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If the house property which was used for residential purpose by the assessee or his parent is sold and from the long term capital gains earned, another house property is purchased the capital gain is not taxed. In the case of CIT v. Chandanben Maganlal (120TAX38) the assessee first purchased a house property from a cash gift from her husband. Later she sold the property and to save itself from capital gains liability purchased a 15% undivided share in another house owned by her husband/son. The assessee had been living in the same house with her husband before and even after such transaction. The assessing officer denied exemption on the pretext that:
a) The assessee had not purchased an new property;
b) The assessee had not purchased only a portion and not the property in toto.

The Gujarat High Court held that it is the choice of the assessee whether he buys the entire property or only a portion of it. All that is required is that the property must be a residential. In this case the transaction between the husband and the wife is held to be bonafide.

This case offers a lawful planning device to the assessees even after considering the clubbing provisions of the Act. The Courts have held that income should be computed first in the hands of the transferee (spouse/minor) who is entitled to the benefits under the Act and the clubbing provision will have application after all the allowable deductions are considered in their hands.

It is therefore advisable to plan purchase of property in joint names. For this purpose the husband can gift the initial sum to the spouse for making her share of investment. On sale at a later date both of them can enjoy separate capital gains exemptions.

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