Is benefit of Section 54F allowable on amount expended within time but not deposited in capital gain account scheme?

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amount of capital gains is required to be invested temporarily in the Capital Gains Account Scheme which can be easily withdrawn at the time of investment in the specified instrument.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 Haider Noman Kohrakiwala Vs ACIT (ITAT Bangalore) where the issue raised was whether benefit of Section 54F is allowable on amount expended within time but not deposited in capital gain account scheme?

Facts of the Case:

• Assessee is an individual who sold his vacant site for Rs.1.60 Crores on 14.08.2014
• In the return of income, the assessee admitted total income of Rs.75,88,070.
• Assessee had claimed deduction under section 54F amounting to Rs.90,58,232 on acquisition of a residential property.
• The investment was made in in two stages:
• Rs.78 lakhs on 27.09.2014 and
• estimated investment of Rs.16 lakhs which was subsequently reduced to Rs.12,33,200 towards registration expenses and for doing kitchenette and wardrobe to rooms, etc.
• The payment made towards expenditure of Rs.12,33,000 were incurred in July 2017 i.e., after a period of two years from the date of sale of vacant site.
• The AO in the Assessment Order restricted the claim of deduction under section 54 to Rs.75,16,405 proportionately on Rs.78 lakhs.
• The AO ignored the expenditure incurred in July 2017 of Rs.12,33,200/- for the following two reasons:
• Even if the assessee’s claim was to be admitted the expenditure should have been incurred on or before 14.8.2016 (within 1 year before or two years after the date on which the transfer takes place) in present case the said expenditure was incurred only in July – August 2017 when the proceeding was under way and
• the said expenditure could not be admitted u/s 54F considering it as the cost of construction of the house as the amount was not deposited in capital gains account scheme before the date of furnishing Return of Income under section 139

Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]

• Aggrieved by the Assessment order in restricting the claim of deduction under section 54F of the Act, the assessee preferred an appeal before the first appellate authority.
• The CIT(A) confirmed the view taken by the AO.
• Aggrieved by the order of CIT(A), the assessee preferred an appeal before the Income Tax Appellate Tribunal (ITAT)

Observations of ITAT on the Facts of the Case

• The AO had held that assessee had purchased an apartment and not constructed the apartment.
• Hence, the due date was 2 years (i.e., 14.8.2016) and not 3 years from the date of sale of original asset (Vacant site).
• The assessee had entered into a composite agreement with the builder to purchase the undivided share of land and for construction of a residential apartment.
• The assessee was the original owner of the apartment.
• The agreement to sell between the assessee and the builder had taken place much prior to completion of the construction of the residential unit.

Reference by ITAT to older cases

• In such circumstances, various judicial pronouncements had held it a case of construction of an apartment and not a case of purchase of apartment. Hence, it was held that the time period of 3 years was applicable.
• The Mumbai Tribunal in the case of Mr. Kishore H Galaiya Vs. ITO in order dated 13.6.2012 had held that booking of a flat with the builder was a case of construction and not purchase of residential flat and therefore, the time period 3 years was applicable.
• The Delhi Tribunal in the case of CIT Vs. R.L. Sood (2000) had held that a payment of substantial amount in terms of purchase agreement within 4 days of sale of his old house, assessee acquired substantial domain over the new residential flat within specified period. It was concluded that it could be said that assessee complied with the requirements of section 54 of the Act and merely because the builder failed to hand over the possession of flat within the specified period, assessee could not be denied the benefit of benevolent provisions of section 54.
• The Delhi High Court in the case of CIT Vs. Smt. Brinda Kumari held that purchase of a house property in a Multi-storeyed building by assessee was “construction of building”.
• In the light of above judicial pronouncements, the AO was not correct in holding in the facts and circumstances of the case that assessee had purchased an apartment.
• On the contrary, it was a case of construction of an apartment when assessee had entered into a composite agreement with the builder to purchase the undivided interest in land and for construction of a residential apartment, therefore, a period of 3 years would have to be applicable and not 2 years as held by the AO

Observations of ITAT on not depositing capital gains amount in the capital gains account scheme

• The other reasoning of the AO not to grant deduction u/s 54F in respect of a sum of Rs.12,33,200 was that assessee did not deposit capital gains amount in the capital gains account scheme before the date of furnishing of return of income u/s 139.
• The Jurisdictional High Court in the case of CIT Vs. K. Ramachandra Rao (2015) (Kar) had held that when assessee invested the entire sale consideration in construction of a residential house within the period stipulated u/s 54F(1), then section 54(4) was not attracted and therefore, the exemption u/s 54F could be denied on the ground that he did not deposit the said amount in the capital gains account scheme before the prescribed due date.
• A similar view was held in the judgement of the Karnataka High Court in the case of Smt. Fatima Bai. In the instant case, assessee had expended Rs.12,33,200 in July, 2017 i.e., well within period of 3 years from the date of sale of original asset.
• Therefore, going by the dictum laid down by the jurisdictional High Court in the case of K. Ramachandra Rao (supra) though the assessee had not deposited capital gains amount in the capital gains account scheme within the prescribed time, since the impugned expenditure was incurred within a period of 3 years from the date of sale of original asset, the assessee was entitled to proportionate deduction u/s 54F of the Act.

Conclusion by ITAT

• Assessee has produced proof of payment of Rs.8 lakhs to M/s. Mas Furniture. M/s. Mas Furniture had acknowledged the receipt of the amount and has stated that amount received from assessee was towards furnishing of apartment of the assessee in Sankalap Central Park.
• Similarly, evidence for payment of stamp duty was furnished by the assessee.
• The stamp duty was part of the cost of the apartment and expenditure incurred for furnishing the apartment was a cost of improvement.
• Moreover, the amount of Rs.12,33,200 whether it has been incurred or not was never in doubt by the AO.
• In light of the above reasoning and judicial pronouncements cited (supra), ITAT held that assessee was entitled to proportionate deduction u/s 54F of the Act on Rs.12,33,200.

Similar Judgement passed in the case of Ashok Kapasiawala vs the ITO

ITAT observed that:

• On a combined reading of section 54F(1) and 54F(4), it was evident that the assessee would be entitled for exemption/deduction u/s.54F in the event he purchased new asset within 1 year from the date of transfer of original asset or the amount is utilized before the date of furnishing the return u/s.139.
• There is no ambiguity in the provision so far deposit of the unutilized amount was concerned, it had to be deposited in a specified capital gain account before the due date of filing of return u/s 193(1).
• The question which was required to be examined was whether the assessee had utilized the amount before the time limit prescribed for such purpose or if not whether the amount was deposited in the manner prescribed u/s.54F(4).
• In the present case, the undisputed facts are that the original asset was transferred on and the new asset was purchased on 05/10/2009.
• The assessee had not filed income-tax return u/s.139(1) so that matter u/s.139 of the Act.
• It was only in response to notice u/s.148 the assessee filed return on 30/04/2012.
• The contention of the assessee is that the amount was utilized before due date of filing of return.
• As per assessee, the period as prescribed under section 54F(4) for deposit in the capital gain account should be reckoned from the due date of filing of return u/s.139(4) of the Act.
• ITAT observed that the assessee purchased new asset on 05/10/2009 and had transferred the original asset on 8/01/2008.
• As per Section 54F (1) of the Act, the exemption would be available if the assessee purchased the residential house within two years after the date when transfer took place.
• The provisions of section 54F(4) would not be attracted in the event if the assessee had purchased or constructed the residential house within the period prescribed under section 54(1) of the Act.
• In the case in hand, there was no dispute with regard to the fact that the assessee had purchased within two years.
• Therefore, ITAT directed the AO to re-compute the assessed income after granting the benefit of section 54F of the Act to the assessee

In simple words, benefit of Section 54F exemption is allowable on amount expended within time but not deposited in capital gain account scheme.