If property is purchased by one person, he/she will get the full tax exemption. If bought together, proportionate exemption is allowed
Buying properties jointly with one’s spouse is very common. The wife’s name is added as a precautionary or safety measure, that is, in order to retain ownership or smooth transfer of ownership in the case of any eventuality like the husband's death. But, in such cases the property purchase may or may not be shared between the spouses. Typically, the husband funds the property purchase while wife is just a co-owner.
As a result, it is assumed that the beneficial owner is the husband and all liabilities and rights — legal and / or tax-related — should ideally be the husband’s. But, this may not always be the case.
Recently, Kapil Kumar (named changed) claimed exemption (under Section 54F) for capital gains he earned from sale of a plot of land by buying another residential property. The twist was that though all payments for purchase of the piece of land were made by Kumar, the house was purchased jointly by Kumar and his wife.
As a result, the Assessing Officer (AO), allowed Kumar to claim only 50 per cent of the exemption. Reason: The wife was a joint owner and hence had a share in the tax exemption.
|Capital gains tax woes|
|* Properties bought jointly need not get joint tax benefit|
|* If one owner has bought a jointly owned property, he/she can alone get exemption|
|* If both owners have contributed to the purchase, they can get proportionate exemption|
|* However, both owners will have to make recommended investments to save capital gains|
|* Joint ownership of properties is encouraged for smooth transfer in case of an eventuality|
|* For exemption of capital gains from property sale, invest in 54EC capital gains bonds or buy another property|
Aggrieved by the AO’s order, Kumar filed an appeal before the Commissioner of Income Tax (Appeals) or CIT(A). Here, too, Kumar's claim was dismissed.
However, in another appeal filed before the Income Tax Appellate Tribunal, Kumar succeeded. The Tribunal held that Kumar is entitled to full exemption under Section 54F.
Unfortunately, the Revenue Department filed an appeal with the Delhi High Court against the Tribunal’s order.
The High Court observed that though the new residential house was purchased jointly by Kumar and his wife, Kumar had paid the stamp duty and corporation tax at the time of registration. Similarly, he had also paid commission and legal expenses for the house. Not even a single penny had been contributed by the wife. The property was purchased by Kumar jointly with his wife to avoid any litigation after his death. All the funds invested in the house were Kumar's as was evident from his bank statement. Therefore, as a matter of fact, Kumar was the real owner of the house.
Based on the aforesaid facts, the Court opined that the conditions stipulated in Section 54F are qualified. It would be treated as the property purchased by Kumar in his name and merely because his wife is a co-owner, it would not make any difference.
Section 54F of the Income Tax Act mandates that a house should be purchased by the assessee. And it does not stipulate that the house should be purchased in the name of the assessee only. Inclusion of the name of the wife should not stand in the way of the deduction legitimately accruing to the assessee. The objective of Section 54F (and the like provision such as section 54) is to provide impetus to house construction and so long as the purpose of house construction is achieved, a technicality should not impede the way of deduction which the legislature has allowed. Purposive construction is to be preferred as against the literal construction, more so when even literal construction also does not say that the house should be purchased in the name of the assessee only. Section 54F is a beneficial provision which should be interpreted liberally in favour of the exemption / deduction to a taxpayer and deduction should not be denied on hyper-technical ground.
The Court further went on to observe that the word ‘assessee’ must be given wide and liberal interpretation so as to include the assessee’s legal heirs also. There is no warrant for giving too strict an interpretation to the word ‘assessee’ as that would frustrate the object of granting exemption.
The Court pointed out that that there were judgments of other High Courts giving benefit of Section 54F of the Income Tax Act when the house of an assessee is purchased jointly with his wife.
In view of the aforesaid discussion, the Court ruled that the exemption under section 54F is extendible to Kumar for the total consideration paid by him, for the purchase of the new asset (the residential property) in the joint name of himself and his wife. The appeal of the Revenue Department stood dismissed.
However, tax experts say that if both spouses have contributed to the purchase of a property, they can claim tax exemption in the proportion of their contribution.
The key takeaway is that it doesn’t matter in whose name the property stands, it is only the person who has effectively paid for the property that will be eligible to and can claim the tax deductions on the same. Often, in the case of properties bought on mortgage, just because of joint ownership, both husband and wife claim the interest deduction. Once again, here it needs to be ascertained which spouse has funded the property and the interest deduction has to be apportioned proportionally. Basically, it is effective ownership that counts and not merely what exists on paper.
The writer is director, Wonderland Consultants
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