Money doesn’t have color – even if capital gains exemption


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Money does not have color – capital gains exemption is available even if you buy a house with the borrowed amount

Whether capital gains exemption will be available if the assessee purchases a new asset with borrowed funds and does not utilize the money generated from the sale of the earlier asset. This is a common question in the minds of taxpayers.

Denial of exemption is a regular feature during various assessment proceedings. This exemption has increased in the faceless assessment scheme.

There was one such issue before the Mumbai ITAT in the following case:

Regi Isovo

[2022] 136 111 (Mumbai – Trib.)

It may be noted that Section 54 requires only purchase and investment. It does not refer to the use of the same fund for investment.

An overview of ITAT will be highly relevant to various taxpayers. A taxpayer can use any source of funds to buy a new home to claim the Section 54 deduction.

ITAT Mumbai observed as follows:

  1. Possession of the new house within the prescribed 2 years is a ‘purchase’ for section 54, even if not funded from the income of the old house.
  2. If the assessee has taken possession of the new house within the prescribed period of 2 years, the assessee is entitled to deduction under section 54, even if the agreement for sale of the new house is not registered within the period of 2 years.
  1. Such possession is to be taken as purchase of a new house within a period of 2 years.
  1. The source of the funds used is irrelevant.
  1. The assessee need not prove that the payment for the new house was made by consideration/capital gain from the sale of the old house.
  1. The assessee will get the deduction even if he has paid for it, however the purchase provided the home loan is completed by entering into possession within the stipulated period of 2 years.



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