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In the last article we discussed how exemption can be availed of by an owner when he hands over his property to a developer for development and in turn receives built up area which is in the nature of residential premises. Several more interesting issues arise in this.
The first condition, if you recall, for obtaining exemption is that you should invest the proceeds in a 'residential property' within a given period.
It is not necessary that you should invest in a residential property which you shall use for your own residence. You may even let out the property.
The next issue is: what is residential? If you invest in a shop, plain land, or office premises it is not residential. What you should invest in is a house property. You should purchase or build a house or an apartment which is meant for residential use and is built like one.
You invest in an apartment and let it out. The tenant uses the apartment for his office. Do you get exemption? Yes, because your wanted to, and did, buy an apartment intended for residential use. Having done so, if the tenant uses it for an office you cannot lose exemption.
So, the nature of the property purchased decides if you will get exemption.
You get exemption for investment in 'a' residential property. What is the 'a' property? Normally, such discussion would be considered silly. But not in tax - because reality offers weird or difficult situations and tax means money. And taxpayers want to save the most tax.
In most development agreements, owners receive a share of the total built up area, say 50%. This obviously will be a number of apartments and not one. Taxpayers then want to claim exemption for more than one apartment. Can it be done?
If the owner has received more than one apartment, then plainly, the exemption is available for only one apartment.
However, there be situations in which more than one apartment can be treated as 'a residential property'.
Often two adjoining apartments are acquired or received to be used as one apartment. Walls separating the apartments are also often not built or broken down to ensure that the two become one large apartment. In such an event, both apartment should be treated as a residential property.
There can been cases where the apartments are adjoining but separate, even on separate floors. But the separate apartments are occupied by family, perhaps a large one. The family may have one kitchen and dining area. If so, it is one family living in physically separated places. The separated apartments can arguably be considered to be 'a residential property'. Such has been the view of the Tribunal in one case.
So, what the issue turns on is the intention of the owner in using the apparently separate apartments. If the intention is to use the separate apartments as one dwelling unit, then it be considered to be a property. If not, not.
However, my advise to you is this: use the logic explained above only if reality matches it. Do not, repeat do not, stretch reality to save tax. It will take you nowhere.
The investment is allowed whether you buy a house or construct one.
You can purchase a house within one year before the date of transfer or two years after the date of transfer. Purchase would mean all necessary ingredients of acquisition without necessarily your getting a registered sale deed in your favour. If you have paid consideration and taken possession, it would be enough. The whole idea is that you should have purchased in a practical sense and not a technical sense. This is important as sale deeds nowadays get delayed beyond imagination.
If you construct a house, it should be done within a period of three years the date of transfer. Thus, if you construct before the date of transfer, it would be worthless as a tax saving.
The house should be complete within the time specified as a house.
It may happen that you buy and construct. For instance, a person bought a house and built an additional floor as an extension. The matter went to the High Court which held that both purchase and construction should be allowed.
Construction means completion of construction. You can start construction before the date of transfer, but should complete it after that date. However, it is always advisable that the bulk of the work is done after the transfer - that way you can avoid litigation.
Construction cost also includes cost of the plot. This view is endorsed by the department which has said that land is an integral part of the house.
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