Sudarshan Kumar was owning a big bungalow in the posh locality of Amritsar. He wanted to shift to New Delhi. So he advertised in the newspaper that "Wanted in exchange of Amritsar bungalow 200 yard plot with building in posh residential area of New Delhi". Lucky chap he was that within a week of the advertisement large number of enquiries were received by him and finally he exchanged a small bungalow in East of Kailash, New Delhi in exchange of his bungalow in Amritsar. Revealing this to his friends he was feeling very happy that just by one single advertisement he could exchange his property and get a bungalow in New Delhi and that too no hassle and no problem with regard to income-tax. He was also feeling doubly happy because doing so he even was not required to make payment of any capital gains tax. A very pertinent question which comes to the mind of the tax payers by having a look at the above mentioned incident of Sudarshan Kumar is whether there is any tax like capital gains tax, etc. merely on exchange of property in which situation no cash is received. Apparently the answer appears to be negative but the correct answer to this important question comes to our mind when we have a deep look to the definition of "transfer" for the purpose of capital gains tax under the I.T. Law. Sec. 2(47) of the I.T. Act, 1961 defines the word "transfer" in relation to a capital asset for the purpose of capital gains tax and for this purpose "transfer" includes:-"The sale, exchange or relinquishment of the asset".
Thus even in the above illustration of Sudarshan Kumar even when he has not sold his property by receiving cash consideration as he has not received any payment of the property but still this transaction of transfer of his property at Amritsar in exchange of property at New Delhi would be treated as a transfer for the purpose of capital gains tax and the tax liability to capital gains would be determined exactly in terms of a situation where the transfer would have been effected as a result of the sale of the property.
The situation relating to exchange of a capital asset like immovable property whether it is land or a building or an apartment or a shop, etc. could be better explained by going a step further and looking to the different aspects connected with exchange of property. If in the above case of Mr. Sudarshan Kumar if he was having not more than one residential property owned by him and he would have received in exchange of his Amritsar property a property in New Delhi even though it is a transfer within the meaning of the provisions relating to capital gains tax but there would be no liability to capital gains tax in terms of the provisions of sec. 54 of the I.T. Act, 1961 dealing with long-term capital gains for individuals and HUFs which are fully exempt on transfer of a residential house where the capital gains are invested in purchasing another house property. In this case as Sudarshan Kumar has purchased (may be through exchange of the property) a property which is also a residential one in that event there would be no liability to capital gains tax.
Reversely, if Sudarshan Kumar would have been the owner of a commercial complex in Amritsar and was also possessing two residential houses and he would have exchanged for his commercial property at Amritsar a residential house property in New Delhi in which situation due to the provisions of sec. 45 and the provisions of sec. 2(47) of the I.T. Act, 1961 there would definitely arise a liability to payment of capital gains tax because there is artificial capital gain due to exchange of the property and there is no way of saving capital gains because commercial property has been sold/exchanged in return for a residential property for which no tax exemption is available under the I.T. Law. This is because of the fact that Sudarshan Kumar was owning two residential house properties already.
The situation would be quite different if Sudarshan Kumar would have owned no residential property at all and would have exchanged his commercial property in Amritsar for a residential property in New Delhi in which situation in terms of the provisions of sec. 54F of the I.T. Act, 1961 he would not be liable to capital gains tax although as a result of exchange of the property, it would tantamount to transfer for the purposes of capital gains tax. But in view of specific provision contained in sec. 54F of the I.T. Act, 1961 the long -term capital gains for individuals and HUFs are exempted if the sale consideration of any other capital asset is invested in purchase of a residential house provided the assessee was not owning more than one residential house property. In this situation we find that as Sudarshan Kumar was not owning any residential house property and he exchanged for his commercial property a residential property hence in terms of the above mentioned sec. 54F of the I.T. Act, 1961 he would get tax benefit and no liability would be there on account of payment of capital gains tax.
The provisions of the Cost Inflation Index would equally be applicable to a situation arising from exchange of properties. For example, if a person owning a residential property exchanges for his commercial property either a residential or a commercial property in which event he would be liable to payment of capital gains based on the Cost Inflation Index concept.
From the foregoing discussion we come to the conclusion that even when there is no sale of the property and the transfer of property takes place merely as a result of exchange of the property in that situation also there is a liability to payment of capital gains because exchange of property tentamounts to transfer in relation to capital assets as per the definition of transfer mentioned in sec. 2(47) of the I.T. Act, 1961. Similarly, the provisions of sec. 54 for buying a residential house on sale of a residential house would be applicable whereby exchanging a residential house for a residential house. Similarly, sec. 54F for individuals and HUFs would be applicable even for exchanging any capital asset other than residential house in exchange of a residential house provided the assessee does not own more than one residential house on the date of sale.
Thus the tax payer should be very careful with regard to entering into transaction relating to acquisition of immovable properties through the course of exchange of property. All the aspects connected with capital gains tax should be kept in mind before taking such a decision. In case a wrong decision is taken there is a likelihood of tax liability arising as a result of transactions on account of "exchange of properties". In a nut shall always avoid exchanging commercial property to a commercial property. Similarly, generally speaking, exchange of a residential property for a residential property would not attract capital gains tax.
