Exemption of Capital Gains u/s 54 Is Allowed Even When New Residential Property is Purchased in Foreign Country!
let us take example. Mr. X, a Non Resident had acquired a property in India. He left India and settled in USA. After twenty years, he sold the property in India for a huge sum. He wants to save on LTCG tax by purchasing a residential house , so that exemption from LTCG u/s 54 can be claimed. So, he purchases a house in USA Now question arises whether purchase of a house outside India makes him eligible to claim exemption u/s 54 of the I T Act?
In my opinion, Yes . The purchase of property outside India also makes a Non Resident eligible for exemption u/s 54 of the I T Act .The reasons are as follows:
- Section 54 is applicable to both Resident and Non Resident equally.
- The house property should be purchased. There is no restriction that the purchased house should be India only.
The Mumbai Tribunal judgment in case of Mrs. Prema P Shah vs ITO 282ITR (AT)211 [2006] is significant in this regard. In fact , this order of Tribunal not openly confirmed that the exemption u/s 54 is allowed even for purchase of residential house outside India , but also stated that in UK , even lease for 150 years can be considered purchase for the purpose of section 54 .
Briefly , the facts of the case was that Mrs Shah was a Non resident Indian. She sold her residential property purchased in 1983 for Rs 6million in 1992. Mrs Shah took another property at London on 150 years lease , and claimed exemption u/s 54 of the I T Act. The A.O disallowed the said claim for following reasons:
- The assessee had only purchased tenancy right.
- To claim exemption, investment should have been made in India.
- The receipts , which gave rise to capital gains, were not utilized for the purchase of the property.
- The assesee did not purchase property in India.
- The lease deed does not entitle assessee right of occupation infinitum.
- The assessee being a non resident Indian, is liable to pay tax @ 20 % on long term capital gains by virtue of Section 115D
The Hon’ble tribunal held
- Relying on Tribunal ,Mumbai Branch’s decision in case of Bombay Housing Corporation vs Asst CIT [2002]81ITR545 , it held that even if assessee borrows funds and satisfies conditions relating to investment in specified assets , he is entitled to exemption u/s 54.
- Even in case of lease which is for perpetuity, assessee is absolute owner of the property and as per the law of
- Long Term Capital Asset as defined under Section
Therefore , in nutshell , a non resident can sell his Indian residential property and out of sale of that property (to set at rest the controversy regarding whether the sale consideration should be used, although a favourable Mumbai Tribunal judgment is there) and can purchase a property any where in the world and enjoy the benefit of exemption u/s 54 of the I T Act.
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