Mr Patel, who hails from Khatodara in Surat, Gujarat, is a co-owner of his late mother’s land in Althan. This plot, spanning 9,510 sq. meter was originally bought for Rs 21.17 lakh by his mother on March 31, 2008. After her death, he inherited 50% of this land and decided to use it as stock for his real estate business. On April 1, 2017, he legally converted this land into stock-in-trade and included it in his real estate business.
For those who might not know, if you want to convert any inherited land held as a capital asset to stock-in-trade for business use, you need to first convert the capital asset into a business asset. This means you need to follow the fair market value and other tax laws. Mr Patel followed the legal requirements and reported a long term capital gain (LTCG) of Rs 5.06 crore under Section 45(2). However, he did not pay any tax on this LTCG.
The reason he avoided paying any tax on this Rs 5.06 crore LTCG is because Patel filed his income tax return (ITR) claiming that he had purchased another land for Rs 2.13 crore and constructed a house on that land which pushed his total construction cost to Rs 5.06 crore, making him eligible for a full tax exemption under Section 54F.
The following are the reasoning and calculations given by Patel to the tax department:
