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Under the law it is not a requisite under section 54 of the Income tax Act that purchase of residential house cannot precede the date of transfer of the residential house that may fetch long term capital gains.

The Madras High Court in C Aryama Sundaram v CIT (2018) 407ITR1 sometime back held that it is axiomatic that section 54(1) did not contemplate that the same money received from the sale of a residential house should be used in the acquisition of new residential house.

The Court went on to hold that had it been the intention of the Legislature that the very same money that had been received as consideration for transfer of a residential house should be used for acquisition of the new asset, section 54(1) would not have allowed adjustment or exemption in respect of the property purchased one year prior to the transfer, which gave rise to the capital gains or may be in the alternative had expressly made the exemption in case of prior purchase, subject to the purchase from any advance that might have been received for the transfer of the residential house which resulted in the capital gains.

Thus one may transact a purchase of residential house transactions even prior to sale of previously held residential house to safeguard capital gains exemption.  If the amount of capital gains was equal to or less than the cost of the new residential house, including the land on which the residential house was constructed, the capital gains were not to be charged under section 45 .


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