Mumbai Tribunal provides clarity on single residence condition for LTCG tax exemption, highlighting the significance for tax planning and individual ownership in joint properties.
The Mumbai Bench of the Income Tax Appellate Tribunal (referred to as “The Tribunal”) has recently made a practical decision to provide clarity on the requirement of owning a single residence for the purpose of availing long-term capital gains (LTCG) tax exemption.
In a specific case, Zainul Abedin Ghaswala vs CIT(A), NFAC, the taxpayer sought exemption from LTCG tax under section 54F of the Income Tax Act, 1961. This provision allows individuals to transfer the proceeds from the sale of a long-term capital asset (excluding a residential property) into a residential property within a specified timeframe to qualify for the exemption. In this case, the taxpayer inherited a piece of land along with five siblings or other legal heirs. They collectively decided to construct six separate flats on the land. Each individual involved provided affidavits stating that their interests were limited to their respective flats, despite the land being jointly owned.
However, the Income Tax Department and CIT (A) rejected the taxpayer’s claim for exemption under section 54F. Their reasoning was that the taxpayer was ineligible for the exemption due to joint ownership in five other flats inherited from their father, which belonged to their siblings. Fortunately, the Tribunal correctly recognized that the taxpayer’s ownership was limited to only one flat. They acknowledged that each individual’s interests were clearly defined and restricted to their respective flats, leading to the overturning of the CIT (A)’s order.
Additionally, this verdict also acknowledges the concept of Undivided Share (UDS), which is prevalent in Tamil Nadu and Karnataka. Furthermore, this judgment has implications for the exemption provided in section 54, which pertains to LTCG from residential properties reinvested in another residential property. Given the importance of this decision, it is essential for taxpayers to stay informed and explore the potential benefits it may offer for their tax planning and investment decisions.
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