Kolkata Woman Pays 0 Tax On Rs 26 Cr Stock Sale Profit: I-T Dept’s Objections Overturned By ITAT

Making gains in the stock market consistently requires patience, strategy, and diligence. However, even after successfully navigating volatility, tax obligations like Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) eat into the gains.

However, in a rare instance, a Kolkata-based businesswoman managed to not only earn gains from the stock market but also bring her entire tax liability to zero, paying zero taxes on her windfall.

Rs 26 Crore Profit, Rs 0 Tax

According to a copy of the proceedings of the case titled Saroj Goenka vs ITO, Ward-30(1), Kolkata, accessed by Outlook Money, a businesswoman named Saroj Goenka accrued a profit by selling 3.6 million shares of Emami on July 13, 2020. Notably, Goenka is a part of the promoter group of the Emami Group.

The shares were sold for Rs 33,77,64,511, which resulted in a long-term capital gain of Rs 26,77,72,881. However, instead of paying the LTCG, Goenka reinvested the wealth into the joint construction of a new residential property located in Kolkata.

According to the court document, Goenka invested Rs 53,86,80,198 in her residential property till March 31, 2021. The residential property was completed on June 9, 2022. Following the construction of her residence, she filed for a full tax exemption under Section 54F of the Income Tax Act, 1961.However, the Income Tax Officer (ITO) objected to her exemption claim. The officer denied the tax benefit and stated that Goenka already owned two other immovable properties.

The ITO also claimed that Goenka began the construction of her new house more than five years ago and thus was ineligible for investments made outside the standard window. The tax department added that the construction costs were not directly funded by the specific bank proceeds of the stock sale. The Commissioner of Income Tax (Appeals) later upheld the denial and additionally alleged that the shares had been gifted to her by her spouse months prior to the sale.

However, when the matter was brought before the Income Tax Appellate Tribunal (ITAT) Kolkata Bench, Goenka countered the allegations. The counsel argued that the property at 110 Southern Avenue was jointly held with other family members and therefore not barred by the law. For the second property, she proved it was an industrial vacant land parcel, meaning it did not qualify as a residential house.

Her legal team further argued that Section 54F does not dictate when a house construction must start, but only requires it to be completed within three years of the asset sale. They also cited previous instances to prove that the law does not require investors to use the proceeds from a stock sale for construction, as long as an equivalent amount is invested.

She further showed that the shares were gifted by her husband's brother, not her spouse. The ITAT bench ruled completely in favour of Goenka and set aside the previous orders, directing the assessing officer to delete the entire tax addition.

What Is Section 54F of the I-T Act?

Section 54F of the Income Tax Act is a provision which seeks to promote investment in real estate. The section states that if an individual or a Hindu Undivided Family (HUF) earns LTCG from the sale of any capital asset, such as equities, mutual funds, gold, or commercial land, the gains can be tax-exempt if the net consideration is redirected into a residential property.

In order to be eligible for this benefit, the taxpayer must purchase a residential house within one year before or two years after the sale date, or construct a residential house within three years from the date of the asset transfer. The section is highly useful for stock market investors, as gains from the sale of equities can attract LTCG and STCG and reduce the actual returns generated from the transaction.

What Investors Should Keep In Mind

While Section 54F offers immense relief, investors must take a mental note of several rules associated with the section. Firstly, the investor must not own more than one residential house, excluding the new residential property, on the exact date when the original asset is transferred.

As seen in Goenka's case, fractional or joint ownership of a family property or owning vacant industrial land does not make a selling shareholder ineligible. However,  owning multiple residential units can. Secondly, if an investor chooses the construction route, the physical construction of the house must be fully completed within three years from the date of the stock or asset sale.

Investors do not need to mandatorily route the exact cash proceeds from their stock brokerage account straight into the cement and bricks of the new property, as long as an amount equivalent to the net consideration is invested into the house.

Lastly, any part of the net consideration that is not utilised for purchase or construction before the due date of filing the income tax return has to be mandatorily deposited into an authorised Capital Gains Accounts Scheme to safely preserve the exemption.