Question & Answer

CA H. N. Motiwalla

Profit on Sale of Property used for Residence (S 54)

Question 1:

An individual assessee sold residential property, held for more than two years, during F.Y. 21-22. He invested the capital gain in residential property during the F.Y. 22-23 i.e. on June 30, 2022 and availed , the benefit of S. 54.

Now, the assessee intends to gift the newly acquired residential property to his son i.e. before three years from the date of acquisition. Will there be any implication on claim of deduction under section 54 ?


Section 54(1) of the Income tax Act 1961 reads as under:

“Subject to the provisions of sub section (2) where, in the case of an assessee being an individual or a Hindu Undivided Family, the capital gain arises from transfer of long term capital assets, being building or land appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” hereafter in this section referred to as the original asset and the assessee has within the period of one year before or two years after the date on which the transfer took place purchased or has within a period of three years after the date constructed, one residential house in India then instead of capital gain being charged to income tax as income of the previous year in which transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say –

  1. If the amount of capital gain is greater than the cost of the residential house so purchased or constructed hereafter this section referred to as new asset the difference between the amount of capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil, or
  2. If the amount of capital gain is equal to or less than the cost of new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain”

Similarly the word transfer has been defined in section 2(47) of the Act, as:

“transfer in relation to a capital assets include:

  1.  the sale, Exchange or relinquishment of the asset; or
  2.  the extinguishment of any right therein, or “

The word “relinquishment” has been tested by the Supreme Court in CIT v. Rasiklal Maneklal (HUF) [177 ITR 198 (SC)] wherein, it has been held that “a relinquishment takes place when the owner withdraws himself from the property and abandons his rights thereto. It presumes that the property continues to exist after relinquishment.

Thus reading the section and judgments of the Supreme Court it is clear that when the assessee (father) gifts his new residential house to his son within three years, he relinquishes his right in the property and thus he will loose the benefit of exemption claimed under section 54 of the Act.

Question 2

What should be the situs of an intangible asset in case of transfer of an intangible asset?


A licence to use a trademark was granted to Indian company by Australian Company. The question arose before the Delhi High Court in CUB Pty Ltd v. UOI [388 ITR 617] whether transfer of a trademark would be taxable in India?

The Court held that in terms of section 9(1) (i) of the Act, all income accruing or arising, directly or indirectly inter-alia through the transfer of capital asset situate in India, shall be deemed to have accrued or arisen in India. The issue of situs of an intangible asset, such as the intellectual property rights in trademarks, brands, logos etc. is indeed a tricky one. In so far as the tangible assets are concerned, there is absolutely no difficulty. They exist in physical form and their existence is at specific location. Thus fixing their situs does not pose any problem. An intangible capital asset, by its very nature, does not have any physical form. Therefore, it does not exist in a physical form at any particular location. The legislature, where it wanted to specifically provide for a particular situation, as in the case of shares, where the share derives directly or indirectly, its value substantially from asset located in India, it did so. There is no such provision with regard to intangible assets, such as trademark, brands, logos i.e. intellectual property rights. Therefore, the well accepted principle of “Imobilia Sequntur personam” would have to be followed. Thus the situs of owner of an intangible assets would be the closet approximation of the situs of an intangible asset. This an internationally accepted rule, unless it is altered by local legislation. There is no such alternation in Indian context.

Thus, reading the above judgment, it is clear that when the intangible asset is transferred the situs of the owner is to be considered.