Long term capital gain tax in selling old house

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There was a house in the name of my grand father. He made a will and gave life interest in the property in the favour of our mother, thereafter her death it was vested in us with absolute right.

According to will we are empowered to sell it or use it any any legal manner. In order to use of the property we have decided to sell it to another person and buy another flat for each of us in separate use.

We made an agreement in year 2008 for sell of this house in rs 4 crore. We got 2.5 crore as earnest money and we bought three separate flats and gave 25% booking amount out of that earnest money.

But sale completed in 2011, we were unable to execute that agreement due to some technicalities. Now I received a notice from Income tax department that I have hot utilised that amount within 2 years from the date of sell.

Question from - Property Law | Taxation

Income out of the sell of old house is included in head of income from house property if sell amount did not utilised within 2 years from the date of transfer of property. The word “transfer” is defined in two acts in different intentions. The Transfer of property act defined transfer in term of actual transfer of property but income tax act defines it in totally different term.

According to section 2 (47) of Income tax act, transfer takes place when any right in respect of any capital assets is extinguished and that right is transferred to some one. it would amount to transfer of a capital assets. Section 54 of  Income tax act provides exemption of tax on long term capital gain.  according to section 54 no tax is levied on the income of capital gain when total gain is re invested in purchase or construction of house before 1 year or within 2 years from the date of transfer of property.

In your case property is transferred on the date when you made an agreement to sell, because on that day you received earnest money and signed an agreement. Signing or executing an agreement to sell property created a right in the favour of vendee and vendor is restrained from selling that property to someone else because vendee has legitimate right in the property and he can execute it through specific performance of contract. [Oxford university press vs CIT 2001; 3SCC].

Transfer is completed on the date of agreement to sell. It does not matter that complete transfer take effect after three years. You should contact a lawyer and submit your reply of the notice. You are eligible to get exemption of long term capital gain tax under section 54.

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