Is Exemption u/s Sec. 54 Allowed Even if New House is Purchased from Borrowed Funds ?

Section 54 provides relief to a tax payer who gets gains on account of sale of residential house. The provision u/s 54 provides that tax will not be imposed on long term gains on sale of residential house up to the extent gains  same is utilised for buying house within two years from the date of transfer of sold assets or constructing the house within three years from the date of transfer of sold assets .

But the question is whether a tax payer has to spend on new residential house the same money which he got out of sale or the tax payer just needs to buy a house within specified period , no matter, from where the money has come.

Recently , Bomaby High Court in CIT vs Dr.P.S.Pasricha has confirmed the decision of Mumbai Tribunal that for claiming benefit under s. 54(1), law does not make it mandatory that the assessee must use the same funds as received from sale. The source of funds is not relevant.

The facts of the case was as under

The facts borne out from the record are that assessee has acquired a residential flat in the building known as ‘Dilwara’ at Cooperage, Mumbai at cost of Rs. 3,22,464. The said property was sold during the year for a total consideration of Rs. 1,40,00,000. After claiming deductions for the expenses incurred for sale and cost of long term capital gains was worked out by the assessee at Rs. 1,24,02,738. The assessee claimed an exemption under section 54(1) of the Act to the extent of Rs. 1,04,78,750 and returned the taxable capital gain at Rs. 19,23,988. After the sale of the above property, the assessee purchased a commercial property at Kolhapur for a total consideration of Rs. 125.28 lakhs and gave the said property on rent to M/s. Huges Telecom Ltd. Thereafter, within the period specified under section 54(1) of the Act, the assessee purchased two adjoining residential flats at Mumbai for a total consideration of Rs. l,04,78,750 on which deduction was claimed under section 54(1) of the Act.

The Tribunal Held as as under

Since the assessee has purchased the residential house before the due date of filing of the return of income, its claim is not hit by sub-section (2) of section 54 of the Act. We, therefore, of the view that assessee is entitled for deduction under section 54(1) of the Act.

The order of Tribunal was challenged by Income Tax Department which ha snow been decided by Mumbai High Court in following words

Having seen the finding of fact recorded by the Tribunal in paragraph No.9, that the assessee had initially utilized the sale proceeds of sale of his residential flat for purchase of commercial properties and later on he purchased two residential flats within a period specified in sub section (2) of Section 54 of the Act. In this view of the matter, the view taken by the Tribunal cannot be faulted. The appeal is without any substance. Hence, the same stands dismissed in limine with no order as to costs.