thereof, was first received]; and
          (b)  the amount by which the compensation or consideration is enhanced or further enhanced by
the court, Tribunal or other authority shall be deemed to be income chargeable under the
head “capital  gains” of the previous year in which such amount is received by the assessee;
(c)  where in the assessment for any year, the capital gain arising from the transfer of
a capital asset is computed by taking the compensation or consideration referred to in
clause (a) or, as the case may be, enhanced compensation or consideration referred to in
clause (b), and subsequently such compensation or consideration is reduced by any court,
Tribunal or other authority, such assessed capital gain of that year shall be recomputed by
taking the compensation or consi-deration as so reduced by such court, Tribunal or other
authority to be the full value of the consideration.

Explanation.—For the purposes of this sub-section,—

           (i)  in relation to the amount referred to in clause (b), the cost of acquisition and the cost of
improvement shall be taken to be nil;
          (ii)  the provisions of this sub-section shall apply also in a case where the transfer took place
prior to the 1st day of April, 1988;
         (iii)  where by reason of the death of the person who made the transfer, or for any other reason,
the enhanced compensation or consideration is received by any other person, the amount
referred to in clause (b) shall be deemed to be the income, chargeable to tax under the head
“capital gains”, of such other person.

(6) Notwithstanding anything contained in sub-section (1), the difference between the repurchase
price of the units referred to in sub-section (2) of section 80CCB and the capital value of such units
shall be deemed to be the capital gains arising to the assessee in the previous year in which such
repurchase takes place or the plan referred to in that section is terminated and shall be taxed
accordingly.
Explanation.—For the purposes of this sub-section, “capital value of such units” means any amount
invested by the assessee in the units referred to in sub-section (2) of section 80CCB.
EXCEPTIONS APPLICABLE UNDER CAPITAL GAINS

SECTION. 54 PROFITS ON SALE OF PROPERTY USED FOR RESIDENCE

The capital gain arises from the transfer of a long-term capital asset  , being buildings or  lands
appurtenant thereto, and being a residential house, the income of which is chargeable under the head
“Income from house property” (hereafter in this section referred to as the original asset), and the assessee
has within a period of [one year before or two years after the date on which the transfer took place
purchased], or has within a period of three years after that date constructed, a residential house, then],
instead of the capital gain being charged to income-tax as income of the previous year in which the
transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is
to say,—
             (i)   if the amount of the capital gain   [is greater than the cost of [the residential house] so
purchased or constructed (hereafter in this section referred to as the new asset)], the difference
between the amount of the capital gain and the cost of the new asset shall be charged
under SECTION 45 as the income of the previous year; and for the purpose of computing in
respect of the new asset any capital gain arising from its transfer within a period of three years
of its purchase or construction, as the case may be, the cost shall be nil; or
           (ii)   if the amount of the capital gain is equal to or less than the cost of the new asset, the capital
gain shall not be charged under SECTION 45 and for the purpose of computing in respect of the
new asset any capital gain arising from its transfer within a period of three years of its purchase
or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.
 (2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the
new asset made within one year before the date on which the transfer of the original asset took place, or
which is not utilised by him for the purchase or construction of the new asset before the date of furnishing
the return of income under section 139, shall be deposited by him before furnishing such return [such
deposit being made in any case not later than the due date applicable in the case of the assessee for
furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or
institution as may be specified in, and utilised in accordance with, any scheme   which the Central
Government may, by notification in the Official Gazette, frame in this behalf and such return shall be
accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already
utilised by the assessee for the purchase or construction of the new asset together with the amount so
deposited shall be deemed to be the cost of the new asset :

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the
purchase or construction of the new asset within the period specified in sub-section (1), then,—
             (i)   the amount not so utilised shall be charged under SECTION 45 as the income of the previous
year in which the period of three years from the date of the transfer of the original asset expires;
and
           (ii)   the assessee shall be entitled to withdraw such amount in accordance with the scheme
aforesaid.

SECTION 54B. CAPITAL GAIN ON TRANSFER OF LAND USED FOR AGRICULTURAL

 

PURPOSES NOT TO BE CHARGED IN CERTAIN CASES. 

the transfer of a capital asset being land which, in the two years immediately preceding the date on which
the transfer took place, was being used by the assessee or a parent of his for agricultural
purposes [(hereinafter referred to as the original asset)], and the assessee has, within a period of two
years after that date, purchased any other land for being used for agricultural purposes, then, instead of
the capital gain being charged to income-tax as income of the previous year in which the transfer took
place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—
             (i)   if the amount of the capital gain is greater than the cost of the land so purchased (hereinafter
referred to as the new asset), the difference between the amount of the capital gain and the cost
of the new asset shall be charged under SECTION 45 as the income of the previous year; and for
the purpose of computing in respect of the new asset any capital gain arising from its transfer
within a period of three years of its purchase, the cost shall be nil; or
           (ii)   if the amount of the capital gain is equal to or less than the cost of the new asset, the capital
gain shall not be charged under SECTION 45 and for the purpose of computing in respect of the
 new asset any capital gain arising from its transfer within a period of three years of its purchase,
the cost shall be reduced, by the amount of the capital gain.]
 [(2) The amount of the capital gain which is not utilised by the assessee for the purchase of the new asset
before the date of furnishing the return of income under section 139, shall be deposited by him before
furnishing such return [such deposit being made in any case not later than the due date applicable in the
case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account
in any such bank or institution as may be specified in, and utilised in accordance with, any scheme   which
the Central Government may, by notification in the Official Gazette, frame in this behalf and such return
shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if
any, already utilised by the assessee for the purchase of the new asset together with the amount so
deposited shall be deemed to be the cost of the new asset :

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the
purchase of the new asset within the period specified in sub-section (1), then,—
             (i)   the amount not so utilised shall be charged under SECTION 45 as the income of the previous
year in which the period of two years from the date of the transfer of the original asset expires;
and
           (ii)   the assessee shall be entitled to withdraw such amount in accordance with the scheme
aforesaid.

SECTION 54D SONALI GOANKAR PART

SECTION 54EC SONALI GOANKAR PART

SECTION 54F CAPITAL GAINS ON TRANSFER OF A LONN-TERM CAPITAL ASSET OTHER

THAN A HOUSE PROPERTY
The provisions of section 54F are given below-

Conditions-Exemption under section 54F is available if the following conditions are satisfied-

 WHO CAN CLAIM EXEMPTION-Under section 54F, only an individual or a Hindu undivided family
can claim exemption .In other words, no other person is eligible for claiming exemption under section
54F.
  WHICH ASSET IS QUALIFIED FOR EXPEMTION- Under section 54F, exemption is available only if the
capital asset which is transferred is a long-term capital asset but other than a residential house
property (for instance, it may be a plot of land, commercial house property, gold, share or any asset
but not a residential house property.)

 WHICH NEW ASSET SHOULD BE PURCHASED OR ACQUIRED-To claim the exemption under section
54F, the taxpayer will have to purchase a residential house property (old or new)or construct a
residential house property (herein after referred to as “new house”).It may be in India or outside India.
The new house should be purchased or constructed within the time-limit given below-

Time-limit

For purchasing a new It should be purchased within one year before, or

house within 2 yrs after ,the date of transfer of the
original asset.
For constructing a new The construction should be completed with 3 yrs
house from the date of transfer of original asset.

The following points should be noted-

 Time-limit in the case of compulsory acquisition-In case of compulsory acquisition, the time-limit is
of 1yr,2yrs or 3yrs shall be determined from the date of receipt of compensation (whether initial or
additional).
 Construction may commence before transfer of capital asset-Construction of house should be
completed within 3yrs from the date of transfer of the original asset. Date of commencement of
construction is irrelevant. Construction may be commenced even before the transfer of the original
asset.
 Allotment by co-operative societies-Case of allotment of flat under the self-financing scheme of
DDA (or similar scheme of co-operative societies or other institutions) is treated as construction of
house for this purpose-Circular No.471, dated October 15, 1986 & Circular No.672, dated
December 16, 1993.
 Holding of legal title not necessary-Holding of legal title is not necessary. If the taxpayer pays full
consideration or substantial portion of it (in terms of the agreement to sell)within the stipulated
period given in the table above, the exemption under section 54F is available ,even if possession is
handed over after the stipulated period or the sale deed is registered later on.
 Residential house should be purchases /acquired (may or may not be used for residential
purposes)-The requirement of section 54F is that the property should be a residential house. The
 use of the property is not the relevant criterion to consider the eligibility for benefit under section
54F.What is required is investment in a residential house. Mere non-residential use would but
render a property ineligible for benefit under section 54F,if it otherwise is a residential house-
Mahavir Prasad Gupta v.CIT[2006]5 SOT 355(Delhi).
 NOT MORE THAN ONE RESIDENTIAL HOUSE PROPERTY SHOULD BE OWNED BY TAXPAYER-Under
section 54F, exemption is available only if on the date of transfer of the original assets, the
taxpayer does not own more than one residential house property (other than the new house).He
should also not purchase within a period of 2yrs after such date (or complete construction within a
period of 3yrs after such date) any residential house (other than the new house).
 Amount of exemption-If the above conditions are satisfied then the exemption is available on the
following basis---
Cost of new house* Capital gains
Net Sale consideration

Notes:
1. The amount of exemption cannot exceed the amount of capital gains.
2. Cost of the new house includes cost of land-Circular No.667, dated October 18,1993.
3. Net sale consideration means the full value of consideration received or accruing as a result of
the transfer of the capital asset after deduction of any expenditure incurred, wholly &
exclusively, in connection with the transfer.
4. If the transfer or allow the transferee to retain & apply a part of total consideration to
discharge the mortgage to which the property had been subjected to the amount so applied for
discharge of mortgage would have to be excluded from the ‘full values of consideration’-CIT v.
N.M.A. Mohammed Haniffa[2001] 115 Taxman 181 (mad.).
5. In case of semi-finished house, the purchaser will have to invest on flooring, wooden work,
sanitary work, etc., to make it habitable. Therefore, the investment in house would be
complete only when such house becomes habitable. Accordingly ,the expenditure incurred on
making the house habitable should be considered as investment in purchase of the house,
subject to the condition that payment is made during the period specified in section 54F-
Saleem Fazelbhoy v.CIT [2006]9 SOT 603 (Mum.)

Circumstances when exemption granted under section 54F may be withdraw-

In the following cases, exemption granted under section 54F can be withdrawn:

Defaults Consequences

Capital gain which arises on the transfer of

the new house will be taken as short-term
1. If the assessee transfers the new
capital gain. Besides, the capital gain which
house within 3 years of its
was exempt under section 54F shall be
purchase/construction.
treated as long-term capital gain of the
year in which the new house is transferred.

2.If the assessee purchases, within a

Capital gain which was exempt under
period of two years of the transfer of
section 54F shall be deemed to be income
original asset ,or constructs within a
by way of long-term capital gain of the year
period of three years of the transfer of
in which another residential house is
such asset ,a residential house other
purchased or constructed.
than the new house.

OTHER POINTS ：-One should also keep in view the following:-

1. If by applying section 5 4F, there is no income in hard of minor child to be added under section
64(1A), the benefit under section 54 F cannot be denied to minor child on the ground that father of
minor child had two residential houses at the time of transfer of the capital assets
2. Where an assessee purchase ground floor of a house and later,when vendor build first floor the
assessee purchases first floor by a separate sale deeds the assessing authority is not justified in
disallowing the assess claim for exemption of capital gains on ground that ground floor and first floor
constitute two residential houses and there fore provisions of section 54 F(2) are attracted.

Scheme of deposit in respect of exemption under section 54F- The provisions are given below:-

1. What is the scheme of deposit under section 54 F the new house can be purchased constructed
within the time limit given above (ie 2 years 13 years From the date of transfer of original assets)
The tax pay to submit his return of income on or before the due date of submission of return of
income (ie generally july 31 or September 30 of the assessment year.)

2. If the amount is not utilized for purchase /construction of the new house till the due date of
submission of return of income, then it should be deposit account) The proof of deposit should be
submitted along with the return of income on the basis of proof of deposit ,the Assessing officer
will give the exemption under section 54 F.
 3. How the deposit account should be utilized by withdrawing from the deposit account in new house
can be purchased / constructed within the period given above.

4. What happens if the deposit account is not fully utilized .If the amount deposited is not utilized
fully for purchase or construction of new house within the stipulated period then the following amt
shall be treated as long term capital gain of the previous year in which the period of three years
from the date of transfer of original assets expires.

SECTION 54G ( SWATI PART)

SECTION 54GA (SWATI PART)

BIBLIOGRAPHY

Direct Tax: Law And Practices

Taxmann
Dr. Vinod K Singhania, Dr. Kapil SINGHANIA