ITAT Kolkata Rules in Favor of Assessee: Section 54F Exemption Allowed on Rs. 26.77 Crore Capital Gains Despite Pre-Sale Construction and Joint Ownership

In a taxpayer-friendly decision, the Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) has allowed full exemption under Section 54F of the Income-tax Act, 1961, on long-term capital gains of ₹26.77 crore arising from the sale of listed equity shares. The Tribunal held that construction of a residential house can commence before the date of transfer of the original asset, direct utilization of sale proceeds is not mandatory, and joint ownership of other properties does not disqualify the claim.

Case Background and Facts

Smt. Saroj Goenka sold 36,00,000 equity shares of Emami Ltd. on 13 July 2020 for a total consideration of ₹33,77,64,511, resulting in long-term capital gains of ₹26,77,72,881. The shares had been gifted to her by her husband’s brother.

The assessee invested ₹53,86,80,198 (up to 31 March 2021) in the construction of a new residential house at 1 Queens Park, Ballygunge, Kolkata. The project, which began in 2015, received its completion certificate on 9 June 2022 — well within three years from the date of transfer of shares.

In her return of income filed on 20 December 2021 for AY 2021-22, she claimed full exemption under Section 54F by reinvesting the capital gains (and more) into the new residential house.

The case was selected for scrutiny under CASS due to the large deduction claimed.

Grounds on Which Exemption Was Denied by Lower Authorities

The Assessing Officer (AO) denied the Section 54F exemption on the following grounds:

• Ownership of more than one residential house: On the date of transfer, the assessee allegedly owned two residential properties — one at 110 Southern Avenue (jointly held) and another at 13 BT Road, Barrackpore Trunk Road (vacant industrial land leased to a tenant who had constructed a factory superstructure).
• Construction commenced prior to transfer: The AO contended that construction began more than five years before the sale of shares and therefore did not qualify.
• Sale proceeds not directly utilized: The investment was not traceable directly to the sale proceeds.

The Ld. CIT(Appeals), NFAC, Delhi, upheld the AO’s order vide appellate order dated 18 August 2025 and further observed that the gift of shares appeared to be a colourable device to avail Section 54F benefit (mistakenly stating that the shares were gifted by the spouse).

Aggrieved, the assessee preferred an appeal before the ITAT Kolkata.

Key Contentions Before the ITAT

Assessee’s Arguments

• The property at 13 BT Road is vacant industrial land; the superstructure (factory) belongs to the tenant as per tenancy agreements and tenant confirmations. No income is assessed under “Income from house property”.
• The Southern Avenue property is jointly owned family property; the assessee is not the exclusive owner.
• Section 54F only requires **completion** of construction within three years after transfer — commencement date is irrelevant.
• There is no statutory requirement for direct utilization/tracing of sale proceeds; investment of an equivalent or higher amount suffices.
• The shares were gifted by the husband’s brother (not spouse), so clubbing provisions do not apply. Similar exemption was allowed to another family member (Smt. Rashmi Goenka) on the same property.

Revenue’s Stand

The Departmental Representative supported the lower authorities’ findings and argued that the gift transaction indicated tax planning to avail undue benefit.

ITAT’s Observations and Decision

The Bench comprising Judicial Member Pradip Kumar Choubey and Accountant Member Rajesh Kumar allowed the appeal in full and directed the AO to delete the addition of ₹26.77 crore.

Key Rulings of the Tribunal

• Joint Ownership Does Not Trigger the Proviso to Section 54F(1)
  Relying on Dr. Smt. P.K. Vasanthi Rangarajan v. CIT* (Madras HC) and *Deepak Kothari v. ACIT(Delhi Tribunal), the ITAT held that a jointly held property does not count as a residential house “owned” by the assessee for the purpose of the disqualification proviso.

• Industrial Land with Tenant-Owned Superstructure Not a “Residential House
  The BT Road property was vacant land let out on lease; the factory building belonged to the tenant. Hence, it does not qualify as a residential house owned by the assessee.

• Construction Can Commence Before the Date of Transfer
  Section 54F mandates only that the house be constructed within three years **after** the date of transfer. Multiple High Court decisions were cited:
  • CIT v. Smt. Beena K. Jain* (Bombay HC)
  • CIT v. Bharti Mishra* (Delhi HC)
  • CIT v. J.R. Subramanya Bhat* (Karnataka HC)
  • Bindu Premanandh v. CIT* (Kerala HC)
  • C. Aryama Sundaram v. CIT* (Madras HC)

The Tribunal observed that commencement of construction prior to transfer is immaterial as long as completion occurs within the statutory period.

• No Requirement of Direct Utilization of Sale Proceeds
  The Act does not require tracing of funds. Exemption is available if the amount of capital gain (or more) is invested in the new asset. Relied on:
  • CIT v. Anandraj (Karnataka HC)
  • CIT v. Kapil Kumar Agarwal (P&H HC)
  • Gouli Mahadevappa v. ITO (Karnataka HC)

• No Colorable Device
  The factual error regarding the donor of shares was noted. Cultural practice of registering properties in female names and allowance of similar claim to another family member negated any allegation of tax evasion.

Key Takeaways from the Decision

• Construction can start BEFORE the sale** of the original asset.
• Completion within 3 years after transfer is sufficient for Section 54F eligibility. 
• No need for direct utilization/tracing of sale proceeds — investment of equivalent or higher amount suffices. 
• Jointly owned residential properties do not disqualify the claim. 
• Vacant industrial land (even with tenant-constructed non-residential superstructure) does not count as a “residential house”.

Conclusion

This decision reinforces the liberal interpretation of beneficial provisions like Section 54F and aligns with consistent judicial precedents across High Courts. Taxpayers planning reinvestment of capital gains in residential property can take comfort from the clarity that pre-commencement of construction, joint family ownership, and absence of direct fund tracing do not bar the exemption, provided substantive conditions are met.