Is Exemption u/s Sec. 54 Allowed Even if New House is purchased from Borrowed Funds?

Section 54 provides relief to a tax payer who gets gains on account of sale of residential house. The provision u/s 54 provides that tax will not be imposed on long term gains on sale of residential house up to the extent gains same is utilised for buying house within two years from the date of transfer of sold assets or constructing the house within three years from the date of transfer of sold assets.
But the question is whether a tax payer has to spend on new residential house the same money which he got out of sale or the tax payer just needs to buy a house within specified period, no matter, from where the money has come.
Recently, Bombay High Court in CIT vs. Dr.P.S.Pasricha has confirmed the decision of Mumbai Tribunal that for claiming benefit u/s 54(1), law does not make it mandatory that the assessee must use the same funds as received from sale. The source of funds is not relevant.

Relief for elderly: Income from Reverse Mortgage to be tax-free

The finance ministry has notified that the Reverse Mortgage Scheme would exempt from tax the income they earn by mortgaging their property.
Reverse mortgage would not amount to transfer and the stream of revenue received by the senior citizen would not be income.
"Reverse Mortgage means mortgage of a capital asset by an eligible person against a loan obtained by him from an approved lending institution," the CBDT in its notification has said. Further, the loan under reverse mortgage should not be for more than 20 years.
Accordingly, the CBDT now said that under the scheme, a capital asset would mean a residential house property which is located in India and individuals or married couples above 60 years of age will be considered as senior citizens. This will imply that the scheme will not be regarded as transfer of a capital asset and so would not attract capital gains tax. Also, the loan amount will be exempt from income tax for the borrower.
The CBDT notification comes into force from 15 April, 2008 and loans in 2007-08 will also be given exemption.

Court rejects move to tax dividend stripping

The Bombay High Court has ruled that losses arising from the purchase and subsequent sale of mutual fund units, soon after receiving dividend on the units, can be allowed as an expense for deduction from taxable income.
In all its tax claims, the I-T department was of the view that losses arising from such transactions amounted to artificial or coloured transactions for evading taxes and was not a sound commercial decision.
For the assessment year 2001-02, Mumbai-based broking firm Walfort Share, purchased 4.55 billion units from Chola MF on March 23, 2000, at Rs 17.57 per unit totalling Rs 8 crore. On the same day, Chola MF distributed a dividend amount of Rs 1.8 crore.
On the next day (March 27, 2000), the assessee sold the units by way of redemption and Chola MF repurchased them at Rs 12.97 each and paid Rs 5.90 crore as the repurchase price. The assessee (Walfort) had also received Rs 2.3 crore as an incentive for purchase and sale of such units.
At the same time, on the units sale, the broking firm made a loss of around Rs 2.1 crore (Rs 8 crore less Rs 5.90 crore). Since the dividend income was exempt from tax under Section 10(33) of the I-T Act, the assessee claimed business loss of around Rs 2.1 crore to be set off against other income.
However, the tax authorities were of the opinion that the loss was created through pre-designed set of transactions to avoid paying tax and added it back to the trading income of the assessee. However, HC in its ruling in August was of the view that such transactions need to be seen with reference to Section 94(7) that deals with tax avoidance transactions.
The section provides that where the units are purchased and sold within a stipulated time and the income from such units is exempt, then, while computing losses of such persons, the losses to the extent of the income received should be ignored.
Thus, losses in excess of the income should be allowed for deduction.