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March 17, 2021

If assessee claimed deduction under wrong provision of Section 54F claim could not be disallowed if it was allowable under an appropriate provision

by CA Jessica Nagaonkar in Income Tax

If assessee claimed deduction under wrong provision of Section 54F claim could not be disallowed if it was allowable under an appropriate provision

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.

Section 54 gives relief from capital gains tax to a taxpayer who sells his residential house and from the sale proceeds he acquires another residential house. Following conditions should be satisfied to claim the benefit of section 54:

  • The benefit of section 54 is available only to an individual or HUF.
  • The asset transferred should be a long-term capital asset, being a residential house property.
  • Within 1 year before or 2 years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within 3 years from the date of transfer of the old house.
  • In case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).
  • With effect from Assessment Year 2020-21, the Finance Act, 2019 has amended Section 54 to extend the benefit of exemption in respect of investment made in two residential house properties.

Section 54Fprovides exemption towards long term capital gain (other than a residential house) when the amount is invested in purchasing or constructing a new residential house property. 

The assessee needs to satisfy the following conditions in order to avail exemption under section 54F:

  • An exemption under section 54F is available only to an individual or a HUF.
  • An exemption is available towards the capital gain arisen on the transfer of any long-term capital asset other than a residential house.
  • The ‘net consideration’ arisen on the transfer of long-term capital asset is invested in either of the following manners –
  • The amount is invested to purchase one residential house in India. It is compulsory that such investment is made within 1 year before or 2 years after the date of transfer; or
  • The amount is invested, within 3 years, to construct one residential house in India.

Let us refer to the case of Satish S. Prabhu vs Assistant Commissioner of Income Tax where the issue under consideration was on the availability of deduction under Section 54 or 54F of the Income Tax Act.

Facts of the Case:

  • The assessee, an individual, was a Chartered Accountant by profession.
  • The assessee was owner of two flats. One flat was purchased by the assessee himself on 21st July 2013, for a sale consideration of Rs 7.50 lakh, excluding stamp duty, registration charges and society transfer fee.
  • Whereas, another flat, was inherited by the assessee on the death of his father in the year 1997.
  • Assessee’s father had purchased the said flat in the year 1970, for a consideration of Rs 8,000.
  • Subsequently, the assessee entered into a development agreement with the housing society and M/s. Nav Durga Construction Co, for re-development of the property.
  • As per the terms of the said development agreement, the assessee received two new flats, against surrender of the old flats.
  • The assessee offered capital gain and simultaneously claimed deduction under section 54 for the flat which was purchased by him.
  • For the flat which was inherited by him, the assessee neither offered it initially to capital gain nor claimed any deduction under section 54/54F.
  • Subsequently, in the course of assessment proceedings, the assessee filed a letter offering the capital gain arising from flat which was inherited by him and claimed deduction under section 54F in respect of the new residential flat received on surrender of the said flat.

Order of the Assessing Officer (AO)

  • AO allowed the capital gain deduction in respect of the flat purchased by the assessee himself and the new flat received in lieu thereof on re-development.
  • However, in respect of the new flat received on surrender of the inherited flat, the AO did not allow assessee’s claim of deduction on the reasoning that the deduction was neither claimed in the return of income filed by him nor by filing any revised return of income.
  • Further, he held that the flat, being a residential premise, the assessee could not be allowed deduction under section 54F on transfer of such property.
  • He observed, merely because the old as well as new flat was used by the assessee as office, it would not change its character as a residential house.
  • Accordingly, he disallowed assessee’s claim of deduction under section 54F in respect of the flat received on surrender of the inherited flat.

Order of Commissioner of Income Tax (Appeals) [CIT(A)]

  • The assessee challenged the aforesaid decision of the Assessing Officer before the first appellate authority.
  • However, Commissioner (Appeals) also sustained the disallowance made by the Assessing Officer.
  • Aggrieved with the order of the CIT(A), assessee appealed before the Income Tax Appellate Tribunal (ITAT)

Observations of ITAT

  • It was clear that the assessee had transferred two flats and in lieu of those two flats had received two new flats on re-development.
  • Merely because the assessee did not offer or disclose the capital gain from the second flat in the return of income would not disentitle him from availing the statutory deduction if otherwise he was entitled to it.
  • Therefore, ITAT was unable to accept the reasoning of CIT(A) that since the assessee did not disclose the ownership of the second flat, he would not be entitled to deduction under section 54F.
  • As regards the second aspect of the issue, whether the assessee was entitled to claim deduction under section 54 or 54F, from the facts on record it was clear that according to the Departmental Authorities, the flat transferred being a residential property, the assessee could claim deduction only under section 54 of the Act.
  • If that was the case, the deduction claimed by the assessee should have been allowed under the correct provision.
  • Merely because the assessee had claimed deduction under section 54F, by treating the flat as a commercial property, assessee’s claim of deduction under section 54 could not be disallowed if the assessee fulfilled the conditions of section 54.
  • In the facts of the present case, the Departmental Authorities had no doubt that the flat transferred by the assessee was a residential flat and on re-development the assessee had also received a residential flat.
  • That being the case, the assessee was certainly entitled for deduction under section 54.
  • Merely because the assessee claimed a deduction under the wrong provision, his claim could not be disallowed if it was allowable under a different provision.

In view of the aforesaid, while admitting the additional ground raised by the assessee being purely a legal ground which could be decided without requiring investigation into fresh facts, ITAT directed the AO to allow assessee’s claim of deduction under section 54.

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