June 2017 | Back to all Real Estate Articles
In a relief to many flat buyers, the Income-tax Appellate Tribunal recently held that if a cheque is encashed by the builder after the deadline for filing income-tax return, it will not debar the taxpayer from claiming I-T exemption available on reinvestment of long term capital gains (LTCGs) in residential property.
Tax experts say this does not apply to post-dated cheques. Builders typically ask for post-dated cheques, if a flat is booked during the construction stage.
If a taxpayer makes a profit on sale of a residential house s/he has held for two years (the 2017-18 budget has reduced the holding period from the earlier three years), it is treated as an LTCG, which is taxable at 20% with an adjustment for inflation, referred to as indexation benefits.
But, if a component of LTCG is reinvested in another house in India within two years of the sale of the original house, the taxpayer can claim a tax exemption under section 54 of the I-T Act. Consequently, the taxable component of LTCGs is reduced to the extent of the reinvestment, which results in a lower tax outgo. In case the amount is not reinvested by the due date of filing I-T return, the taxpayer has to deposit it in a separate bank account under the capital gain account scheme.
The ITAT heard the case of Akansha Ranju Pilani who had earned Rs 1.6 crore on sale of property on August 2, 2011. He purchased another residential property on July 26, 2012 for Rs 2.75 crore and claimed tax exemption. While he had issued several cheques for the purchase price to the builder on the date of the agreement, cheques for Rs 62.21 lakh were encashed by the builder after the expiry of the date for filing the I-T return.
The I-T officer held that as the unutilised amount of Rs 62.21 lakh was not deposited in a separate bank account, to this extent the tax exemption claimed by Pilani should be disallowed. The taxpayer that "once cheques have been issued, his liability is fulfilled and it constitutes utilisation of the sale proceeds of the old house."
He pointed out that the cheques were issued to the builder on July 26, 2012, prior to the due date of filing the I-T return, which fell on August 31. The ITAT thus decided in favour of the taxpayer.
"This decision relies on a tenet set by the Supreme Court that the date of payment in case of a cheque is its date of delivery. On encashment by the recipient the payment is complete, but it relates back to the date of handing over of the cheque (or delivery date)," explains Gautam Nayak, tax partner, CNK & Associates.
However, Nayak sounds a word of caution. "If post-dated cheques have been given to the builder, then the taxpayer should ensure that the unutilised sum is deposited with a separate bank account before the due date of filing the I-T return. In such cases, the date of delivery will be the date mentioned on the cheque."