GAFFAR BAIG,BENGALURU vs. INCOME TAX OFFICER, WARD-4(2)(4), BENGALURU

PER KESHAV DUBEY, JUDICIAL MEMBER:

This appeal at the instance of the assessee is directed against the order of the ld. CIT(A)/NFAC dated 15.07.2025 vide DIN & Order No. ITBA/NFAC/S/250/2025-26/1078519940(1) passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2017-18.

ITA No.1662/Bang/2025 Mr. Gaffar Baig, Bengaluru Page 2 of 11 the transfer of the original asset under the facts and in the circumstances of the appellant's case.

2.1. The learned CIT[A]/NFAC failed to appreciate that the appellant had invested the entire capital gains in the construction of the new residential house within the time prescribed u/s.54 of the Act and hence, the appellant was entitled to the benefit u/s.54 of the Act, as completion of the new residential house within the time specified was not mandatory for claiming deduction under the facts and in the circumstances of the appellant's case.

2.2. The learned CIT[A]/NFAC ought to have appreciated that the appellant has utilized the entire capital gains for purposes of construction of the new residential house before the due date for filing the return of income for the year under appeal and therefore, there was no requirement to deposit unutilized gains in CGAS under the facts and in the circumstances of the appellant's case. 2.3 The learned CIT[A]/NFAC is not justified in refusing to follow the binding judgement of the jurisdictional High Court in the case of Sambandam Udaya Kumar reported in 345 ITR 389, under the facts and in the circumstances of the appellant's case. 3. Without prejudice to the right to seek waiver before the Hon'ble DG/CCIT, the appellant denies himself liable to be charged to interest u/s.234-B and 234-D of the Act, which requires to be cancelled under the facts and in the circumstances of the appellant's case.

ITA No.1662/Bang/2025 Mr. Gaffar Baig, Bengaluru Page 3 of 11 Accordingly, notices u/s 143(2) as well as 142(1) of the Act were issued calling for the specific details for verification of the above issues. A show cause notice was also issued on 27.11.2019 to furnish evidence in support of his claim of deduction u/s 54 of the Act. In response to the notices, the assessee submitted various details through e-proceeding portal.

3.1 During the course of assessment proceeding, the AO observed that the assessee had sold a residential villa bearing no.7 of type “Blue Berry” situated in Prestige Mayberry at K.R. Puram Hobli, Bengaluru East Taluk for a consideration of Rs.1,95,81,500/- on 5.8.2016. The assessee had declared capital gain of Rs.1,85,18,145/- after deducting indexed cost of acquisition and construction. Further, the assessee had also claimed deduction u/s 54 of the Act against the said capital gain of Rs.1,85,18,145/-. The assessee during the course of assessment proceeding contended that the entire capital gains of Rs.1,85,18,145/- is re-invested in the construction of the new residential building on a property bearing no.344 (Old no.151 earlier numbered as 161), BBMP Khata No.568/151/344, Inner Circle, 6th Cross, Outer Circle, Whitefield, K.R. Puram Hobli, Bengaluru. The AO in order to verify the claim of the assessee in respect of deduction claimed u/s 54 of the Act, sent an Inspector to visit the property wherein the assessee was constructing his residential house and accordingly the Inspector submitted a report that the assessee is constructing a residential house which is still under construction with more than 40% of the construction yet to be completed. Further, interior works, railing of steps and other major work have not yet started. The inspector also met with the Assistant Director of Town Planning, BBMP, Mahadevapura Office, where on verification of the document of the property, the BBMP vide its letter dated 28.11.2019 stated that the sanction plan for the above property is sanctioned in the name of

ITA No.1662/Bang/2025 Mr. Gaffar Baig, Bengaluru Page 4 of 11 Shri Gaffar Baig for residential building. After that Shri Gaffar Baig had neither obtained commencement certificate nor occupancy certificate for the above property. The AO considering the report of the Inspector along with the photographs and BBMP letter, held that as per section 54 of the Act, the assessee should have constructed a residential house within 3 years. Further, the AO from the letter obtained from Assistant Director of Town Planning, was of the opinion that the assessee had obtained Plan sanction but not obtained the commencement certificate and occupancy certificate which shows that the assessee did not intend to complete the construction within the time limits laid down in section 54 of the Act. The AO accordingly disallowed the deduction of Rs.1,85,18,145/- as claimed by the assessee u/s 54 of the Act and brought to tax.

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ITA No.1662/Bang/2025 Mr. Gaffar Baig, Bengaluru Page 7 of 11 that the photograph enclosed with the notice itself establishes the fact that substantial construction of the residential house is already completed and it is evident that the assessee had already spent more than Rs.1.85 Crores in construction of the residential house. The assessee also relied upon the decision of Hon’ble High Court of Karnataka and stated that the provisions as contained in section 54 of the Act should be construed liberally. We are of the considered opinion that the authorities below have also not disputed the fact that the assessee had already re-invested the entire amount of capital gain amounting to Rs.1,85,18,145/- into the construction of new residential house as required u/s 54 of the Act. The only contention of the authorities below are that the new residential house should have been completed on or before 3 years from the date of transfer of the capital asset, i.e. on or before 04.08.2019.

9.1 We are of the considered opinion that section 54 of the Act is a beneficial provision of promoting the construction of residential house and therefore, the said provision has to be construed liberally for achieving the purpose for which it was incorporated in the statute. The words used in the section 54 of the Act are purchased or constructed. For such purpose, the capital gain realized should have been invested in a residential house. The condition precedent for claiming benefit under the said provision is the capital gain realized from the sale of capital asset should have been parted by the assessee and invested either in purchasing a residential house or in constructing a residential house. If after re-investing the entire capital gain within a prescribed period of 3 years, merely because the residential house is not fully completed before the period stipulated, in our opinion the assessee cannot be denied the benefit of section 54 of the Act. Thus, if the assessee had invested the money in the construction of a residential house, merely because the construction

ITA No.1662/Bang/2025 Mr. Gaffar Baig, Bengaluru Page 8 of 11 was not complete in all respects and it was not in a fit condition to be occupied within the period stipulated that would not disentitle the assessee from claiming the benefit u/s 54 of the Act. The essence of the provision contained in section 54 of the Act is whether the assessee who receives capital gain has invested in the construction of residential house or not? Once it is demonstrated that the capital gain accrued on transfer had been re-invested either in purchasing a residential house or in construction of a residential house, even though the construction are not complete in all respects, that would not disentitle the assessee from the said benefit.

9.2 While holding so, we rely on the decision of jurisdictional High Court of Karnataka in the case of CIT Vs. Sambandam Udaykumar reported in (2012) 345 ITR 389 in which it is held as under:

“10. A reading of the aforesaid provision makes it very clear that if a capital gain arises from the transfer of any long term capital asset, not being a residential house and the assessee has within the period of one year before or two years after the date on which transfer took place purchased or has within a period of three years after that date constructed a residential house, if the cost of the new asset is not less than the net consideration in respect of the original asset the whole such capital gain shall not be charged under section 45 of the Act. However, 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 be 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 of the Act. 11. Section 45 of the Act makes it very clear that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save or otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H is chargeable to income tax under the head capital gains and shall be deemed to be income of the previous year in which the transfer took place. The aforesaid sections which form part of section 54 of the Act are cases where capital gain on transfer of capital asset not to be charged in those cases. Section 54F of the Act is a beneficial provision of promoting the construction of residential house. Therefore, the said provision has to be construed liberally for achieving the purpose for which it was incorporated in the statute. The intention of the Legislature was to encourage investments in the acquisition of a residential house and completion of construction or occupation is not the requirement of law. The words used in the section are purchased or constructed. For such purpose, the capital gain realized should have

ITA No.1662/Bang/2025 Mr. Gaffar Baig, Bengaluru Page 9 of 11 been invested in a residential house. The condition precedent for claiming benefit under the said prevision is the capital gain realized from sale of capital asset should have been parted by the assessee and invested either in purchasing a residential house or in constructing a residential house. If after making the entire payment, merely because a registered sale deed had not been executed and registered in favour of the assessee before the period stipulated, he cannot be denied the benefit of section 54F of the Act. Similarly, if he has invested the money in construction of a residential house, merely because the construction was not complete in all respects and it was not in a fit condition to be occupied within the period stipulated, that would not disentitle the assessee from claiming the benefit under section 54F of the Act. The essence of the said provision is whether the assessee who received capital gains has invested in a residential house. Once it is demonstrated that the consideration received on transfer has been invested either in purchasing a residential house or in construction of a residential house even though the transactions are not complete in all respects and as requited under the law, that would not disentitle the assessee from the said benefit. 12. In fact, Madras High Court had an occasion to consider this aspect in the case of CIT v. Sardarmal Kothari reported in [2008] 302 ITR 286 where it has been held as under: "4. The requirement of the provision is that the assessee, within a period of three years after the date of transfer, has to construct a residential house in order to become eligible for exemption. In the cases on hand, it is not in dispute that the assessees have purchased the lands by investing the capital gain and they have also constructed residential houses. In order to establish the same, the assessees submitted before the CIT(A) several material evidences, viz., invitation card printed for the house warming ceremony to be held on 12th July, 2003. The assessees have also produced the completion certificates from the municipal authority on 30th Jan., 2004. On the basis of the above documents, the CIT(A) concluded that the requirement of the statutory provision has been complied with by the assessees and that was reconfirmed by the Tribunal in the orders impugned." 13. The said Judgment of the Madras High Court has been affirmed by the Apex Court and the appeal was dismissed at the stage of preliminary hearing in CC Nos.3953-3954/2009 decided on 6.4.2009. 14. In the instant case, the material on record discloses that the assessee had invested Rs. 2,16,61,670/- as on 31.10.2006 within twelve months from the date of realization of sale proceeds of shares. The developer acknowledging the said amount has given particulars of the stage of construction. According to him, only minor fittings like window shutters and some electrical work were required to be made. In fact, the report of the inquiry conducted by the Department also discloses the flooring work, electrical work, fitting of door and window shutters were still pending. The assessee has produced before the authorities the registered sale deed dated 7.11.2009 showing the transfer of the property in his favour. The said document discloses marble tiles flooring has been done, electricity, water and sanitary connections have been given, wood used is teak in respect of doors and windows. The assessee has been put in possession of the property and he is in occupation. Therefore, the assessee has invested the sale consideration in acquiring a residential premises and has taken

ITA No.1662/Bang/2025 Mr. Gaffar Baig, Bengaluru Page 10 of 11 possession of the residential building and is living in the said premises. The object of enacting section 54 of the Act i.e., to encourage investment in a residential building is completely fulfilled. 15. In that view of the matter, the Tribunal was justified in extending the benefit of section 54F of the Act to the assessee and the said order does not suffer from any infirmity which calls for interference. 16. Therefore, the substantial question of law is answered in favour of the assessee and against the revenue.

9.3 On perusal of assessment order, we also observed that the AO did not accept the decision of the Hon’ble High Court of Karnataka by merely stating that the Hon’ble High Court is speaking about deduction u/s 54F of the Act and not section 54 of the Act. We are of the considered opinion that the ratio decidendi as given for section 54F of the Act are equally applicable u/s 54 of the Act as claimed by the assessee as both the sections require re-investment on a similar line in the purchase or construction of a residential house. The only difference is the nature of capital gains required to be reinvested in the purchase or construction of the new residential house. Section 54 of the Act speaks about capital gain arises from the transfer of a long-term capital asset being buildings or lands appurtenant thereto and being a residential house whereas section 54F of the Act talks about the capital gain from the transfer of any long-term capital asset not being a residential house. Therefore, relying on the above decision of the jurisdictional High Court cited (supra), we held that as the assessee had already invested the entire capital gain of Rs.1,85,18,145/- into the construction of a new residential house within the specified period of 3 years and hence, the assessee is liable to claim deduction u/s 54 of the Act. Accordingly, we direct the AO to allow the claim of the assessee u/s 54 of the Act & delate the addition as made in the assessment order.

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Order pronounced in the open court on 22nd July, 2026

Sd/- Sd/- (Prashant Maharishi) (Keshav Dubey) Vice President Judicial Member

Bangalore, Dated 22nd July, 2026. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.