One of my clients has bought a house property in the year 2001. However in the year 2013 , he demolished the house completely and built a triplex house with 3 floors. He sold 2 of the above houses in 2013. Whether the sale amounts to  Short term capital gains or Long term capital gains? How to Compute the gains ? Whether Indexation benefits are available? 

Posted 2 years, 10 months ago by Rakesh Bharadwaj


As per me the asset is Long term. House property was bought in 2001 and later only the improvement was done.

Improvement cost will be indexed only of 2013. But the house property will be considered as long term.

Any input by Pulkit or Vedant?

Posted 2 years, 10 months ago by Rahul Rai


@Rakesh 

 

You may refer to a similar case law CIT v/s DL Ramachandra Rao (1999) 236 ITR 51(Mad). It was decided gain on Sale of land is Long term capital gain. sale of building is Short term capital gain.

Posted 2 years, 10 months ago by Vedanta Deshika


We cannot claim Indexation (for  cost of improvement)  for LTCG in case of land, For calculating STCG on building , we can take cost of construction as cost of acquisition.

Posted 2 years, 10 months ago by Vedanta Deshika


But how can we say that building was short term? He purchased land along with building, building was only improved.

Posted 2 years, 10 months ago by Rahul Rai


@Rahul Rai,

This was the decision of Madras high court. The logics and reason scan be referred to in the judgement. I am attaching herewith a copy of the case

 Commissioner_Of_Income_Tax_vs_Dr._D.L._Ramachandra_Rao_on_19_February,_1997.PDF 

 

 

Posted 2 years, 10 months ago by Vedanta Deshika


The question says bought a house property (Land with house). In the given case law i believe only the land was bought and not house property.

The land and house property both have to be long term, land was bought in 2001 and also the house on it.

Posted 2 years, 10 months ago by Rahul Rai


@Rahul Rai

Its a case with similar facts and circumstances. It is noteworthy here to note that in both the cases the house property has been sold and there arises doubt whether it will be a Long term or short term capital asset 

Posted 2 years, 10 months ago by Vedanta Deshika


@Vedanta

Agreed that asset constructed before 3 years is short term-its in part with case law, but my doubt is asset was already existing when the property was first bought. Buyer just did an improvement to the existing asset.

Posted 2 years, 10 months ago by Rahul Rai


@Rahul Rai

How can u consider it just as an Improvement. the building was completely demolished and built from scratch. 

 

Posted 2 years, 10 months ago by Vedanta Deshika


Just have the doubt. Demolishing and rebuilding is formation of a new asset or improvement over the old asset?

If the formation of building is new asset, than demolition cost will be added to cost of purchase of new asset?

Posted 2 years, 10 months ago by Rahul Rai


@Rahul Rai

I think our learned CA Pulkit Sharma only can take up such a great question 

Posted 2 years, 10 months ago by Vedanta Deshika


@ Rahul Rai

The cost incurred in demolition of old house will be treated as cost incurred to aquire the new property.

Posted 2 years, 10 months ago by CA Pulkit Sharma


My silent reply would be Please read sections 2(47), section 111A, section 112, Section 55 - meaning of Cost of Improvement.

The plain reading that goes under section 55 is addtions or alterations to a capital asset as defined under 55(2)(i) and not bringing all together a new asset in existance of the previous asset.

Pls. read, i am 100% sure the doubt will get resolved .

 

Regards,

CA. S Kamath

skamath@saasintellect.in

Posted 2 years, 10 months ago by CA Sundeep Kamath


@ Sundeep

Being an accountant certain things bunces. Would be thankful if you can explain the provisions.

A big fan of you on this site.

Posted 2 years, 10 months ago by Rahul Rai


Your Reply:

You need to be logged in to reply.