If a residential house held for more than 36 months is sold , the capital gains arising out of such sale is eligible for exemption u/s 54 of the I T Act provided one buys a house within two years or construct a residential house within three years.
In your case , the question is whether investment of capital gains in the construction of house on a preexisting residential house , make you eligible for claiming exemption.
The Income tax department certainly will interpret that no exemption can be given in case of such investment , however, the issue has been already decided by Madras High Court in Commissioner Of Income Tax. vs P. V. Narasimhan. 181 ITR 101, Madras High Court rreferred two orders of Gujarat High Court and Delhi Court and held that the exemption for investment of sales proceeds in construction of a new house on floor of existing residential house is eligible investment for section 54 of the I T Act .
The respondent/assessee owned two residential houses, one at Tiruppattur and another at No. 19, Pinjala Subramaniam Road, Madras-17. The house at Tiruppattur which was in his enjoyment for residential purpose was sold by him on May 24, 1974, for a sum of Rs. 45,000. By that sale, admittedly, he has earned capital gain to a extent of Rs. 32,500. The asses see claimed exemption under section 54 of the Act before the Assessing Officer on the ground that by utilising the sale proceeds obtained by the sale of the house at Tiruppattur, he has put up first floor it No. 19, Pinjala Subramaniam Road, Madras-17, after demolishing the old structure (first floor). The Income tax Officer disallowed the assessee’s claim for exemption on the ground that the assessee had made only some alteration by adding additional rooms to the existing house. Consequently, the said sum of Rs. 32,500 was subjected to tax under the head “Capital gains”.
The Tribunal held
“Once the principle laid down in the said judgment to the effect that the “house property” takes into account an independent residential unit has come to stay with which we respectfully agree, there is no force in the contention that, since the independent residential unit (in this case, the first floor) was put up on an existing old house, the exemption under section 54 was not available. Therefore, we are unable to agree with learned counsel for the Revenue that the principles laid down in those cases will have no application to the facts of the present case.”
Complete order can be downloaded from here.
Going by the aforesaid decison , you are eligible for claiming exemptuion u/s 54.
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