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Get a tax deduction on sale of commercial property. Here's how

 

Arun Kumar owns a residential property in his name which he uses as residence and also owns an office space which has been rented out. Along with this, he has also inherited a plot of land from his father.

Kumar works as a whole- time director with a private sector company.

As per the provisions of The Income- tax Act (' the Act'), the rental income earned by Kumar from the commercial property will be taxed under the head " Income from house property" and will be allowed all the prescribed deductions on the same.

Kumar has recently sold the inherited plot of land and wishes to reinvest the proceeds in another residential property, as advised by his tax consultant, in order to claim exemption under section 54F of the Act. However, Section 54F lays down a pre- condition that the taxpayer should not own more than one residential property ( whose income is chargeable under the head " Income from house property") at the time of the investment, as above, to claim exemption under this section. In Kumars case, the income from the office space is currently being offered under the head "income from house property" other than the residential property that is being claimed as a self- occupied property. Does this imply that Kumar will not be able to claim the exemption under section 54F? The Act does provides exemption on long term capital gains earned on sale of property. One of the provisions is Section 54F of the Act, which provides that if a taxpayer earns any long- term capital gains through sale of any capital asset, other than a house property, then exemption can be claimed by investing the sale proceeds in a house property within the prescribed time limit, that is, within two years from the date of sale of the property or within one year before the date of sale. The time limit is extended to three years, in case the individual were to construct a new house property.

In one of the recent cases that came up before the Chennai Income Tax Tribunal, a taxpayer had filed his return of income electronically and claimed deduction under section 54F of the Act in his computation of income. His case was selected for scrutiny by the tax officers. During the course of assessment, the taxpayer submitted that in addition to the new property bought, he owned one more residential property and one commercial property in Chennai. In view of the qualifying condition defined under section 54F, the tax officer rejected the taxpayer's exemption claim on the ground that he is the owner of two properties.

For claiming exemption, it is essential that on the date of sale, the taxpayer should not own more than one residential property other than the new property. The officer was also of the view that the term 'residential property' and 'commercial property' have not been defined separately under the Act. A residential property could be converted into commercial and vice versa by virtue of its use. With this view in mind, the officer rejected the taxpayer's claim. At the first appellate level, the appellate officer found merit in the officer's findings and did not grant any relief to the taxpayer.

The taxpayer preferred a second appeal with the Tribunal. During the course of the appellate proceedings, the taxpayer's representative submitted that the commercial property owned by the taxpayer has been let out and is being used exclusively for commercial purposes. The income received from letting out is assessed under the head of income "Income from house property". It was further submitted that under the existing provisions of the Act, there is no other head of income provided for assessing rental income received from letting out of commercial property.

The taxpayers' representative argued that the view taken by the officer, that rental income from letting out of commercial property being assessed under the head "Income from house property" leading to the conclusion that the owns another residential property, is misconceived. Supporting documents like water supply bills, planning permits issued by the town development authority, rent agreements, etc to show that the building where the property is owned by the taxpayer is a commercial property were not considered by the officers.

Thus, it was amply clear that the property is not being used for residential purposes.

In its decision, the honourable Tribunal observed that the officer and the first appellate authority have wrongly concluded that the taxpayer owns two residential properties.

The Tribunal held that the observation of the officer and first appellate authority, that the property is residential, is not correct. This observation was based on the fact that since the taxpayer has claimed various deductions from rental income, under the prescribed section 24 of the Act, the property should be qualified as a residential property The Tribunal observed that the Act does not differentiate between rental income from house property and a commercial building. Both these incomes are assessed under the head "Income from house property" subject to certain exceptions.

The relevant section under the Act prescribes three rules to be complied with for any income to be charged under the head 'House Property":

a. The property should consist of buildings;

b. The person should be the owner of the property;

c. The property should not be used for the purpose of his business / profession.

It relied on various judicial decisions in the past and held that the term "building" as used in the relevant sections of the Act is not qualified by the word 'residential'. There have been several decisions where the income from letting out of commercial buildings / warehouses / factory premises was held to be assessable under the head House property.

Based on the above, the honourable Tribunal held that the taxpayer is eligible to claim the deduction under section 54F of the Act.

In case the lower officer's view was further supported by the Tribunal, then it would have been difficult for individuals, like Kumar, owning one residential property and one or more than one commercial properties to claim capital gains exemption. With the favourable decision, Kumar can now reinvest the capital gains from sale of his plot into a second residential home.

|Sale proceeds from commercial property are eligible for tax exemption |Show proof that property is used solely for commercial purposes |Use documents like water supply bills, planning permits, rent agreements

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