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September 19, 2020

Renovation of residential house allowable exemption u/s 54F for Capital Gains

by shivam jaiswal in Income Tax

Renovation of residential house allowable exemption u/s 54F for Capital Gains – ITAT

Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price.

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available under sections 54, 54B, 54D, 54F etc. As per the provisions of these sections, the amount is required to be reinvested in specified investment types before the specified period. However, if the due date of filing income tax returns falls before the expiry of the specified period, the amount of capital gains is required to be invested temporarily in the Capital Gains Account Scheme which can be easily withdrawn at the time of investment in the specified instrument.

What is Section 54F of the Income Tax Act?

The income tax law provides for certain situations where such capital gains will not be subject to tax. Section 54F provides one such exemption. In the case of an assessee being an individual or a HUF, if the capital gain arises from the transfer of any long-term capital asset, not being a residential house (original asset) and the assessee has within a period of 1 year before or 2 years after the date on which the transfer took place purchased, or has within a period of 3 years after that date constructed, one residential house in India (new asset), the capital gain shall be dealt with in accordance with the following provisions of this section:

  • 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
  • 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

Let us refer to the case of Ms Juveria Begum and others vs ITO (Hyd ITAT) (2020) where the issue under consideration was whether renovation of residential house is an allowable exemption u/s 54F as it amounts to construction of a residential house or not.

Facts of the Case:

  • All the assessees were family members and co-owners of a plot of land with an AC shed located in Hyderabad.
  • The same plot was sold vide a Sale Deed dated 06-03-2006.
  • The sale consideration was shared by the co-owners in proportion to their land holding.
  • The respective assessee’s claimed exemption of capital gains on purchase of a residential house collectively in the year 2006 itself to the extent it was incurred for purchase and the balance of the amount was deposited in the Capital Gains Scheme Account.
  • The period of three years in the assessee’s case expired in the AY.2009-10 and as per the information available on record for the AY.2006-07, the Assessing Officer (AO) observed that the assessee had utilised the amount deposited in Capital Gain Scheme Account to renovate the existing residential unit.
  • The AO observed that the extension of the existing residential unit could not amount to investment (purchase/construction) of a new residential house. Therefore, the AO disallowed the claim of exemption u/s.54F of the Income Tax Act.

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Proceedings before the Commissioner of Income Tax (Appeals) – CIT(A):

Aggrieved, the assessee preferred an appeal before the CIT(A), who confirmed the order of AO by holding that any investment made towards extension or modification or renovation of an existing house would not come under the purview of purchase/construction of new asset as envisaged under Section 54 or 54F.

Appeal before the Income Tax Appellate Tribunal (ITAT):

  • Aggrieved by the order of the CIT(A), the assessee appealed before the ITAT where the assessee prayed that the exemption u/s 54F of the Act be granted.
  • The Departmental Representative, on the other hand, supported the orders of the authorities below and submitted that the assessees had to invest the capital gain in a new asset to be eligible for exemption u/s.54F.
  • Since the assessee was seeking the money spent on renovation of the house which was already existing, the exemption u/s 54F was not available.

Observations of ITAT on the order of the AO and CIT(A)

  • The assessees had sold an open plot of land with an AC shed and therefore Long-Term Capital Gain arose from the same.
  • The assessees had submitted before the ITAT that they had purchased another house on 29-03-2006 and had invested the balance consideration also in renovation of the said house and claimed that the expenditure for such renovation also as ‘exempt’ u/s.54F.
  • ITAT found that in the assessment order, there was a clear finding that the house was purchased by the assessee and that it was already a self-contained residential unit.
  • Thus, it was seen that the assessee’s had invested their capital gains for purchase of a residential unit and thereafter, they had renovated/re-modified the said unit.
  • The AO disallowed the claim mainly on the ground that the house which was purchased itself was a self-contained unit and that the assessee had not given the details of the modifications made by the assessees.
  • The assessees submitted before the ITAT that they had submitted the details before the CIT(A) but the same was not considered by the CIT(A). The disallowance was confirmed by the CIT(A) only on the ground that the amount spent on renovation was not eligible for exemption u/s.54F.
  • ITAT did not agree with this finding of the CIT(A).
  • Section 54F only mandated that the capital gain should be invested in ‘a residential house’ within the stipulated time by way of purchase or construction.
  • Thus, the amount spent on renovation of such residential house by an assessee according to his requirements was also allowable as exempt u/s.54F as it would amount to construction of a residential house.
  • The only other requirement was that the construction should be completed within three years from the date of transfer of the original asset.

Reference to earlier case by ITAT

  • The CIT(A) also agreed that the issue was covered in favour of the assessee by the decisions of the Karnataka and Calcutta High Courts but choose to follow the decisions against the assessee.
  • The Bombay High Court in the case of CIT Vs. Godavari Devi Saraf (1978) held that, in the absence of a decision from the jurisdictional High Court, the decision of another High Court which was in favour of the assessee had to be followed.
  • Hence, the order of the CIT(A) was not sustainable and the assessee’s claim of exemption u/s.54F had to be examined in the light of the details submitted by the assessee and the report of the valuer submitted by the assessee in the absence of sufficient details as the construction was allegedly done in the year 2006.
  • Therefore, ITAT deemed it fit and proper to remit the issue back to the file of AO with a direction to allow the exemption u/s.54F in respect of the cost of the house and also the amount spent on renovation/re-modification of the house.
  • Accordingly, the Grounds raised by the assessee were treated as allowed for statistical purposes. Thus, this appeal of the assessee was treated as allowed for statistical purposes.

In conclusion, Section 54F of the Act only mandates that the capital gain should be invested in ‘a residential house’ within the stipulated time by way of purchase or construction. Therefore, the amount spent on renovation of such residential house is also allowable as exemption u/s 54F of the Act as it would amount to construction of a residential house.

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