Legal Advice

Long term capital gain tax in selling old house

Shivendra Pratap Singh


High Court Lucknow


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Question asked on: 16 Nov, 2015

There was a house in the name of my grandfather. He made a will and gave life interest in the property in the favour of our mother, thereafter her death it was vested in us with the absolute right.

According to will we are empowered to sell it or use it any legal manner. To use of the property we have decided to sell it to another person and buy another flat for each of us in separate use.

We made an agreement in the year 2008 for sell of this house in Rs 4 crore. We got 2.5 crores as earnest money and we bought three separate flats and gave 25% booking amount out of that earnest money.

But sale completed in 2011, we were unable to execute that agreement due to some technicalities. Now I received a notice from Income tax department that I have hot utilised that amount within 2 years from the date of sell.

Income out of the sell of the old house is included in the head of income from house property if they sell amount did not utilise within 2 years from the date of transfer of property. The word “transfer” is defined in two acts in different intentions. The Transfer of property act defined transfer in term of actual transfer of property but income tax act defines it in a different term.

According to section 2 (47) of the Income-tax Act, the transfer takes place when any right in respect of any capital assets is extinguished and that right is transferred to someone. it would amount to transfer of a capital asset. Section 54 of the Income-tax Act provides an exemption of tax on long term capital gain. according to section 54, no tax is levied on the income of capital gain when the total gain is reinvested in purchase or construction of the house before 1 year or within 2 years from the date of transfer of property.

In your case property is transferred on the date when you agreed to sell because on that day you received earnest money and signed an agreement. Signing or executing an agreement to sell property created a right in the favour of vendee and vendor is restrained from selling that property to someone else because vendee has the legitimate right in the property and he can execute it through the specific performance of a contract. [Oxford university press vs CIT 2001; 3SCC].

The transfer is completed on the date of agreement to sell. It does not matter that complete transfer takes effect after three years. You should contact a lawyer and submit your reply to the notice. You are eligible to get exemption of long term capital gain tax under section 54.