CAPITAL GAINS –Issues u/s 54 and 54F
BY,
CA NAVEEN KHARIWAL G
MOB: 9880683725
EMAIL ID: naveenkhariwalg@gmail.com
1
SECTION 54:
“(1) [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 the transfer of a long-term capital asset,
being buildings or lands appurtenant thereto,
and being a residential house,
the income of which is chargeable under the head "Income from house
property", and
the assessee has within a 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 that date constructed, a
residential house, then],
instead of the capital gain being charged to income-tax as income of
the previous year in which the transfer took place,
it shall be dealt with in accordance with the following provisions of
this section, that is to say,—
2
(i) if the amount of the capital gain [is greater than the
cost of [the residential house] so purchased or constructed, the
difference between the amount of the 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
(ii) if the amount of the capital gain is equal to or less than
the cost of the 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.
3
[(2) The amount of the capital gain which is not appropriated
by the assessee towards the purchase of the new asset made
within one year before the date on which the transfer of the
original asset took place, or
which is not utilised by him for the purchase or construction of
the new asset before the date of furnishing the return of income
under section 139,
shall be deposited by him before furnishing such return [such
deposit being made in any case not later than the due date
applicable in the case of the assessee for furnishing the return of
income under sub-section (1) of section 139] in an account in
any such bank or institution as may be specified in, and
utilised in accordance with, any scheme which the Central
Government may, by notification in the Official Gazette, frame in
this behalf and
such return shall be accompanied by proof of such deposit;
and, for the purposes of sub-section (1), the amount, if any,
already utilised by the assessee for the purchase or construction
of the new asset together with the amount so deposited shall be
deemed to be the cost of the new asset :
4
Provided that if the amount deposited under this
sub-section is not utilised wholly or partly for the
purchase or construction of the new asset within the
period specified in sub-section (1), then,—
(i) the amount not so utilised shall be charged
under section 45 as the income of the previous year in
which the period of three years from the date of the
transfer of the original asset expires; and
(ii) the assessee shall be entitled to withdraw such
amount in accordance with the scheme aforesaid.”
5
• Profit on sale of property
used for Residence
Section 54
Basic Conditions
Individual or HUF
Transfer of long term capital asset
buildings or lands appurtenant thereto
Residential house
The income of which is chargeable under the head “income from
house property”
Compliance for exemption
Purchase a residential house
- one year before
- two years after
the date of transfer
constructed a residential house
- with in period of 3 years
after the date of transfer
Restriction on transfer of new assett
6
Exemption U/s 54
Capital Gains > Cost of the new residential house
- diff liable to tax u/s 45.
Capital Gains < Cost of the new residential house
- No taxability u/s 45.
7
New Asset
-
Not to be transferred with in a period of 3 years of its
purchase or construction as the case may be
- In case transferred:
Gain to be short term capital gain
Cost of acquisition depends upon extent of
exemption availed at the time of its acquisition
- if fully exhausted
- Nil
- Otherwise
- Balance
8
Section 54F:
Capital gain on transfer of certain capital assets not to be charged in
case of investment in residential house.
54F. (1) [Subject to the provisions of sub-section (4),
where, in the case of an assessee being an individual or a Hindu undivided
family],
the capital gain arises from the transfer of any long-term capital asset,
not being a residential house (hereafter in this section referred to as the original
asset), and
the assessee has, within a 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 that date constructed, a residential
house, the capital gain shall be dealt with in accordance with the following
provisions of this section, that is to say,—
(a) if the cost of the new asset is not less than the net consideration in
respect of the original asset, the whole of such capital gain shall not be charged
under section 45 ;
(b) if the cost of the new asset is less than the net consideration in respect of the
original asset, so much of the capital gain as bears to the whole of the capital gain
the same proportion as the cost of the new asset bears to the net consideration,
shall not be charged under section 45:
9
 (2) Where the assessee purchases, within the period
of [two years] after the date of the transfer of the
original asset, or
constructs, within the period of three years after such
date, any residential house,
the income from which is chargeable under the head
"Income from house property", other than the new
asset,
the amount of capital gain arising from the transfer of
the original asset not charged under section 45 on the
basis of the cost of such new asset as provided in
clause (a), or, as the case may be, clause (b), of subsection (1), shall be deemed to be income chargeable
under the head "Capital gains" relating to long-term
capital assets of the previous year in which such
residential house is purchased or constructed.
10
 (3) Where the new asset is transferred within a period of three years from
the date of its purchase or, as the case may be, its construction,
the amount of capital gain arising from the transfer of the original asset not
charged under section 45 on the basis of the cost of such new asset as
provided in clause (a) or, as the case may be, clause (b), of sub-section (1)
shall be deemed to be income chargeable under the head "Capital gains"
relating to long-term capital assets of the previous year in which such new
asset is transferred.]
[(4) The amount of the net consideration which is not appropriated by the
assessee towards the purchase of the new asset made within one year before
the date on which the transfer of the original asset took place, or
which is not utilised by him for the purchase or construction of the new
asset before the date of furnishing the return of income under section 139,
shall be deposited by him before furnishing such return [such deposit being
made in any case not later than the due date applicable in the case of the
assessee for furnishing the return of income under sub-section (1) of section
139] in an account in any such bank or institution as may be specified in, and
utilised in accordance with, any scheme which the Central Government may,
by notification in the Official Gazette, frame in this behalf and such return
shall be accompanied by proof of such deposit ; and,
for the purposes of sub-section (1), the amount, if any, already utilised by
the assessee for the purchase or construction of the new asset together with
the amount so deposited shall be deemed to be the cost of the new asset :
11
Provided that if the amount deposited under this sub-section is
not utilised wholly or partly for the purchase or construction of the
new asset within the period specified in sub-section (1), then,—
(i) the amount by which—
(a) the amount of capital gain arising from the transfer of the
original asset not charged under section 45 on the basis of the cost
of the new asset as provided in clause (a) or, as the case may be,
clause (b) of sub-section (1),
exceeds
(b) the amount that would not have been so charged had the
amount actually utilised by the assessee for the purchase or
construction of the new asset within the period specified in subsection (1) been the cost of the new asset,
shall be charged under section 45 as income of the previous year
in which the period of three years from the date of the transfer of
the original asset expires ; and
(ii) the assessee shall be entitled to withdraw the unutilised
amount in accordance with the scheme aforesaid.
12
Profit on sale of capital asset other than
residential house
Section 54F
Basic Conditions
- Individual or HUF
- Transfer of long term capital asset
- Other than residential house
Compliance for exemption
- Purchase a residential house
- one year before or
- two years after
the date of transfer or
- constructed a residential house
- with in period of 3 years
after the date of transfer
- Eligibility as well as other conditions to be fulfilled
13
Conditions for section 54F
Assessee should not own more than one residential house
other than the new asset on the date of transfer of the
original asset
Should not purchase/ construct any other residential house
within two years / three years respectively of the transfer
of the original asset
Restriction only for RH where income chargeable under the
head “Income from house property”
New asset not to be transferred before three years from
the date of its purchase/ construction, in case transferred
LTCG exempted earlier to be taxed in the year of sale
14
14
Exemption U/s 54F
Net consideration > Cost of the new
residential house
- Proportionate diff liable to tax u/s 45.
Net consideration < Cost of the new
residential house
- No taxability u/s 45.
15
15
SCOPE OF THE PROVISIONS
In CIT v Aravinda Reddy (TN), the Supreme Court Succinctly
Summed up the object, purpose and symmetry of the section in
the following words:
“if you sell your house to make a profit, pay Caesar what is due
to him. But, if you buy or build another, subject to the conditions
of section 54(1), you are exempt.”
The language, the purpose and the symmetry of the section was
therefore held to be plain. Thus, if the assessee buys and also
further constructs a house which is used for his residence,
exemption under this section cannot be refused.
16
Self financing scheme - DDA. [S. 2(29A), 2 (42A)]
Allottee of a flat under self financing scheme of the DDA
gets title to the property on issuance of allotment letter
as clarified vide Circular No. 471 dt 15-10-1986, and
therefore, capital gain arising on sale of flat by the
assessee on 6th Jan., 1989 which was allotted to him on
2nd Feb., 1982, by issuance of an allotment letter was a
long term capital gain, irrespective of the date of
allotment of specific flat number and delivery of
possession on 15th May, 1986, assessee was entitled to
exemption under section 54 on reinvestment of sale
proceeds in another house. ( A. Y. 1989-90).
- Vinod Kumar Jain v. CIT (2011) 244 CTR 346 / (2010)
195 Taxman 174 / 46 DTR 185 (P&H)(High Court)
17
Circular : No. 471 [F. No. 207/27/85IT(A-II)], dated 15-10-1986.
Investment in a flat under the self-financing
scheme of the Delhi Development Authority to
be treated as construction for the purposes of
capital gains.
Cost of the new asset is the tentative cost of
construction.
18
Circular : No. 672, dated 16-12-1993
Allotment of flats/houses by co-operative
societies and other institutions, whose schemes
of allotment and construction are similar to
those of DDA, should be treated as cases of
construction for purposes of sections 54 and
54F .
19
Is investment in more than one house possible U/s 54 ?
In favour of revenue
• Exemption u/s 54 can be claimed only in respect of one house provided
conditions of Sec 54 are satisfied.
K.C. Kaushik v ITO 185 ITR 499 (Bom.)(1990)]
• Assessee was not entitled to exemption in respect of two independent residential houses
situated at different locations. (A. Y. 2005-06)
-Pawan Arya v. CIT (2011) 237 CTR 210 / 49 DTR 123 / 200 Taxman 66 (P&H)(HC)
-Allowed only for one flat.
-[Gulshanbanoo R. Mukhi v. JCIT 83 ITD 649 (ITAT- Mum) (2002)]
20
In favour of revenue
In Asstt. CIT v. Dr. P.S. Paricha (2008) 20 SOT 468 (Mum). The
taxpayer acquired two adjoining residential flats in one building and
gave them on rent to two different tenants. The Tribunal held that the
eligibility for exemption under section 54 would be limited to one flat
only; as it was occupied by two tenants the two flats could not be
treated as single residential unit.
InDy. CITv. Ranjit Vithaldas Lokupavan [2008] 25 SOT 420 (Mum.)
the taxpayer reinvested the capital gain in two different places. The
taxpayer claimed that, though the flats were located at different places,
a common kitchen and common prayer place were held for being
treated as single unit. The Tribunal rejected the taxpayer's claim for the
reason that they were not contiguous and could not be treated as one
unit. In result, the taxpayer became eligible for exemption only for the
amount invested in one residential unit.
21
In favour of the assessee:
In ITO v. Ms. Sushila MJhaveri [2000] 107 lTD 327 (Mum.)(SB)
the taxpayer acquired two adjoining flats and by removing the
intermediate walls with a common kitchen it was used as one
residential house. Since both the units were combined and made into
one unit, investment in two flats was held as eligible for exemption
under section 54.
In Prem Prakash Bhutani v. Asstt. CIT [2009] 31 SOT 38
(Delhi)(URO) even construction of several residential units meant
for family members and in the presence of evidence in the form of
ration card where all the residents were shown as belonging to same
family, it was held that such independent portions occupied by the
family members were eligible for exemption notwithstanding fact
that several independent residential units were occupied in the same
place.
22
In favour of the assessee:
The Karnataka High Court in CITv. D. Ananda Basappa [2009]
180 Taxman 4 the taxpayer transferred a residential building and
invested the long-term capital gain in acquisition of two residential
flats situated side by side by means of two separate registered sale
deeds and claimed exemption for both the residential units acquired.
Both the units were in the occupation of two different tenants. The
Court held that the apartments were situated side by side and the
builder had made necessary modifications to make them one unit by
fixing opening door in between those two apartments. The mere fact
that when the Inspector visited the premises they were occupied by
two different tenants was not a ground to hold that the apartments
were not one residential unit. The aspect of one registered sale deed
or more than one deed could not be determinative of the building
being considered as one residential unit or otherwise.
23
In favour of the assessee:
The Court referred to section 13 of the General Clauses Act, 1897
wherein it is declared that whenever the singular is used for a word,
it is permissible to include the plural. The expression 'a' residential
house should be understood in a sense that building should be of
residential nature and 'a' should not be understood to indicate a
singular number.
24
Dismissal of the special leave petition in Ananda Basappa’s (D)
case (2010) 320 ITR (St.) 19 was in following words.
“Their Lordships S.H. Kapadia and Aftab Alam JJ. Dismissed
the Department’s special leave petition against the judgment
dated October 20, 2008 of the Karnataka High Court in ITA No.
113 of 2004 reported in 309 ITR 329 whereby the High Court
held that the assessee was entitled to exemption under section
54 on purchase of two flats which were combined to make
one residential unit. CIT v Ananda Basappa (D) (2009) 309 ITR
329 (kar.)”
25
• CITv. Smt.Jyothi K.Mehta [2011] 12 taxmann.com 440
(Kar.) the taxpayer sold a residential house and acquired
two flats and claimed exemption under section 54 of the
Act. The Assessing Officer held that the taxpayer was
already owner of a residential flat at Bombay and she had
purchased two flats out of the sale proceeds. Hence, the
taxpayer was not entitled to claim exemption from the
capital gains. The Commissioner (Appeals) factually
found that the two flats were utilized as a common
residence and, hence, the taxpayer was eligible for
exemption under section 54. The Tribunal too, upheld the
order of the Commissioner (Appeals).
26
The Karnataka High Court held that the two flats acquired by a
taxpayer were situated side by side. The builder had effected
necessary modifications to the flats to make them one unit by
opening the door in-between the two apartments. It was further held
that the taxpayer could have purchased both the flats in one single
sale deed or could not have narrated the purchase of two premises as
one unit in the sale deed, did not make any difference. The Court
made reference to the precedent in CITv. Smt.KG.Rukminiamma
[2011] 196 Taxman 87/[2010] 8 taxmann.com 121 (Kar.).1n Smt.
KG. Rukminiamma's case (supra) it was held that the expression 'a
residential house' used in section 54 does not convey the intention of
the Legislature to mean a single residential house as eligible for
exemption. If that was the intention, the Legislature might very well
have used the word 'one' instead of 'a residential house'.
27
The Court in Smt. Jyothi K Mehta's case (supra) also made reference
to section 13(2) of the General Clauses Act, 1897 and held a new
asset acquired after the sale of the original asset can also be
buildings or lands appurtenant thereto, which also should be 'a
residential house'. The letter 'a' in the context it is used should not be
construed as meaning 'singular'. Being an indefinite article the
expression should be read in consonance with the other words
'buildings' and 'lands'. A further evidence that the two residential
units were situated side by side and necessary modifications were
made by means of a door in between the units to make it as a single
unit satisfied the requirements. The Court, accordingly, held that the
taxpayer was eligible for exemption under section 54 for both the
residential units which could be used as a single residential unit.
28
In favour of the assessee:
• Two adjoining flats converted into single residence, exemption allowed.
[ACIT v Mrs. Leela P. Nanda 286 ITR (AT) 113 (Mum)(2006)]
• Four flats purchased in same building but on different floors because of large size of
family, which maintained a common kitchen and a common ration card, exemption
allowed.
[Vyas (K.G.) v ITO 16 ITD 195 (Bom.)(1986)]
29
In favour of the assessee:
Contd….
• Several self occupied dwelling units which were contiguous
and situated in the same compound and with in the common
boundary having unity of structure should be regarded as
one residential house.
[Shiv Narain Choudhary v. CWT 108 ITR 104 (All)(1997)]
• More than one units converted into one single house
allowed for the purpose of sec. 54F as well.
[Neville J. Pereira v. ITO 8 Taxmann.com 68 (Mum. ITAT)]2010)]
30
Investment in two adjacent flats.
The assessee had purchased two adjacent flats which were
interconnected and used as one residential house.
Assessing Officer denied the exemption. On appeal the
Tribunal held that the Assessing Officer shall allow the
exemption in respect of both the flats if it is found that the
flats are being used as one residential house and the
investment was made by assessee himself. In appeal by
revenue the Bombay High Court up held the decision of
Tribunal.
- CIT v. Joe B. Fernandes ITA No. 1467 of 2007
dt. 10-12-2008 429 (2012) 43. B.BCAJ (January- 2012 – P. 41)
31
Investment in residential unit by merging 4 flats and
that too prior to handing over of the possession of
said residential unit
The assessee earned capital gain from sale of
ancestral property. The assessee claimed exemption
u/s 54F in respect of amount invested towards
purchase of four flats which were converted into one
residential unit. The AO allowed exemption only in
respect one flat by holding that flat were separate
and independent residential unit having separate
kitchen and entrance and thus, according to him flat
could not be said as adjacent flats even though
builders had referred them as composite unit.
32
• It was held by the Tribunal that, if requirement
of assessee family was met-out only by
enlarging residential unit by merging 4 flats and
that too prior to handing over of the
possession of said residential unit, then said
converted residential unit would be treated as
a residential house as stipulated u/s 54F and
thus, claim of the assessee was allowed. (AY
2007-08)
• ACIT v. Deepak S. Bheda (2012) 52 SOT 327
(Mum.) (Trib.)
33
Multiple sales & purchases of residential houses.
Though section 54 refers to capital gains arising from “transfer of
a residential house”, it does not provide that the exemption is
available only in relation to one house. If an assessee has sold
multiple houses, then the exemption under section 54 is available
in respect of all houses if the other conditions are fulfilled. If
more than one house is sold and more than one house is bought,
a corresponding exemption under section 54 is available.
However, the exemption is not available on an aggregate basis but
has to be computed considering each sale and the corresponding
purchase adopting a combination beneficial to the assessee.(A. Y.
2006-07)
- Rajesh Keshav Pillai v. ITO (2011) 44 SOT 617 / 60 DTR 402 / 141
TTJ 183 (Mum.)(Trib.)
.
34
Sale of commercial properties/capital asset
and Investment in two residential units
Assessee sold two commercial properties/ capital assets and
claimed deduction under section 54F on ground of purchase of two
residential units being ground and first floor in a Group Housing
Complex. Assessing Officer disallowed same on ground that
deduction was not allowable as two distinct properties were
purchased. Commissioner (Appeals) considering all the factors held
that assessee had in possession was one single unit comprising of
two floors of one and same double storied residential house having
common stair case kitchen, etc. The Tribunal held that assessee
would be entitled to exemption as claimed. (A. Y. 2005-06).
- ACIT v. Sudha Gurtoo (2011) 48 SOT 393 / 7 ITR 653
(Delhi)(Trib.)
35
Whether Investment should be in assessee’s name –
Where a liberal view was taken
• Sec. 54 clearly says that if the assessee is owner of the property, he is entitled to
exemption even if the new property purchased is in the name of his wife but the same is
assessed in the hands of the assessee.
[CIT v. V. Natarajan 154 Taxman 399 (MAD.) [2006]]
36
Profit on sale of property used for residential house and Property purchased
in the joint names of assessee and husband.
To claim exemption under section 54 and 54EC
what is material is investment of sale
consideration in acquiring residential premises or
constructing a residential premises or investing
amount in bonds set out in section 54EC, there is
no requirement that such investments should be
in name of assessee only. Assessee sold her
residential house property and invested part of
sale proceeds in purchasing residential house
property and specified bonds in joint names of
assessee and her husband.
37
The Court held that as entire consideration had
flown from assessee and no consideration had
flown from her husband, merely because either in
sale deed or in bonds her husband’s name is
mentioned, in law, he would not have any right,
and assessee could not be denied benefit of
deduction under section 54 and 54EC. (A. Y. 200708).
- DIT v. Jennifer Bhide (2011) 203 Taxman 208
(Karn.)(High Court)
38
Purchase of house in joint names of assessee and
his wife, assessee is entitled to exemption under
section 54F.
Assessee purchased the house in the joint name of
assessee and his wife and claimed exemption
under section 54F. The assessing Officer has
allowed exemption only to the extent of 50
percent, which was confirmed by Commissioner
(Appeal). On appeal to the Tribunal, the Tribunal
allowed the full exemption to the assessee.
39
• On further appeal to High Court by revenue the
Court held that as the wife has not contributed to
purchase and whole purchase consideration was
paid by assessee, it would be treated as the
property purchased by the assessee in his name
and merely because he had included the name of
his wife and the property purchased in the joint
name of his wife would not make any difference
and the assessee is entitled to exemption under
section 54F.Accordingly the appeal of revenue
was dismissed.(A.Y. 2007-08)
• CIT v. Ravinder Kumar Arora ( 2012) 342 ITR
38/75 DTR 406/252 CTR 392 (Delhi) (High Court)
40
Investment in property in joint name-Benefit of exemption to be
allowed for entire amount of investment .[S. 22 to 26, 27(i),
64(i)(iv)]
The assessee sold the inherited property and purchased a new
residential property in joint name with his wife and claimed
deduction under section 54. The Assessing Officer allowed the
exemption only to the extent of 50% investment on the ground
that 50% property belongs to wife. On appeal the Commissioner
(Appeals), granted the exemption of entire amount . On appeal
by revenue, the Tribunal held that the name of assessee’s wife
was entered in the sale agreement just for purpose of security ,
and for purpose of sections 22 to 26, 27 and 64. Assessee would
be owner of whole property and income there from would be
assessable in his hands, therefore benefit of section 54 of entire
amount invested in new property was to be allowed. Appeal of
revenue was dismissed. (A.Y 2007-08)
ACIT v. Suresh Verma ( 2012) 135 ITD 102/72 DTR 82 (Delhi)
(Trib.)
41
Purchase of house jointly with spouse is
eligible for exemption.
The assessee had made long-term
capital gain on sale of shares. The sale
proceeds were invested in purchase of
row house in the joint names and
exemption under section 54F was
claimed. The Assessing Officer denied
the exemption on the ground that the
property was purchased in joint name of
wife. In appeal Commissioner (Appeal)
confirmed the denial of exemption.
42
• On appeal to Tribunal, the Tribunal held that
total consideration for the house had been
met by the assessee and the name of wife was
added only for the sake of convenience. The
Tribunal drew the support from the section 45
of the Transfer of Property Act which provides
that the share in the property will depend on
the amount contributed towards the purchase
consideration.(A.Y.2004-05)
• (ITA no 4285/Mum/2009 dated 6-62012.Bench ‘F’)Vasudeo Pandurang Ginde
v.ITO (2012) BCAJ –July –P.57(Mum.)(Trib.)
43
Contd….
Whether Investment should be in assessee’s name –
Where a narrower view was adopted
• House property in the name of HUF sold but new house purchased in
the name of Karta and his mother-To claim the benefit of sec. 54F the
residential house which is purchased or constructed has to be of the
same assessee.
[Vipin Malik (HUF) Vs CIT 183 Taxman 296 (Delhi)(2009)]
• Exemption u/s 54F is allowed only when the new residential property
is purchased by the assessee in his own name and not in name of his
adopted son.
[Prakash v. ITO 173 Taxman 311 (Bom.) [2008]]
44
Nexus between capital gain and amount of investment u/s 54 is not
Necessary.
Held that the assessee had initially utilized the sale proceeds on sale
of its residential flat in commercial properties and, later on, he
purchased two residential flats within a period specified in sub-section
(2) of section 54. The Revenue’s main dispute was that the sale proceeds
were utilized for purchase of a commercial property and residential house
was purchased out of the funds obtained from different sources, as such,
the identity of heads has been changed
Assessee is not required under the provision for sec 54 to establish
the nexus between the amount of capital gain and the cost of new asset .
[Ishar Singh
Chawla Vs. CIT 130 TTJ (Mum) (UO) 108 (2010) and Ajit
Naswanit Vs. CIT 1127 Taxman 123 (Delhi) (Mag.) (2001)]
45
Whether capital gains earned by assessee can be utilized for other
purpose, and as long as assessee fulfils condition of investment of equivalent
amount in asset qualifying for relief under section 54F, by securing money spent
out of capital gains or from other sources available to it either by borrowal or
otherwise, he is eligible for exemption under section 54F in respect of entire
amount of capital gains realised?
Judgement:
Held, yes - Whether merely because capital gains earned had been
utilized for other purposes and borrowed funds were deposited in capital gains
investment account, benefit of section 54F exemption cannot be denied
[2012] 24 taxmann.com 104 (Hyd.)
J.V. Krishna Rao V Deputy Commissioner of Income-tax, Circle 3(3),
Hyderabad*
46
A residential house was purchased by assessee - Assessee contended that she had
sold certain shares and sale proceeds of said shares were invested for purchasing
of said house and, accordingly, claimed deduction under section 54F –
Tribunal considered entire facts and circumstances of case and came to conclusion
that assessee was not entitled for deduction under section 54F on reason that
assessee had not utilized sale consideration of shares for purchase of house
property and house was purchased by assessee partly from bank loan and partly
from loans taken from family members and others –
Assessee filed miscellaneous application for rectifying said order - Whether since
sale proceeds of shares were not appropriated towards purchase of residential
house, Tribunal, was justified in disallowing deduction under section 54F –
Held, yes - [In favour of revenue]
[2012] 18 taxmann.com 265 (Hyd. ITAT)
Smt. V. Kumuda v. Deputy Commissioner of Income-tax, Circle-16(2), Hyderabad*
47
Contd….
• Where assessee utilized the sale consideration for other purposes
and borrowed the money for the purpose of purchasing the Residential House
Property to claim exemption u/s54,it was held that the contention that the same
amount should have been utilized for the acquisition of new asset
could not be accepted.
• [Bombay Housing Corporation v. Asst. CIT 81 ITD 454 (Bom) (2002)]
48
Purchase of new residential house -Deposit under
Capital Gains accounts scheme.
Assessee having deposited the sale proceeds of
property in his bank account under the capital gains
account scheme within the prescribed period and
purchased a new property by availing of a loan which
was paid out of the same bank account, he has
complied with the provisions of Capital Gains Accounts
Scheme and, therefore, assessee is entitled to
exemption under section 54F. (A. Y. 2006-07)
- P. Thirumoorthy v. ITO (2011) 49 DTR 91 / 135
TTJ 75 / 7 ITR 10 (UO)(Chennai)(Trib.)
49
Link capital gain & investment
Capital asset sold resulting in long term capital gains and sale
proceeds utilized for business.
New residential house property purchased after getting the same
financed from bank Other stipulations for exemption complied
Whether assessee entitled to deduction u/s 54F
Exemption u/s 54F not admissible
Milan Sharad Ruparel v. ACIT 121 TTJ 770 (Mum)
Ajit Vaswani v. (2001) CIT 117 Taxman 123 (Delhi) (Mag.)
50
Whether Capital gain arising from transfer of a selfoccupied residential house would be entitled to
exemption
Section 54 of the Income-tax Act provides for exemption in respect of capital
gain arising from the transfer of a long-term capital asset, being a residential
house, the income of which is chargeable under the head ‘Income from house
property’
Board clarified that Income from a self-occupied residential house is
chargeable under the head ‘Income from house property’ even though in
certain circumstances such income may be computed at nil or at a negative
figure by virtue of section 23(2) read with section 24 of the Act. Thus, a
person shall be entitled to claim exemption under section 54 of the Act even
in respect of a self-occupied residential house
Circular : No. 538, dated 13-7-1989
51
Does mere sale of appurtenant land qualify for relief under section 54
• Benefit u/s 54(1) is not available in case of sale of land adjoining to the building.
The land appurtenant to the building means that the ownership of building and
land appurtenant should be of same person. If building is owned by one person
and land is owned by another, it will be the case of land adjoining to the building
and by no stretch of imagination it can be called land appurtenant to the said
building.
[P.K. Lahri v. CIT 146 Taxman 349 (ALL.) [2005]]
52
Land appurtenant to a building is a question of fact
Land appurtenant thereto implies lands which are necessary for the
effective enjoyment of the building as a residential house
Tests as per judicial precedents
S Radha Krishnan vs CIT (1984) 145 ITR 170 (Madras)
CIT vs M Kalpagam (1997) 227 ITR 733 (Madras)
CIT vs Zaibunisa Begum (1985) 151 ITR 320 (AP)
L & T vs Trustees (1988) 4 SCC 260
53
In CIT v Kalpagam (M) (1997) 227 ITR 733 (Mad) following five tests have
been understood as relevant for the meaning of the expression:(1) If the building together with the land is treated as an indivisible unit and
enjoyed as such by the persons occupying the building, it is an indication that
the land is appurtenant to the building;
(2) If the building has extensive lands appurtenant thereto and even if the building
and the land have been treated as one single unit and enjoyed as such by the
occupiers, an enquiry could be made to find out whether any part of the land
contiguous to the building can be put to independent user without causing any
detriment to the enjoyment of the building. Such enquiry should be conducted
not based on any artificial considerations, but from the point of view of the
persons occupying the building. The number of persons or different branches of
families residing in the building, the requirements of persons occupying the
building, consistent with their social standing, etc., are relevant for the purpose.
If any surplus is arrived at on such enquiry, then the extent of such surplus land
may not qualify to be treated as land appurtenant to the building;
54
(3) If there is any evidence to indicate that any portion of the land
contiguous to the building was applied to user other than the
enjoyment of the building, then that provides a safe indication
regarding the extent of land applied for such user. For instance, the
land used by the occupiers for commercial or agricultural purpose
although forming part of the land adjacent to the building, does not
qualify to be treated as land appurtenant to the building;
(4) If the owner or occupier is deriving any income from the lands
which is not liable to be assessed as income from house property
under section 22 of the Act, then such portion of the land does not
qualify to be treated as land appurtenant to the building; and
(5) Any material pointing to the attempted user of the land for
purposes other than the effective and proper enjoyment of the house
would also afford a safe guide to determine the extent of surplus land
not qualifying to be treated as land appurtenant to the building.
55
The above tests are illustrative and by no means exhaustive. It is for
the tax authorities to apply their mind properly to the facts of each
case and to devise tests suitable and appropriate to each case.
56
MEANING OF RESIDENTIAL HOUSE
• It is not necessary that a person should reside in the house to call it a
residential house. If it is capable of being used for the purpose of residence
than the requirement of the sec. 54F is satisfied.
[Amit Gupta v. DCIT 6 SOT 403 (Delhi)(2006) & Mahavir Prasad Gupta 5
SOT 353 (Del)(2006)]
•
Mere assessee’s efforts to use residential property for commercial purposes
also claim of deduction u/s 54F cannot be denied.
ITO vs Shri Suresh Chand Kukreja (ITAT INDORE)
(I.T.A.No. 235/Ind/2011.)
• Exemption u/s 54 cannot be claimed on the basis of a mud structure not worthy
of the caption ‘residential house’.
[M.B. Ramesh v. ITO 320 ITR 451 (Kar.) [2010] ]
57
Mere construction of room without amenities like
boundary wall, kitchen , toilet electricity , water and
sewerage connection etc cannot be held to be house
,hence benefit of section 54 cannot be granted.
The assessee claimed the long term capital gain arising
from the sale of his residential house to be exempted
u/s. 54 on the ground that investment was made for
purchase of residential plot in Janta Enclave, Ludhiana
and subsequently he had constructed a room on the
said plot, which was let out at the rate of Rs.250 per
month. The Assessing Officer concluded that the
residential house constructed by the assessee was only
one room set and as it was having no amenities, the
exemption u/s. 54 could not be granted.
58
In the instant case, in order to examine the entitlement of the
assessee for exemption u/s. 54, it is to be seen whether the
assessee had constructed residential house within three years
of the transfer of his property. For doing so, the meaning of
the term `house’ is to be explored. The term `house’ has not
been given any statutory definition and, thus, has to be
assigned meaning as understood in common parlance. As per
dictionary, it means abode, a dwelling place or building for
human habitation. A building, in order to be habitable by a
human being, is ordinarily required to have minimum facilities
of washroom, kitchen, electricity, sewerage etc. In view of the
above, it was held that the house in question was not a
residential house and therefore, the assessee was not entitled
to the benefit u/s. 54. Appeal of assessee was
dismissed.A.Y.1997-98)
Ashok Syal v. CIT, Jalandhar(2012) 209 Taxman 376 (P &
H)(High Court)
59
S.54F: Mere construction of sunshade is not
construction of new house hence not eligible for
exemption.
For the purpose of s. 54F, the residential house so
constructed is referred to as new asset. Obviously,
anew house is not something which is either an
extension or addition made to an existing structure.
Inthe present case, approval plan of the Corporation
pertains only to roof changing (sunshade
projection)and for construction/extension of/to the
first floor. Assessee was not therefore entitled to
exemptionunder s. 54F.
• Pushpa v. ITO (2012) 79 DTR 218 (Ker)(High Court)
60
Whether Investment in CGAS and return to be filed
within time allowed under section 139(1)
Section 54(2) requires that in case the capital gain is not appropriated by
the assessee for purchase for a new asset or for constructing of the new
asset before the date of furnishing the return of income under section
139, he should deposit the same not later than the due date prescribed for
filing a return of income under section 139(1) in a specified bank account.
A plain reading of the above clearly shows that the amount in question should
be deposited in the specified bank account before the due date prescribed for
furnishing the return of income under section 139(1). There is no dispute on the
fact that the assessee has fulfilled this condition. There is no requirement that
the assessee should file her return of income before the due date prescribed
under section 139(1). On the contrary it is suffice if the assessee furnished the
return of income under section 139. The revenue in this case is equating the
requirement of depositing the money in the specified bank account before the
due date for filing of the return specified under section 139(1) as a requirement
that the assessee should file the return within the time prescribed under section
139(1). Section 54(2) does not specify such requirement. Thus, this basis of
rejection of the claim under section 54 is wrong.
[Esther Christopher Mascarenhas v. ITO 9 Taxmann.com 99 (Mum.-ITAT)
(2011)]
61
Investment in property within time allowed under section
139(4), entitled to exemption
The assessee has invested the sale consideration in his new
residential house which he acquired on 15-10-2008. The
assessing officer has held that as the assessee has not
invested the amount in capital gain account scheme , before
due date of filing of return of income which was 31-7-2008,
as per section 54(2) , the exemption was denied. On appeal
the Commissioner (Appeals) allowed the claim of assessee on
the ground that the investment was made within the period
of section 139(4). On appeal by revenue , the Tribunal also
confirmed the order of Commissioner (Appeals) holding that
since the assessee had invested in the new property within
time allowed under section 139(4) , the assessee would be
entitled to exemption under section 54. (A.Y. 2008-09)
ITO v. Sapna Dimri (2012) 50 SOT 96 (Delhi) (Trib.)
62
Booking of the flat with the builder is to be treated
as construction of flat and extended period under
section 139(4) has to be considered for the
purpose of utilisation of capital gain amount
The assessee sold the property and invested in
residential property. The Assessing Officer denied
the exemption on the ground that the assessee has
failed to deposit the balance amount in the account
in any of the specified bank as required under
section 54 and utilize the same in accordance with
the scheme framed by the Government and could
not produce evidence regarding taking possession
of the new flat. On appeal Commissioner (Appeals)
confirmed the disallowance. On appeal to Tribunal
the Tribunal held that the assessee had booked the
new flat with the builder and as per agreement , the
assessee was to make payment by installments and
the builder was to hand over the possession of the
flat after construction.
63
Based on the circular no 672 dated 16-12-1993(1994) 205 ITR (St) 47, read
with circular no 472 dated 15-10-1986,(1986) 162 ITR (st)17 the case of
the assessee was to be considered as construction of new residential house
and purchase of flat. The Tribunal held that in the case of assessee had
invested the capital gains in construction of a new residential house within
a period of three years, this should be treated as sufficient compliance of
section 54 and it was not necessary that the possession of the flat should
also be taken within the period of three years. The Tribunal also held that
the due date of filing of return of income under section 139(1) has to be
construed with respect to the due date of section 139(4) as the section
139(4) provides for the extended period of filing return as an exception to
the section 139(1) and considering this there is no default as the entire
amount of capital gain had been invested within due date under section
139(4) .(A.Y. 2006-07).
Kishore H.Galaiya v.ITO ( 2012)137 ITD 229/ BCAJ –July –P. 58
(Mum.)(Trib.)
64
Assessee’s case was that since return for assessment year 1996-97 could
be furnished before expiry of one year from end of relevant assessment
year or before completion of assessment, whichever is earlier, under subsection (4) of section 139, he could fulfil requirement under section 54
for exemption of capital gain from being charged to income-tax on sale
of property used for residence up to 30-3-1998 –
Whether assessee was entitled to claim benefit under section 54 on entire
amount of capital gains –
Held, yes
2006] 157 TAXMAN 398 (GAU.)
HIGH COURT OF GAUHATI – CIT v. Rajesh Kumar Jalan
65
Assessee earned long-term capital gain of Rs. 38.67 lakh on sale of
shares - It claimed exemption under section 54F for Rs. 27.44 lakh in its
return of income under section 139(4) filed on 9-1-2009 as it had made
an investment in acquisition of a residential flat –
Assessing Officer denied exemption on ground that due date of
filing of return under section 139(1) was 31-7-2008 while sale deed for
acquired flat was executed on 19-9-2008
- Whether since amount was utilized by assessee for purchase of
new residential flat before 9-1-2009, same would be qualified for
deduction under section 54F(1) –
Held, yes - [In favour of assessee]
R.K.P. Elayarajan v. Deputy Commissioner of Income-tax
52 SOT 159
66
Deposit of amount in capital gains account scheme by
date mentioned under section 139 (4).
If a person has not furnished the return of the
previous year within time allowed under Sub
section (1) i.e. before 31st July of the Assessment
year, the assessee can file the return before expiry
of one year from the end of the relevant previous
year. The assessee has deposited the amount
before filing of return under section 139(4),
therefore the assessee is entitled to the benefit of
exemption under section 54. (A. Y. 2006-07).
- CIT v. Jagriti Agrawal (Ms) (2011) 339 ITR 610 /
203 Taxman 203 / 64 DTR 333 (P&H)(High Court)
67
Investment in residential house - Revision of orders prejudicial to revenue
- Exemption - Capital gains - Investment in house with in time specified
under section 139(4). (S. 263)
Commissioner passed the order under section 263 withdrawing exemption
under section 54F, on the ground that new house was registered in favour
of the assessee beyond the due date prescribed under sub section (1), of
section 139 and that the assessee failed to deposit the sale proceeds as
provided under section 54F(4). High Court held that Tribunal was justified
in setting aside the order of the Commissioner by holding that the
investment made by the assessee being with in time specified under
section 139 (4) ,the assessee is eligible for exemption under section 54F in
view of the binding decision of the Jurisdictional High Court. (A. Y. 200607).
- CIT v. Vrinder P. Issac (Smt.) (2011) 64 DTR 376 (Karn.)(High Court)
68
Whether Investment in residential house‐
outside India is eligible for exemption.
• Property purchased in foreign country is also eligible for exemption u/s 54.
The new house may be in India or outside India
[Prema P. Shah Vs. ITO 101 TTJ 849 (Mum)(2006)]
Held: No, Income Tax Act, 1961 applies only to India
Leena J Shah v. ACIT (2006) 6 SOT 721 (Ahd)
69
• There is nothing in s. 54F to suggest that the
new residential house acquired should be
situated in India and therefore, assessee is
eligible to claim exemption u/s. 54F
notwithstanding
the
fact
that
the
houseproperty purchased in outside India.
(A.Y. 2009 – 2010)
• Vinay Mishra v. ACIT (2012) 79 DTR 1/20 ITR
129 (Bang) (Trib.)
70
Transfer of a long-term capital asset, being
buildings or lands appurtenant thereto,
• S.54: Capital gains‐Property used for residence‐Exemption‐Sale of
two residential houses invested in acquiring single residential
house is eligible for exemption.
• If other conditions as regards time limit etc. are fulfilled, exemption
u/s. 54 is allowable where capital gains arising from sale of two
residential houses are invested in a single residential house.
• Dy. CIT v. Ranjit Vithaldas (2012) 79 DTR 377/ 150 TTJ 581
(Mum.)(Trib.)
71
Whether exemption is allowed on the basis of actual sales
consideration or as per deemed sales consideration u/s. 50C
It has been held that for claiming exemption u/s 54F ( or 54 or any
other exemption under the head long term ) there must be two
computation of capital gains – one by taking actual sales consideration
and one by taking deemed sales consideration as per section 50C of the
IT Act. The maximum long term exemption is restricted to the amount
of capital gains computed by taking actual sale consideration received or
amount invested for buying house or constructing house if that is less
than that.
- Gouli Mahadevappa v. ITO (2011) 49 DTR 207 / 128 ITD 503 / 9 ITR
129 / 135 TTJ 489 (Bang.)(Trib.)
72
Capital gains arising from the transfer of any long term capital asset for
the purpose of section 54F has to be worked out applying section 48
without imposing section 50C into it, when sale consideration was
shown at Rs. 20,00,000/- stamp duty valuation was Rs. 36,00,000/and the assessee invested in new house Rs. 24,00,000/- including Rs.
20,00,000/- sale consideration, he could claim exemption under
section 54F only of Rs. 18,06,494/- and not entire Rs. 36,00,000/-. (A.
Y. 2005-06).
- Gouli Mahadevappa v. ITO (2011) 49 DTR 207 / 128 ITD 503 /
9 ITR 129 / 135 TTJ 489 (Bang.)(Trib.)
Gyan Chand Batra v ITO (2010) 133 TTJ 482 / 45 DTR 41
(Jaipur)(Trib.) Tribunal has taken different view.
73
Exemption not available
where builder not even allotted plot within 3 years
• Where assessee sold his agricultural land and deposited part of
consideration with a builder for purchase of a plot on which no
construction activity could be started within a period of 3 years because
no plot was ever handed over to him, benefit of section 54F was not
available to assessee - The main thrust of the section 54F is construction
of a residential house; the Legislation in its wisdom has specifically
provided the period of three years, it cannot be enlarged to indefinite
period
[Pankaj Wadhwani v. CIT 18 Taxmann.com 33 (Indore ITAT)[2012]]
74
Construction within 3 years
Assessee has made payments out of the capital
gains with in the stipulated time
Builder failed to hand over the property with in
the prescribed time
Exemption u/s 54/ 54F cannot be denied
CIT vs RC Sood (2000) 108 Taxman 227 (Del)
CIT vs Ms Hille JB Wadia (1995) 216 ITR
75
Whether Construction of house property can be started before
the date of transfer.
Construction of house property can be started before the date of
transfer.
[CIT v. HK Kapoor 150 CTR 128 (All) (1998)]
Subramanya Bhat 165 ITR 571 (1987)]
76
Whether Purchase of Fractional interest is not barred
• Assessee
purchases
15%
share
in
the
residential house property in which he was already
staying, Exemption u/s 54 cannot be denied.
CIT vs Chandan Ben Magan Lal 245 ITR 182
(Guj) (2000)
CIT vs TN Arvinda Reddy 120 ITR 46 (SC) (1979)
77
S. 54F: Capital gains –Investment in residential
house- Exemption cannot be denied for holding
joint property with her husband , since assessee
did not own any property in status of an individual
as on date of transfer , claim was allowed.
Assessee held a property jointly with her husband.
She transferred another property owned by her
individually for consideration under a development
agreement. It was held that joint ownership of a
property could be held to stand in her way of
claiming exemption u/s. 54F,hence, since assessee
did not own any property in status of an individual
as on date of transfer, her claim was to be
allowed.(A.Y.2000-01)
P.K. Vasanthi Rangarajan(Dr.)(Smt)v. CIT, Chennai
(2012) 209 Taxman 628/252 CTR 336 (Mad.) (High
Court).
78
Pre condition that assessee should not own more than 1
residential house Share in a joint property is ‘owned
wholly or partly’ whereas in section 54F the word is
‘owned’ For denial of exemption u/s 54F the assessee
should own a complete residential house and does not
include shared interest in a residential house
ITO vs Rasik Lal N Satra (2006) 98 ITD 335 (Mum)
79
Whether 54 is admissible either for purchase or for construction
or for both:
Where the assessee had partly invested the capital gains on the
purchase of another house and partly on the construction of
additional floor to the house so purchased within the prescribed time
limit, it was held that the Income-tax Officer was not justified in
restricting exemption to investment on purchase only, holding that
the exemption under section 54 was admissible either for purchase
or for construction but not for both.
[Sarkar (B.B.) v CIT (1981) 132 ITR 661 (Del)].
80
Can capital gains exemption u/s 54F or 54 be claimed for buying
land also?
Yes, one can claim exemption from capital gains u/s 54
or 54F for land purchase , but only if the said land is part of land on
which house is being constructed. This is the decision in
ACIT vs Narendra Mohan Uniyal 32 SOT 152 (Delhi)
81
Circular : No. 667, dated 18-10-1993
In cases where the residential house is
constructed within the specified period, the cost
of such residential house can be taken to include
the cost of the plot also.
82
Delay in Registration of Sale deed
Immaterial
Payment made but sale deed could not be executed
with in 2yrs; whether assessee is entitled to benefit
u/s 54 ?
Legal transfer not mandatory, payment of
consideration coupled with taking over of possession
is more important
CIT v. Dr Laxmichand (1995) 211 ITR 804 (Bom)
CIT v. Shahzada Begum (1988) 175 ITR 397(AP)
83
Purchase of new flat - Section 53A of Transfer of
Property Act, 1882.
Assessee sold a building on 30-4-2004 and claimed deduction
under section 54 in respect of capital gain arising on sale of
building as he has invested in a new flat on 25-6-2003. i.e. with
in one year from date of transfer of building. Assessing Officer
was of the view that as registration of transfer deed of
building was dated 26-8-2004 hence, claim under section 54
was denied. The Tribunal held that buyer had performed their
part of their obligation as on 30-4-2004, in such a situation,
mere non registration of transfer deed would not change date
of transfer of building to 26-8-2004. Tribunal held that
assessee was entitled to deduction under section 54. (A. Y.
2005-06).
- Sureshchandra Agarwal v. ITO (2011) 48 SOT 210
(Mum.)(Trib.)
84
•Construction in another property not eligible for
exemption: An assessee gifted some land to his wife.
He, thereafter constructed a building on the said land.
The Government acquired the land and building and
paid compensation for land to the wife and for the
building to the assessee (husband). It was held that
capital gain on land was assessable in the hands of
the husband by virtue of section 64 but he was not
entitled to exemption under section 54 in respect of
capital gain on the acquisition of the land of the wife
as the capital gain to the wife did not arise on transfer
of a residential house.
[T.N. Vasavan v CIT (1992) 197 ITR 163 (Ker)].
85
Collaboration agreement
Whether repurchase of a part of the property
sold will entitle assessee to claim benefit u/s 54
Held, yes
CIT v. Phiroze H. Patel (1994) 205 ITR 377 (Bom)
86
Purchase/ construction
Property being developed by the builder under
collaboration agreement Assessee to get some portion of
the dwelling unit Whether time limit of 2 yrs or 3 yrs
would apply ?
The case would fall under purchase of property by way of
construction
ITO v. Abbas Ali Shiraz (2006) 5 SOT 422 (Bang.)
Construction may be by a third party
CIT v. Uma Budhia (2004) 141 Taxman 39 (Kol.)
87
Incomplete house
Capital gains invested in construction of residential
house with in the stipulated time More funds
required to complete the construction in a
particular manner Assessee entitled to exemption
as the utilization of the capital gains is complete
Ajay Goyal v. ITO (ITA No 493 of 2004 dt 9-5-2005)
88
Invested in purchase of land, construction not
completed, entitled to exemption.
The assessee had invested full sale consideration
received on sale of original asset in purchase of plot of
land and started construction of a new house, though
not completed. In view thereof the assessee was
entitled to the exemption under section 54F of the
Act, in as much as the thrust of the said section is on
investment of net consideration received on sale of
original asset and started construction of a new
residential house, though the new house is not
completed the assessee had complied with provisions
of section 54F and hence is entitled to benefit of
exemption claimed by assessee.(A.Y.2007-2008)
Rajneet Sandhu(Smt) v. DY.CIT(2012) 49 SOT
7(Chandigarh) (Trib.)
89
Section does not require construction to be complete
within specified period, just because the construction is not
complete the assessee cannot be denied the exemption.
The assessee sold shares for Rs. 4.18 crores and within 12
months, invested Rs. 2.16 crores thereof to construct a
house property and claimed exemption under section 54F.
However, as even after the expiry of 3 years of the date of
transfer, the construction of the house was not complete and
sale deed was not executed, the Assessing Officer & CIT(A)
denied relief under section 54F though the Tribunal granted
it. On appeal by the department to the High Court, the High
Court held dismissing the appeal: Section 54F is a beneficial
provision for promoting the construction of residential house
& requires to be construed liberally for achieving that
purpose.
90
The intention of the Legislature was to encourage investments
in the acquisition of a residential house and completion of
construction or occupation is not the requirement of law.
The words used in the section are ‘purchased’ or
‘constructed’. The condition precedent for claiming benefit
under section 54F is that the capital gain should be parted
by the assessee and invested either in purchasing a
residential house or in constructing a residential house.
Merely because the sale deed had not been executed or
that construction is not complete and it is not in a fit
condition to be occupied does not disentitle the assessee
to claim section 54F relief (CIT v.Sardarmal Kothari and
another (2008) 302 ITR 286 (Mad.) followed).(A.Y. 2006-07)
156 CIT v. Sambandam Udaykumar(2012) 345 ITR 389 /
206 Taxman 150 / 72 DTR 232 (Karn.)(High Court)
91
construction was not completed but as the full
consideration was paid to builder, the assessee is
entitled for exemption-Exemption was allowed only
in respect of one house.
The assessee paid the entire consideration when the
building was under construction and claimed the
exemption under section 54F. The assessing Officer
rejected the claim on the ground that the flat was
not ready within two years of transfer. The Tribunal
held that as the assessee having paid full
consideration before the statutory period of two
years from the date of sale of shares and has
acquired the right in the flats constructed by the
builder the benefit of exemption under section 54F
cannot be denied.
92
• The Tribunal allowed the exemption in respect
of one flat because the purchase was by two
separate agreements though the both the
flats were on the same floor and the
certificate by architect being a self serving
document and nothing has been produced
from the builder to show that the flats were
used as one unit. (A.Y. 2005-06)
• Sudhakar Ram v. ACIT (2012) 72 DTR 187 / 49
SOT 90 (Mum.)(Trib.).
93
Assessee unable to construct residential house
within prescribed period, exemption to be
granted under special circumstances where
intention of the statute is satisfied
During the relevant assessment year, the
assessee sold the capital asset and earned long
term capital gain. Subsequently, assessee
invested entire sale consideration in purchasing
a land for construction of a residential house.
However, assessee was prevented from
constructing the house on the said land for the
prescribed period of 3 years due to Order of
status quo by Civil Court as a result of injunction
petition filed by the owner of the land.
94
• The Tribunal observed that the conduct of
assessee unequivocally demonstrates that
assessee had proceeded to construct a
residential house, based on which he had
claimed exemption, thus under certain special
facts and circumstances the assessee would be
entitled to exemption under Section 54F of the
Act as the intention of the statute was fully
satisfied by the assessee. (A.Y. 2007-08)
• V.A. Tharabai(Smt.)v. Dy.CIT ( 2012) 50 SOT
537 (Chennai)(Trib.)
95
Death of the assessee
Legal heirs entitled to exemption if conditions
satisfied
CV Ramanathan (1980) 155 ITR 191 (Madras)
Mir Ghulam Ali Khan (1987)165 ITR 228 (AP)
Deposit in Capital Gains Scheme A/C inherited by the legal
heirs No obligation to utilize the same for purchase or
construction of the residential house because the same is
not income but estate devolving upon the legal heirs.
Circular No. 743, dt 13-7-1989
96
Benefit u/s 54/ 54F – “construction” includes remodeling
Benefit only for new construction or for remodeling & renovation
also covered.
Benefit not restricted to new construction alone
CIT v. ar Mathavan pillai (1996) 219 ITR 696 (Ker)
CIT v. Narsimhan PV (1990) 181 ITR 101(Mad)
Mere extension of old existing house would not mean construction.
The construction must be real one and not a symbolic construction.
CIT v. Pradeep Kumar (2006) 153 Taxman 138 (Madras)
97
Firm’s Property when used for residential purpose : Where
a firms property is used for residence of partners and thereafter
distributed to the partners upon dissolution of the firm and the
partner sells the same, exemption can be claimed by the partner
under section 54. For this purpose, period for which this property
was held by the firm shall also be taken into account for
determining the question whether the house property in exemption
was a long-term capital asset or not.
[CIT v M.K. Chandrakanth (2002) 258 ITR 14 (Mad)].
98
Sale proceeds out of transfer of an asset other than a residential house
acquisition of property prior to transfer of asset – deduction allowed
The assessee purchased a residential house and within one
year of such purchase, sold his insurance survey business
and claimed deduction under section 54F against the
purchase of residential house. The Assessing Officer
rejected the same on the ground that the property was not
purchased out of sale consideration of the transferred
asset. It was held that the assessee was entitled to the
deduction under section 54F since the section itself
provides for acquisition of property prior to transfer of
asset.
- CIT v. R. Srinivasan (2011) 198 Taxman 26
(Mad.)(Mag.)(High Court)
99
Investment in residential house Time limit
Where the assessee had purchased a flat after one year
of sale of original asset and constructed a new house
within three years of sale of original asset proviso (ii) to
section 54F was not attracted and assessee was entitled
to exemption under section 54F in respect of new house
constructed by him. (A. Y. 2006-07)
- P. R. Kulkarni & Sons (HUF) v. Addl. CIT
(2011) 49 DTR 442 / 135 TTJ 630 (Bang.)(Trib.)
100
Purchase price of new house adjusted
- Construction of new house.
Assessee sold the land to MTDC on 31st March 2005, and possession of
new constructed bungalow has been given by the MTDC to the assessee
on 31st March 2008 and even otherwise as the entire purchase price of
the new house property was adjusted on 31st March 2005, itself i.e. the
date of transfer of land in question to MTDC, assessee was entitled to
exemption under section 54F. The contention of the revenue stating that
as construction was not started prior to date of filing of return i.e. 31st
July 2005, the assessee should have deposited the consideration received
on transfer of land in capital gains account with the bank which has not
been done. The Tribunal held that there was no occasion for depositing
the amount in question as it was not received by the assessee any point of
time. According to the Tribunal the view of Assessing Officer was not
correct. (A. Y. 2005-06).
- Chetan Vithal Tupe v. ACIT (2011) 64 DTR 218 / 47 SOT 1 (Pune)(Trib.)
101
• Whether Expenditure on laying tiles, white-washing,
electrical rewiring, and wood work be included in post COA.
Tribunal held that expenses relating to advocate
fee and brokerage of property would be
included in cost of acquisition. Expenditure
incurred by assessee on laying tiles, whitewashing, electrical rewiring, and wood work
after acquisition of property could not be
treated as part of acquisition cost. (A. Y. 200809).
- S. Sudha (Smt) v. ACIT (2011) 48 SOT 335
/ 10 ITR 206 (Chennai)(Trib.)
102
Investment in residential house
(S. 2(47), 45, 50C).
Assessee transferred her 1/3 share in land which was sold vide
agreement dated 28-12-2000, for a total consideration of Rs. 24.10
lakhs to original purchaser in part performance of contract.
Possession was handed over on 28-12-2000. Subsequently on
request of the purchaser conveyance deed was entered in to in
favour of nominee during previous year 2005-06. Assessee
purchased a residential flat for a total consideration of Rs 23.50
Lakhs vide agreement for sale dated 23-3-2001 and possession of
said property was delivered to assessee on 27-4-2001, it means that
long term capital gain arising out of sale of land was invested in
residential house, therefore exemption under section 54F would be
allowable. (A. Y. 2005-06).
- Rajshree Bihani (Smt.) v. ITO (2011) 48 SOT 594 (Kol.)(Trib.)
103
Deposit in savings bank account.
Where the assessee had deposited sale
proceeds in normal savings account as against
scheme specified by Central Government
through notification in official Gazette as per
section 54F(4), it violated provisions of section
54F(4), hence, not eligible for exemption.
(A. Y. 1996-97).
- Thakorlal Harkishandas Intwala v. ITO
(2011) 43 SOT 347 / 140 TTJ 21 (Ahd.)(Trib.)
104
Capital gains-Property used for residenceExemption-Exchange of old flat for new one
under a development agreement, amounts
to construction for claiming deduction u/s
54.(S.45 )
Acquisition of new flat under a development
agreement in exchange of old flat amounts
to construction of new flat for purpose of
claiming deduction u/s 54. (A.Y.2006-07)
Jatinder Kumar Madan v. ITO (2012) 51 SOT
583 (Mum.) (Trib.)
105
Capital gains-Investment in residential house- ExemptionTransfer- Transfer is complete when possession was handed
over-As the investment made by assessee within period of one
year prior or date of transfer , the assessee is entitled to
deduction under section 54F.(S. 2 (47) )
The assessee has sold the property at Chennai and the sale
agreement was originally entered in to on 27-8-1996 and
clearance from appropriate authority was obtained on 8-10-1996
, subsequently the agreement was restated and conveyance was
done on 25-11-1999. The assessee once again approached the
appropriate authority on 11-02-2000 for clearance and obtained
and the possession was given on 28-11-2009 . All these facts
were disclosed in the original assessment which was completed
under section 143 (3) read with 147 the claim was allowed only
for purchase at the stage of assessment. On appeal the
Commissioner (Appeals) considering the various judicial
pronouncement applicable to section 54 and 54F allowed the
claim for both the purchases and construction of property at
Bangalore. Subsequently, notice under section 263 was issued
which was withdrawn.
106
A fresh notice under section 148 was issued on the ground
that the assessee had furnished the wrong date of transfer
since the provision was complied with only on 21-2-2000,
deduction under section 54 / 54F was wrongly claimed
hence to be withdrawn .On appeal the Commissioner
(Appeals) allowed the appeal of assessee on reassessment
as well as on merits following the ratio of Bombay High
Court Judgment in Chaturbuj Dwarakadas Kapadia v.CIT (
2003) 260 ITR 491 (Bom) . Revenue filed an appeal before
the Tribunal , as there was difference of opinion the matter
was referred to third member . The Tribunal held that
since the possession was handed over to buyer on 28-111999 against receipt of consideration of transaction, it
could be said that transfer of property had taken place on
28-11-1999 satisfying the requirement of section 2 (47).
107
The Tribunal also held that latest NOC issued by
appropriate authority on 21-2-2000- could not be
considered in isolation of first NOC issued on 8-10-1996 as
it was revision of first NOC, therefore NOC issued on 21-22000 relates back to first NOC issued on 8-10-1996 and as
such reinforced facts of transfer of property on 28-11-1999,
when the possession was handed over to buyer .
Accordingly the investment made by assessee on 9-12-1998
in residential property was well within period of one year
prior to transfer i.e. 28-11-1999 for availing deduction
under section 54F .Accordingly the issue was decided in
favour of assessee. (A.Y.2007-08)
ACIT v. P. R. Chockalingam (2012) 135 ITD 75/ 70 DTR 138 /
146 TTJ 44/17 ITR 617 (TM ) (Chennai)(Trib.)
108
Whether Amount paid to contractor is to be
considered as cost of acquisition.
Amounts paid for completion of flat purchased
in semi finished condition, pursuant to a
tripartite agreement entered by the assessee
with the contractors and the builder form part
of cost of new house even though such
agreement was entered prior to agreement for
purchase of house. On the facts all expenditure
incurred prior to taking over possession has to
be considered as part of cost.(A.Y. 2006-07)
Nirupama K. Shah v. ITO - 419 (2012)
43B. BCAJ P. 31 (Jan 2012)(Mum.)(Trib.)
109
Applicability of section 54F in case of
clubbing of income u/s. 64
Where assessee invested consideration
received from sale of shares in purchase of
residential house property, exemption under
section 54F could not be denied to it on
ground that flat was registered in name of
assessee’s minor daughter. (A.Y. 2008‐09)
N. Ram Kumar v. ACIT (2012) 138 ITD 317
(Hyd.)(Trib.)
110
Whether 54/54F available under Direct Taxes Code Bill, 2010
– The rollover benefit available under section 54 along with
other rollover provisions in the Income tax Act, 1961 is proposed
to be covered under section 55 of the Direct Taxes Code Bill,
2010.
111
Issues - Section 54F
Whether in view of provisions of sub-section (4) of section 54F read with sub-section
(1) of section 54F, deemed cost of new asset is an amount which has already been
utilized by assessee for purchase or construction of new asset plus amount
deposited as per requirements of sub-section (4) of section 54F ?
Facts
Assessee sold a plot of land on 5-2-2005 - Out of sale consideration, he invested a
sum of Rs. 19.30 lakhs in purchase of a flat on 19-2-2005 and further deposited a
sum of Rs. 16 lakhs in a bank on 1-3-2005 under Capital Gains Account Scheme.
He claimed exemption under section 54F on amount invested in purchase
of flat and also on amount deposited in bank under Capital Gains Account Scheme Assessing Officer denied exemption under section 54F on amount deposited in bank
on plea that assessee had also acquired a new flat.
Whether in instant case amount deposited by assessee in capital Gains
Account Scheme was also a deemed cost of new asset (Flat)?
Judgment
Held, yes - Assessee was entitled to exemption under section 54F on amount
deposited in bank under Capital Gains Account Scheme
[2011] 16 taxmann.com 127 (Delhi)
Assistant Commissioner of Income-tax, Circle, Noida v. Vikas Singh*
112
Issues - Section 54F
Facts
Assessee sold a piece of land for Rs. 81 lacs - Assessee invested Rs. 75 lacs in
purchase of residential house on which exemption of long-term capital gains
under section 54F to extent of Rs. 73.94 lacs was allowed - Subsequently,
assessee sold latter house and again purchased another residential house for Rs.
70.80 lacs - Assessing Officer opined that long-term capital gains of Rs. 73.94
lacs which was allowed as exemption was to be withdrawn - After allowing setting
off of capital loss of Rs. 25 lakhs on sale of second property being amount of
difference between sale consideration and amount shown in sale deed he
brought balance amount of Rs. 48.74 lacs to tax
Whether since assessee invested sale proceeds of second house again in
purchase of new residential house within period of two years, assessee was
eligible for exemption?
Judgment
-Held, yes [in favour of assessee]
[2012] 21 taxmann.com 385 (Chennai)
ACIT, Circle XV, Chennai v.Ms. Sultana Nazir
113
Issues 54F
Section 271(1)(c), read with sections 54 & 54F, of the Income-tax Act, 1961 –
Penalty - For concealment of income - Assessee earned long term capital gain
on sale of a property - He invested a part of sale consideration in a residential house
and declared balance for tax - Assessee claimed deduction under section 54F Assessing Officer observed that in order to claim deduction under section 54F
assessee should have invested entire sale consideration - According to assessee, due
to clerical mistake of his counsel, exemption was wrongly claimed following method of
section 54 - Assessee filed revised return offering excess deduction claimed to tax Assessing Officer, however, passed a penalty order
- Whether since assessee had brought on record complete facts regarding
calculation of deduction while misunderstanding provisions of sections 54 and 54F,
explanation offered by him was to be considered as bona fide and, consequently,
impugned penalty order was to be set aside
Held, yes [In favour of assessee]
[2012] 26 taxmann.com 256 (Agra)
IN THE ITAT AGRA BENCH - Sarv Prakash Kapoor v.Deputy Commissioner of
114
Income-tax-4(1), Agra*
CAPITAL GAINS ACCOUNTS
SCHEME
115
• The account under Capital Gains Accounts
Scheme cannot be opened in all the branches
and with all the banks. The government has
identified the following 28 banks to accept the
deposit under Capital Gains Accounts Scheme
1988.
116
• These banks are: State Bank of India, State Bank
of Bikaner & Jaipur, State Bank of Hyderabad,
State Bank of Indore, State Bank of Mysore, State
Bank of Patiala, State Bank of Saurashtra, State
Bank of Travancore, Central Bank of India, Bank of
India, Punjab National Bank, Bank of Baroda, UCO
Bank, Canara Bank, United Bank of India, Dena
Bank, Syndicate Bank, Union Bank of India,
Allahabad Bank, Indian Bank, Bank of
Maharashtra , Indian Overseas Bank, Andhra
Bank, Corporation Bank, New Bank of India,
Oriental Bank of Commerce, Punjab & Sind Bank
& Vijaya Bank.
117
• All branches of these banks except the rural
branches are authorized to receive the deposit
and maintain account under Capital Gains
Accounts Scheme, 1988. Other than the
above, no other bank is authorized to accept
the deposit under Capital Gains Accounts
Scheme.
118
• In terms of the Capital Gains Accounts
Scheme, 1988 there are two types of deposit
accounts and the tax payers can choose any
one of the account which he likes. The first
account is known as Deposit Account A,
wherein the deposit shall be in the form of
saving deposit, while the deposit in Deposit
Account B will be in the form of term deposit
with an option available to the assessee to
keep the deposit either as cumulative or
noncumulative deposit.
119
• Whenever the tax payer is interested to open
an account in terms of Capital Gains Accounts
Scheme, the depositor shall make an
application in Form No A and exercise the
option whether the amount is to be
deposited in Account A or in Account B. It is
also possible for the assessee to deposit the
money in both the accounts.
120
• In case of deposit under Account A, the bank
shall issue a bank passbook to the depositor,
where all the amounts of deposits,
withdrawals together with interest due shall
be entered. In the case of deposit under
Account B, the bank shall issue a deposit
receipt in which will be mentioned the
principal amount of deposit, the date of
deposit and the date of maturity of the
deposit. It is possible to transfer the deposit
account from one branch of a bank to another
branch of the same bank.
121
What are Forms C and D?
• Similarly, it is possible to convert the deposit
Account B to the deposit Account A. As and
when the money is required to be withdrawn
for the purposes of making payment for the
residential property, the assessee shall apply
in form No C.
122
• After receiving the application the bank shall
permit the withdrawal of the amount. It may
also be noted here that where the amount of
withdrawal exceeds Rs 25,000, the bank will
make the payment by way of crossed demand
draft drawn in favour of the person to whom
the depositor intends to make the payment.
123
• Tax payers should also note that other than the
initial withdrawal later on when the
withdrawals are made by the tax payers, they
shall furnish in Form No D in duplicate, the
details regarding the manner and the extent of
utilizing of the amount in respect of the
immediately preceding withdrawal. The bank
after receiving two copies of Form D from the
accountholder will retain one copy and return
the other copy to the tax payer.
124
• The scheme further provides that the amount
which has been withdrawn should be utilized
for purchase or construction of the property
within 60 days from the date of such
withdrawal. The facility of nomination is also
available to the deposit holder by filling up
Form No E.
125
• Finally, when the property has been purchased
or the construction has been completed and
now the tax payer desires to close his Capital
Gains Account Scheme then he shall make an
application with the approval of the assessing
officer. The application for closure of the
account will be in Form G.
126
• Whenever you are contemplating to make a
deposit in respect of Capital Gains Account
Scheme, either by way of a savings account or
a fixed deposit account, then please remember
that you do not open the normal savings bank
account or a normal saving bank deposit but
specifically fill up No A and then make the
deposit with the concerned bank under the
Capital Gains Accounts Scheme.
127
• Opening a bank account for Capital Gains
Account Scheme
• Once the deposit is made by you either in the
savings account or in the fixed deposit account,
please ensure that it is clearly mentioned in the
account opened that it is for Capital Gains
Account Scheme. A large number of tax payers
commit the mistake of just opening a bank
account with a bank to save capital gains and
later on use the money for buying or
constructing the residential property.
128
• But please do remember that the income tax
law very specifically provides that the money
which has not been used for buying or
constructing a residential property, such
money should be kept exclusively under
Capital Gains Accounts Scheme under a
separate bank account in terms of Capital
Gains Accounts Scheme.
• Also do remember that the deposits in these
accounts can be made in one lump sum or in
installment.
129
Taxability of unutilised deposit under the
Capital Gains Accounts Scheme, 1988 in the
hands of the legal heirs of the assessee
Board clarified that the said amount cannot be
taxed in the hands of the deceased. The
unutilised portion of the deposit does not
partake the character of income in their hands
but is only a part of the estate devolving upon
them.
Circular : No. 743, dated 6-5-1996.
130
Thank You
131