ITAT: Sale Proceeds from Depreciated Assets Qualify for Tax Benefits

26 Aug 2024 CW Team

The Income Tax Appellate Tribunal (ITAT) has ruled that proceeds from the sale of depreciated assets qualify for tax benefits if they are invested in the purchase or construction of a new residential property. The decision provides much-needed clarity for taxpayers looking to reinvest proceeds from assets that have lost value over time.

The ruling stems from a case where a taxpayer claimed capital gains exemption under Section 54F of the Income Tax Act. This section allows for tax exemption on long-term capital gains if the proceeds are reinvested in a residential property. The taxpayer had sold a depreciated asset and used the proceeds to purchase a new home, seeking tax relief on the reinvested amount.

The tax authorities initially rejected the claim, stating that the asset was depreciated and, hence, did not qualify for tax benefits. However, the ITAT overruled this decision, stating that the nature of the asset?s depreciation does not negate the taxpayer's eligibility for benefits under Section 54F. The tribunal emphasised that the purpose of the law is to encourage reinvestment in residential properties, regardless of the asset's prior depreciation.

This ruling is significant as it sets a precedent for similar cases, providing relief to taxpayers who seek to reinvest their capital in real estate, even from depreciated assets. It also underscores the importance of the provisions under Section 54F, which aim to incentivize investment in residential properties.

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