As per the order, the assess had incurred the cost for making the house inhabitable before taking the possession. The Tribunal referred to another judgement passed by the Coordinate Bench in the matter of Shrinvas R Desai vs ACIT (OSD) wherein it was held that there is no restriction on the buyer from incurring any construction expenditure on improvisation or supplementary work of a ready-made uni. It was held that such additional expenses would be eligible to be considered as a qualifying investment under Section 54 of the Act.

Allowing the assesses’ appeal for exemption of Rs 14 lakh as the expenses incurred on making the house habitable. The Tribunal said “the assessee is found to be entitled to the exemption” as the incurred expenditure was within the stipulated time frame and the expenses were not doubted by authorities.

What Section 54 says

The Section 54 of the Income Tax Act 1961 provides that a seller can avail of tax exemption on the capital gain realised from the transfer of a residential house property. Individuals and Hindu Undivided Families can avail this benefit on investing the capital gains from residential assets for purchasing or construction of another residential property.

According to experts, the above benefit is not available to partnership firms, companies, limited liability partnerships and other such bodies.

Total exemption

According to Finance Act 2020, the long term capital gains tax exemption benefit on investments made in two residential house properties has been limited to Rs 2 crore. Experts say that this benefit is only available on the transfer of a long-term capital asset.

In case the property is not eligible for benefit under Section 54, the gain will be taxed at the rate applicable to LTCG on sale of residential property. The current rate is 20 percent plus surcharges and cess as applicable.

No benefit for speculators

Only long term buyers can avail the tax exemption benefit. Experts say that the benefit under Section 54 would be withdrawn in case someone claims exemption but transfers the new house within three years from the date of possession or the completion of construction.

No benefit for small alterations

As per the ITAT ruling, capital gains tax exemption can be claimed for making the property habitable. However, if the property is already habitable and you carryout minor alterations then no benefit can be claimed, according to experts.

What taxpayers should do

Currently, Section 54 does not explicitly mention the tax exemption benefit on incurred cost for making the new property inhabitable. However, several orders suggest taxpayers can avail this benefit. One should consult his/her tax advisor to take benefit of this exemption.