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April 25, 2022

Deductions are permitted under Section 54 for unfinished construction and consideration received for the construction of a residential home.

by CA Shivam Jaiswal in Income Tax

Deductions are permitted under Section 54 for unfinished construction and consideration received for the construction of a residential home.

Facts and Issue of the case

The assessee is an individual and filed her return of income for year under consideration on 05.08.2016 declaring total income of Rs. 8,66,860/-.  The said return was selected for scrutiny and statutory notices were issued to assessee. In response to statutory notices, representative of assessee appeared before the Ld.AO and filed requisite details called for.  From the assessment order, the Ld.AO noted that assessee had declared income from other sources of Rs. 8,66,860/- and long term capital gains of Rs. Nil.  We observe   that   assessee   claimed   deduction   u/s.   54F   of Rs.4,64,16,154/- being cost of acquisition of residential property on Site No. 839/21, 37th F Cross, 4th T Block, Jayanagar, Bangalore – 560 011 on 10.2.2011 for an amount of Rs. 1,52,02,905/- and construction of residential house on the same property value of Rs. 3,12,13,249/-.

The Ld.AO observed       that    assessee       also    constructed a residential house on the same property. As per valuation report, the construction cost was Rs.3,12,13,249/-. Therefore, the deduction u/s. 54F was restricted to Rs. 3,12,13,249/-. The difference between the total Capital Gains and Cost of construction Rs. 14,90,260/- (Rs. 3,27,03,509-Rs. 3,12,13,249) was brought to tax and the Long Term Capital Gains was computed at Rs.14,90,260/-. The Ld.AO was of the opinion that the property acquired by assessee on 10.02.2011 was before the transfer of original asset and accordingly the claim u/s. 54F was denied. Aggrieved by the order of Ld.AO, assessee preferred appeal before Ld.CIT(A). Before the Ld.CIT(A), the assessee submitted that, she along with her father, her sister and her brother disposed off a vacant land situated at Ekarajapura Village, Hosakote Taluk and the share of the assessee in the long term capital gain was Rs.3,27,03,509/-. The deed of sale was executed by the assessee, her father, her sister and her brother on 22.08.2015. The assessee had claimed the benefits under Section 54F of the Income tax Act, in view the acquisition of the residential house property and re-construction of the residential house property.

It is submitted before the Ld.CIT(A), that the assessee has not submitted the details of Sale Deed dated 29.01.2015. The assessee submitted that no Sale Deed executed on 29.01.2015 by or in favour of the assessee and that there has been a Gift of the property given out of natural love and affection by the assessee’s father to the assessee and her husband under a document titled as Release Deed executed by the father on 03.12.2014. The assessee submits that by virtue of the Gift Deed termed as Release Deed dated 03.12.2014 the assessee’s father gifted and renounced his undivided rights, interest in the property in favor of his daughter i.e., the assessee.

The Ld.CIT(A) relying on the decision of Hon’ble Supreme Court in case of Dilip Kumar & Company reported in 95 taxmann.com 327 held that the provision giving benefit to assessee needs to be interpreted strictly and in case there is an ambiguity in the provision, the same is subject to strict interpretation. He thus upheld that disallowance of the claim by the Ld.AO.

Aggrieved by the order of Ld.CIT(A), the assessee is in appeal before this Tribunal.

The Ld.AR contended that all the issues alleged in the present appeal relates to disallowance of claim u/s. 54F of the Act. He submitted that the land in which the investment was made is jointly held by assessee and her husband and the total cost of construction was incurred by assessee alone. He thus relied on following decisions in support of the claim that assessee is entitled to deduction u/s. 54F even though she is a co-owner.

On the contrary, the Ld.Sr.DR submitted that assessee has claimed u/s. 54F toward purchase of land 4 years prior to sale of original asset along with cost of construction of residential house. He also submitted that the disallowance is justified as assessee is co-owner of the said new asset along with her husband. The Ld.Sr.DR vehemently supported the orders passed by the authorities below.

Observation of the case

Court has perused the submissions advanced by both sides in the light of records placed before court. Assessee purchased a property in 2011 along with her father and husband being a land located at BDA Site No. 839/21, 37th F Cross, 4th T Block, Jayanagar, Bangalore – 560 011. Subsequently, assessee’s father released his rights in favour of assessee with respect to his 1/3rd share vide release deed dated 03.12.2014.  Thus from December 2014, the property was jointly owned by assessee and her husband Shri K.C. Narayanaswamy. From the records it is clear that during Financial Year 2015-16, relevant to Assessment Year under consideration, assessee sold land situated at 34/1, Ekkarajapura Village, Sulibele Hobli, Hoskote Taluk wherein, assessee was 1/3rd co-owner of the property.  The other co-owners were their family members.  Assessee’s share of capital gains on sale of such 1/3rd share was Rs. 3,27,03,500/-.  Out of the said capital gains earned by the assessee, she spent sum of Rs.3,12,13,249/- towards construction of new house in the Jayanagar property being BDA Site No. 839/21, 37th F Cross, 4th T Block, Jayanagar, Bangalore – 560 011.

Court note that assessee claimed the cost of land of Jayanagar property and cost of construction incurred by her u/s. 54F being the subject matter of the present appeal. From the facts and references,  it is clear that assessee invested the capital gains earned from sale of her 1/3rd share in 34/1, Ekkarajapura property for the purpose of construction of residential house on the land jointly owned by her and her husband at BDA Site No. 839/21, 37th F Cross, 4th T Block, Jayanagar, Bangalore – 560 011.

The authorities allege that, deduction under section 54F will be available to assessee only if the assessee has within a period of one year before or two year after the date on which transfer took place or, has within a period of three years after the date of transfer constructed a residential house. The revenue contends that as the assessee acquired the property with respect to which the deduction under section 54 F was claimed was acquired on 10/02/2011, i.e., 4 years prior to the transfer of original asset and that the assessee constructed the residential house on the same property which is valued at Rs.3,12,13,249/-, the Capital gain was restricted to Rs.14,90,260/-.

In the present facts of the case, there is no dispute that assessee is the owner of the property, in respect of which the deduction is claimed. The assessee started construction on the land owned by the assessee and he husband in the year 2015. The original asset was sold in which assessee had 1/3rd share in the financial year relevant to assessment year under consideration i.e, August 2015.

In decision relied by Hon’ble Madras High Court in case of Ms.Moturi Luxmi vs ITO in ITA No.181 of 2019 by order dated 17/08/2020, decisions referred by Ld.CIT(A) was considered.  Court also refer to Full Bench decision of Hon’ble Supreme Court in case of Commissioner of Customs (Import) Vs. M/s Dilip Kumar & Sons & Ors. (Supra). This decision was relied by Ld. CIT(A) to deny exemption claimed by assessee u/s 54F. 

Now coming to the decision of Hon’ble Madras High Court in case of C Aryama Sundaram (Supra) relied in case of M/s Moturi Laxmi Vs. ITO (Supra). Hon’ble Court first analysed the conditions assessee fulfilled to enter exemption clause and thereafter applicability was liberally interpreted. Similar is the analysis by Hon’ble Madras High Court in other decisions referred to in M/s Moturi Laxmi Vs. ITO (Supra). Hon’ble Delhi High Court in case of CIT Vs. Bharti Mishra reported in (2014) 41 taxmann.com 50, decisions of Hon’ble Karnataka High Court in case of CIT Vs J.R Subramnya Bhat reported in (1986) 28 Taxman 578 and CIT Vs. K Ramachandra Rao reported in (2015) 56 taxmann.com 163, all principally allowed exemption u/s 54/54F, only on substantial satisfaction of required conditions therein. Hon’ble Karnataka High Court and Hon’ble Madras High Court in decisions relied by Ld.AR widely interpreted the provision, consequent to strict satisfaction of conditions therein.

The passport to derive benefit under sec.54F(1) is investment in construction of property within the period required u/s 54(1)F or to invest in residential property within the stipulated time for enabling deduction under section 5 4F of the Act. Hon’ble Karnataka High Court in decision of CIT vs.Sambandam Udaykumar reported in 251 CTR 371 took the view that, under provisions of section 54F of the Act, the condition preceded is that, capital gains realised from sale of capital asset should have been parted by assessee and invested or constructed a residential house, as the case may be. Hon’ble court also observed that, the essence of the purpose of section 54F, is whether, the assessee who received the capital gain has invested in a house. Once it is demonstrated that the consideration received on transfer of capital asset has been invested in or construction of residential house, even though the construction is not complete in all respect as required under law, assessee cannot be denied benefit under section 54F. Further on a plain reading of decision of Hon’ble Karnataka High Court in case of CIT Vs. Sambandam (Supra) reveals that, there is no particular stage of completion of construction, that is contemplated. Ld. AR submitted that, the construction was later on completed and the sale deed was registered in favour of assessee on 05/07/2019 in respect of transfer of ownership of residential property. There is nothing placed by revenue on record to demonstrate any other violation in support of their arguments.

In present facts court is of the view that assessee has substantially fulfilled all necessary conditions to be entitled for liberal interpretation of sec.54F.In courts view, F.B decision relied by Ld.Sr.DR and Ld.CIT(A) of Hon’ble Supreme Court in case of M/s Dilip Kumar (Supra) needs to be applied after analysing the facts in each case. In Courts opinion, in present facts decision by Hon’ble Supreme Court support the case of assessee. Respectfully applying ration of Hon’ble Karnataka High Court in case of CIT Vs. Sambandam (Supra), we hold that assesse is eligible for exemption of Rs.65 lakhs u/s 54F.


In the result, the appeal filed by assessee was allowed by the court.

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