INCOME TAX OFFICER, WARD-2(1), HYDERABAD vs. NARASIMHA REDDY DUTHALA, HYDERABAD

Date of Hearing : 13.03.2025 Date of Pronouncement : 09.05.2025 ORDER PER MANJUNATHA G. : This appeal has been filed by the Revenue against the order dated 27.08.2024 of the learned CIT(A)-National Faceless Appeal Centre [in short the “NFAC”] Delhi, relating to the assessment year 2022-2023.

2 ITA.No.1113/Hyd./2024 2. The Revenue has raised the following grounds in the instant appeal :

1. “The CIT(A) has erred both in law and on facts of the case.

3. Whether on the facts and circumstances of the case and in law, the CT(A) has erred in holding the house property at Nizampet as transferred to the daughter of assessee based on an unregistered Sreedhan Agreement dated 30.11.2017, contrary to the requirement of registration of an immovable property under the transfer of property Act, 1982 and ignoring the assessee's own return filed for the A.Y. 2021-22 where in such said property continued to be shown as owned by the assessee. 4. Whether on the facts and circumstances of the case and in law, the CT(A) has erred is not considering the residential house purchased on 19.01.2021 in A.Y 2020-21, where in another 54F claim was made. 5. Without prejudice to the above contentions, CIT(A) ought to have considered the residential house in My Home Bhuja Apts registered in the name of assessee on 7th July 2021 which is subsequent to the sale of original asset (16 June 2021) and thereby violating the provisions of 54F as per the proviso a(i) of sec 54F(1). 6. Any other ground(s) that may be urged at the time of hearing.”

3 ITA.No.1113/Hyd./2024 3. Briefly stated facts of the case are that, the assessee is an individual and filed return of income for the assessment year 2022- 2023 on 07.11.2022 declaring total income of Rs.42,52,70,700. The case was selected for scrutiny under CASS for the reason of deduction/exemption claimed under section 54 to 54GA of the Act. During the course of assessment proceeding, the Assessing Officer noted that, during the financial year 2021-2022 relevant to assessment year under consideration i.e., A.Y. 2022-2023, the assessee on 16.06.2021 sold unquoted equity shares of two companies namely M/s. Vandana Life Sciences Pvt. Ltd., and M/s. Vindhya Pharma (India) Pvt. Ltd., for a total consideration of Rs.92,49,92,793/-. The assessee has computed long term capital gains of Rs.92,28,20,193/- after deducting indexed cost of acquisition of Rs.2,21,72,590/-. Further, out of the total long term capital gains, the assessee has claimed exemption under section 54F of the Act to the tune of Rs.53,22,48,667/- being investment made for purchase of land for Rs.43,83,37,000/- and further deposited Rs.10,67,00,000/- under capital gain deposit

4 ITA.No.1113/Hyd./2024 account scheme and declared net capital gain of Rs.39.05 crores.

5 ITA.No.1113/Hyd./2024 derived from transfer of unquoted equity shares of two companies for investing part of sale consideration for purchase/construction of new residential house property.

6 ITA.No.1113/Hyd./2024 that, the assessee claimed to have executed Gift without any formal gift deed registered by paying relevant stamp duty and, therefore, in view of provisions of section 123 of the Transfer of Property Act, 1882, for making a gift of immovable property, the transfer must be executed by a registered instrument signed by donor and attested by at least two witnesses. Therefore, the Assessing Officer observed that, in absence of registered Gift Deed, proper conveyance of the title of property cannot be passed on to the Donee i.e., in the present case daughter of the assessee viz., Sahiti Duthala and, therefore, the arguments of the assessee that, he had gifted the property to her daughter way back in the year 2015 on the occasion of her marriage is devoid of merit and cannot be accepted.

5.1. The Assessing Officer further observed that, the assessee also not eligible for claiming exemption under section 54F of the Act because, the assessee has not made investment in purchase of new residential house property on or before the due date provided under section 139(1) for filing of return of income and the assessee had made

7 ITA.No.1113/Hyd./2024 investment in purchase of property only on 18.10.2022 and also made investment in capital gains deposit account scheme on 28.10.2022 beyond the due date prescribed under the Act and in view of provisions of section 54F(4) of the Act, once the assessee made investment beyond the due date provided under section 139(1) of the Act, then, the assessee needs to deposit capital gain amount in the capital gain deposit scheme on or before the due date applicable in the case of the assessee for furnishing return of income under section 139(1) of the Act. Although, the assessee claims that, due date for filing his return of income was 31.10.2022 and later extended to 07.11.2022, but, going by the provisions of section 44AB of the Act, the assessee is not required to get his accounts audited from an Accountant because, in a case where the expenditure incurred in cash does not exceed 5% of the total payment, then, the turnover limit for getting accounts audited is Rs.10 crore and since the turnover of the assessee is less than Rs.10 crore, the assessee is not required to file audit report under section 44AB of the Act. Therefore, opined that, the assessee need

8 ITA.No.1113/Hyd./2024 to file his return of income on or before 31.07.2022. Since the assessee has filed return of income beyond the due date provided under section 139(1) and further, the investment made in new asset is also beyond the due date, held that, the assessee is not eligible for deduction under section 54F of the Act.

5.2. The Assessing Officer further observed that, the assessee is also not eligible for claiming exemption under section 54F of the Act on investment made in purchase of land because, the assessee has purchased 4153.57 square metres of land, however, constructed residential house only on 291.52 square metre, which means, the assessee has utilised roughly 6% of the land area for the purpose of construction of residential house property leaving behind 94% vacant land. Therefore, the Assessing Officer observed that, the assessee is not eligible for claiming exemption under section 54F of the Act. In other words, the Assessing Officer rejected exemption claimed by the assessee under section 54F of the Act on three grounds including having more than one residential house as on the date of transfer

9 ITA.No.1113/Hyd./2024 of original asset i.e., shares of companies and further, no investment was made in capital gain account on or before the due date provided under section 139(1) of the Act and further, investing capital gain amount only in purchase of land and constructing residential house in less than 6% of land area. The relevant observations of the Assessing Officer are as under.

“Part V – Conclusion : 42. In the case of the assessee, the following conclusions are drawn : A. The assessee, as per his own I.T. R. furnished for AY. 2021-22, claimed that he owned more than one residential house as on March 31, 2021. However, during the course of assessment proceedings, the assessee claims that one of the houses is not owned by him since he had orally gifted the same to his daughter at the time of her marriage in 2015. As per discussion above, the argument cannot be accepted since registered gift deed was made only in June 2023 and oral gift cannot be regarded as valid as per provisions of Section 123 of Transfer of Property Act, 1882. B. Further, since the assessee claims that he has purchased another house property (My Homes Bhooja) (other than the house on which exemption is claimed) within one year from date of transfer of shares, the claim of assessee for exemption is not allowable. C. As discussed above, the due date applicable under section 139(1) in the case of assessee is 31st July 2022 for A.Y.2022-23 Since, the assessee has purchased land in October 2022 and placed an amount of Rs.10.67 crores in Capital Gains Account Scheme in October 2022, the claim for exemption is not allowable due to Section 54F(4) of the IT Act:

10 ITA.No.1113/Hyd./2024 D. The assessee purchased a plot of land in October 2022 for a total consideration of Rs. 43,83,37,000 (inclusive of stamp duty and other charges). He further places an amount of Rs.10.67 crores in Capital Gains Account Scheme in October 2022 but agreement with Construction contractor is only for Rs.2,02,30,000, E. Only 6 per cent of total area of land is being constructed upon. The intention of legislature is to allow exemption for purchase/construction of residential house and not towards purchase of vacant plot of land; 42) Conclusion drawn In view of the facts of the case and discussion as above, the exemption claimed under section 54F of Rs.53,22,48,667/- is being disallowed. Penalty proceedings u/s.270A(9) of the Act are being initiated for under-reporting of income inconsequence of misreporting as the assessee has misrepresented facts. Late fees u/s. 234F of the Act is being levied since the return of income is belated.”

, as brought out in the assessment order and submissions made during appeal proceedings. The only issue involved in these grounds is the allowabililty of claim of exemption under section 54F, in respect of part of Long Term Capital Gains (LTCG), which has arisen on sale of certain shares during the year. This is an undisputed fact that the appellant has sold shares of two companies, namely M/s Vandana Life Sciences Pvt Ltd and M/s Vindhya Pharma (India) Pvt Ltd. for a total sale consideration of Rs.94,49,92,783/- on 16.06.2021, i.e. during the Financial Year 21-22. These shares are not quoted on any recognised Stock Exchange. AO has verified the respective Valuation Reports, and found that Fair Market Value (FMV) of the shares was less than the actual sale consideration for which these shares were actually sold. In other words, the deeming provisions of Section 50C were not attracted. AO has also made independent verification from buyer of these unquoted shares, and found that the purchase of shares was duly reflected in their financial statements, and the source of funds in their hands was adequately explained. The appellant has computed LTCG of Rs.92,28,20,193/- arising on sale of these shares (after taking indexed cost of acquisition at Rs.2,21,72,590/-) during the year. AO has examined the Share Register and noted that the appellant has followed the First-In First-Out (FIFO) method for the purpose of computation of Capital Gains. Out of the total LTCG, the appellant has claimed exemption under section 54F to the tune of Rs.53,22,48,667/-, and has offered the remaining LTCG of Rs.39,05,71,526/-for taxation. The claim of exemption under section 54F has been made by the appellant, in proportion to the investment made towards construction of residential house (the new asset), and partly towards amount deposited in Capital Gains Account Scheme. These investments have been made by the appellant in October 2022. In his return of income for the year, the appellant has declared total income of Rs.42.52 Crore

14. ITA.No.1113/Hyd./2024 (including LTCG to the tune of Rs.39.05 Crore) and has paid the due taxes thereon (including Rs.11.76 Crore by way of Self- Assessment Tax and Rs.1 Crore by way of Advance Tax). There is no dispute on these facts relevant and material to the impugned transaction.

6.8 AO has, however, denied the claim of exemption under section 54F, holding that the appellant violated some of the disqualification criterion prescribed therein, such as (i) he was owning more than one residential house (other than the new asset) as on the date of transfer, (ii) he has purchased another residential house, other than the new asset, within a period of one year (iii) the due date of filing return of income for the appellant was 31st July 2022, whereas the qualifying investments were made in October' 2022, hence not within the due date; and (iv) purchase of vacant land cannot be considered eligible for exemption under section 54F.

6.9 The moot point for adjudication is whether, on the given facts and circumstances, the appellant was eligible to claim the exemption from Capital Gains under section 54F, on proportionate basis, in respect of the qualifying investment made towards construction of residential house (new asset) and deposits made in the Capital Gains Accounts Scheme. I find that this issue has to be addressed having regard to all the relevant and material facts relating to the said transaction. I find that the appellant, in the course of assessment proceedings, has brought on record the necessary particulars of transactions of purchase and sale of shares, along with the supporting documents relating to the qualifying investments/deposits made for the purpose of claim of exemption. During the appellate proceedings, the appellant has uploaded copies of the relevant documentary evidence in support of his claim, as under: -

6.10 On a careful perusal of evidence brought on record, I find that the appellant has satisfactorily discharged the primary onus cast upon it to produce sufficient material to establish the fact of investment made in construction of residential house (the new asset) and also the deposits made in Capital Gains Account Scheme, within the prescribed time period, for the purpose of claiming exemption under section 54F, by furnishing all the relevant and material evidence. In respect of investment made towards construction of residential house (the new asset); the qualifying amount, date and genuineness of investment are duly evidenced by- (i) sale deed of land dated 18.10.2022; (ii) construction agreement with Builder dated 08.12.2022; (iii) revised construction agreement dated 03.01.2023; and (iv) the Occupancy Certificate. In respect of deposits made towards Capital Gains Accounts Scheme, the qualifying amount and the date of deposits made are duly evidenced from the relevant bank account statement itself.

16 ITA.No.1113/Hyd./2024 6.11 In this context, it is pertinent to refer to the relevant provisions of the Act. Section 54F has been inserted by the Finance Act' 1982 with effect from 1st Apirl 1983. Section 54F grants exemption from tax on Capital Gains, arising from transfer of certain long term capital assets, in case of investment of net sale consideration into a residential house. The relevant provisions are reproduced as under,- 54F. Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.- (1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or [two years] after the date on which the transfer took place purchased, or has within a period of three years after that date [constructed, one residential house in India] (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,- (a) 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; (b) 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: Provided that nothing contained in this sub-section shall apply where- (a) the assessee,- (i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset, or (ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or 17 ITA.No.1113/Hyd./2024 (iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and (b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head "Income from house property".] Explanation-For the purposes of this section,- [****] [***] "net consideration", in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. (2) Where the assessee purchases, within the period of [two years] after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head "Income from house property", other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of subsection (1), shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such residential house is purchased or constructed. (3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such new asset is transferred.

18 ITA.No.1113/Hyd./2024 (4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for fumishing the return of income under sub- section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub- section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset: Provided that if the amount deposited under this sub- section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,- (i) the amount by which- (a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), - (b) the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset, shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and 19 ITA.No.1113/Hyd./2024 (ii) the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid."

6.12. On a plain reading of the above provisions, and in the light of evidence brought on record, it is evident that the appellant has fulfilled all the eligibility criterion prescribed therein to claim the benefit of exemption from chargeability of Capital Gains (arising from sale of shares in his hands). The quantum and date of qualifying investments made towards construction of residential house (and deposit of unutilized net consideration in the Capital Gains Accounts Scheme) by the appellant are not disputed by the AO. The peculiar feature of the present case is that the AO has denied the benefit of exemption, mainly on grounds of technical breach of certain disqualification criterion laid down therein; and not for failure to fulfil the substantive criterion of having made the qualifying investment towards construction of new residential house, or having deposited the unutilized sale consideration in the Capital Gains Accounts Scheme. 6.13 Section 54F is a beneficial provision allowing for exemption from chargeability of Capital Gains in certain cases, where the net sale consideration is invested in new residential house. In a plethora of judgements, Courts have firmly laid down the rule that a provision for deduction, exemption or relief should be interpreted liberally, reasonably in favour of the assessee; and it should be construed so as to effectuate the object of the legislature, and not to defeat it. 6.13.1. In a case involving interpretation of provisions of Section 54F. Hon'ble Gujrat High Court in the case of Kishorbhai Harjibhai Patel Vs ITO (2019) (107 taxmann.com 295) (Gujarat), has held that once an assessee falls within the ambit of a beneficial provision, then the said provision should be liberally interpreted. 6.13.2. In another case involving interpretation of similar provisions of Section 54EA, Hon'ble Karnataka High Court in the case of CIT Vs. J. Palemar Krishna (2012) (342 ITR 366) (Karnataka) has upheld the view that an interpretation to extend the benefit intended by the Legislature should definitely be preferred to an interpretation to deny the benefit by resorting to technical interpretation.

20 ITA.No.1113/Hyd./2024 6.13.3. Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. Vs CIT (1992) (196 ITR 188) (SC) has held that a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the section and not to frustrate it 6.14. The facts of the present case are required to be considered in the light of principles laid down in the aforementioned judicial precedents. There is no dispute on the fact that the appellant has fulfilled the substantive requirements in order to claim the exemption of LTCG under section 54F, on a proportionate basis, by way of investing part of the sale consideration towards construction of residential house, and depositing certain unutilized sale consideration in the Capital Gains Account Scheme, within the prescribed time period. This is duly and adequately supported by documentary evidence on record, as elaborated at Para 6.10 above. AO has, however, denied the benefit of exemption purely on certain technical grounds. The material facts relating to each such ground of denial of exemption are discussed in detail, in the succeeding paragraphs. The due date applicable to the appellant 6.15. Sub-section (4) of Section 54F stipulates that the net sale consideration should be invested in the new asset, or the unutilized sale consideration should be deposited in the Capital Gains Account Scheme, within the due date for furnishing return of income under section 139(1). There is no dispute on the fact that the appellant is one of the partners in the partnership firm M/s Duthala Pharma, having fifty percent share in profits thereof. The said partnership firm submitted its Tax Audit Report, required under section 44AB of the Act, for the Financial Year ending 31st March 2022 in Form 3CB on 7th October 2022. The Explanation below sub-section (1) of section 139 lays down that "due date" for the said sub-section, in case of partner of a firm, whose accounts are required to be audited under the Act, or under any other law, shall be 31st October' 2022. On these facts, it is evident that the "due date" for furnishing return of income under section 139(1), as applicable to the appellant being partner in a firm, whose accounts have indeed been audited under section 44AB of the Act, for the year under consideration, was 31st October 2022. The appellant has made the qualifying investment towards construction of new house, by way for 21 ITA.No.1113/Hyd./2024 purchase of land, on 18th October' 2022. Further, the appellant has made the qualifying deposit of unutilized part of the sale consideration in the Capital Gains Accounts Scheme on 28th October' 2022. In other words, the appellant has duly satisfied the technical requirements enjoined under sub-section (4) of section 54F, by investing part of the sale consideration towards new asset, as also depositing the unutilized part in the Capital Gains Accounts Scheme, within the due date under section 139(1)as applicable to him, i.e. within 31st October' 2022. 6.15.1. The view of the AO on this issue is that the accounts of the said partnership firm M/s Duthala Pharma were not required to be audited under section 44AB of the Act, and therefore the due date applicable to the appellant was 31st July' 2022, and not 31st October' 2022. It is noted from the Tax Audit Report of the said partnership firm, that the Turnover for the year under consideration is to the tune of Rs. 6.24 Crore, as against which it has declared a net loss of (-) Rs. 23.75 Lakh. Therefore, the said partnership firm has got its books of accounts audited, and furnished the Audit Report, as required under section 44AB of the Act. AO has, however, made out a case that the account of the firm were not required to be audited under section 44AB, by virtue of applicability of Proviso thereto; which lays down that the Turnover criterion for getting the accounts audited shall be extended up to Rs. Ten Crore, in certain cases (whereas the declared Turnover of the firm was only Rs. 6.24 Crore). I am not inclined to concur with the view of the AO. The view taken by the AO is too pedantic, to say the least. In case of an individual, the due date of furnishing return of income under section 139(1), ordinarily, is 31st July of the relevant assessment year. However, in case of an individual, being partner in a firm whose accounts are required to be audited, the due date of furnishing return of income under section 139(1), ordinarily, is 31st October of the relevant assessment year. The simple reason for allowing partner of a firm extended time to furnish his return of income, is that the details of remuneration, interest etc. paid by the partnership firm are required to be audited by the Tax Auditors of the firm. These details are necessary for the partner to finalize his return of income. In the instant case, the partnership firm M/s Duthala Pharma has got audited its books of accounts for the year, as the Turnover was in excess of Rs.One Crore, and the firm has claimed losses for the year. Therefore, it is only logical that the appellant being partner in such firm, must be allowed extended time up to 31st October of the relevant assessment year (i.e. 31st October' 2022), to finalise his return of income. The argument of the AO is that the aggregate cash payments by the 22 ITA.No.1113/Hyd./2024 said partnership firm does not exceed five percent of the total payments, and therefore by virtue of Proviso, the partnership firm was not required to get the books audited. Firstly, the fact whether or not the cash payments/receipts exceed five percent of total payments/receipts, is a question which can scarcely be answered with any certainty, in absence of detailed audit of books of accounts. Secondly, this Proviso merely serves to relax the Turnover limit prescribed for statutory audit of an assessee, carrying on business or profession; by stipulating that in case where cash transactions do not exceed five percent of total transactions, the Turnover limit shall stand increased from One Crore to Ten Crore. It is for the assessee (the partnership firm here) to claim that its case is covered by the said relaxation; hence books of accounts are not mandatorily required to be audited. However, in the instant case, when the partnership firm has actually got the books of accounts audited, under clause (a) of section 44AB (as the declared Turnover was in excess of Rs. One Crore), it cannot be the case of AO that there was no requirement to conduct audit, by virtue of applying the said Proviso. 6.15.2. In view of the above, I find that "due date for furnishing return of income for the appellant, being partner in a firm whose books of accounts have been audited under the Act, was 31st October 2022. Therefore, the appellant has duly satisfied the requirements under section 54F(4), by making investment towards construction of new residential house, and depositing the unutilized sale consideration in the Capital Gains Accounts Scheme', within the said "due date". 6.15.3. On similar issue, Hon'ble ITAT, Ahmedabad in the case of ITO Vs Jhaveri Sandeep Bipinchandra (HUF) (2024) (162 taxmann.com 796) (Ahmedabad Trib.) has held that where assessee fulfilled basic condition for claiming exemption under section 54F by investing net consideration received on sale of original asset in a new asset/residential house within prescribed period of two years from sale of original asset, exemption could not be denied merely for reason that majority of investment was made subsequent to due date of filing of return of income under section 139(1). Applicability of Proviso below sub-section (1) of Section 54F 6.16. The proviso below sub-section (1) of section 54F lays down certain disqualifications for the claim of exemption under the said section. The proviso lays down that the benefit of 23 ITA.No.1113/Hyd./2024 exemption shall not be available to an assessee, who either owns more than one residential house (other than the new asset) on the date of transfer of original asset; or purchases another residential house (other than the new asset), within a period of one year of transfer, or constructs another residential house (other than the new asset) within a period of three years of transfer. This is subject to further condition that the income from such other residential house is chargeable to tax under the head 'Income from House Property'. 6.16.1. In the instant case, AO has noted from the ITR filed by the appellant for the earlier years i.e. for Assessment Year 2021-22, that the appellant already owned two house properties. Therefore, AO has taken a view that the appellant was not eligible to claim exemption under section 54F, as he had violated either of the first two conditions, namely (i) the appellant was owning more than one residential house (other than the new asset) as on the date of transfer of original, or (ii) the appellant had purchased another residential house, other than the new asset, within a period of one year. The relevant and material facts relating to these house properties are discussed below. 6.16.2. In respect of the residential House Property at Plot No. 7, Gayatri Gardens, Balaji Hills, Nizampet, Hyderabad- 500090, the appellant has contended that the said property was gifted by him to his daughter Ms. Sahithi Duthala, at the time of her marriage, way back in 2015. The appellant has claimed that the gift was made by way of oral gift to his daughter, as per the prevalent customs and traditions. The appellant has furnished copy of registered Streedhan Agreement dated 30.11.2017. wherein the aforesaid residential House Property has been mentioned as gift received from father, i.e. the appellant. The appellant has also furnished copy of Gift Settlement Deed dated 25th June 2022 in respect of the said property, between the donor (the appellant) and the donee (his daughter). In this regard, the appellant has clarified that though the formal Gift deed was executed and registered much later, the appellant had gifted away the property to his daughter in 2015 itself; therefore he was not the owner of the said property at the time of sale of shares i.e. as on June 2021. The appellant has also furnished copies of ITRs filed by his daughter Mrs Sahithi Duthala for the Assessment Years 2020-21, 2021-22 and 2022-23, wherefrom it is noted that his daughter has been mentioning address of the said residential House property in her return of income. In view of a plethora of evidence brought on record, it is evident that the appellant was not the actual owner of the said residential House 24 ITA.No.1113/Hyd./2024 property (on the date of sale shares in June 2021), as the same had been gifted away to his daughter long back in 2015. The gift was given at the time of a social occasion (ie. marriage), in accordance with prevailing traditions; and it was made between two natural persons having bonds of natural love and affection. The gift has been later recognized in two registered documents also, namely the Streedhan Agreement (between daughter and her husband), and by way of Gift Deed (between father and daughter). AO has rejected the validity of Gift transaction merely relying because it was not registered and executed. However, on considering the totality of facts, and in the light of documentary evidence, I am inclined to concur with the appellant's contention that he had validly made a Gift of the aforesaid residential House property to his daughter, Mrs Sahithi Duthala, at the time of her marriage in 2015; even though the same was formalized at a later date. Therefore, the appellant cannot be regarded as owner of the said residential House Property at Gayatri Gardens, as on the sale of shares in June 2021. 6.16.3. In respect of the other residential House Property being Flat No. 1605, Block G, My Homes Bhooja, Gachibowli Raidurgam Village, Hyderabad-500036, the appellant has contended that booking amount for the said house property was paid by his daughter in 2020 (Rs.50,000/- on 30.09.2020 and Rs.79,11,500/-on 18.12.2020), and the remaining amount was paid by the appellant. The total consideration for the said flat was to the tune of Rs.4.17 Crore. The appellant has stated that substantial part of the sale consideration (to the tune of Rs.3.30 Crore) was paid prior to the date of transfer of original asset (i.e sale of shares on 16.06.2021). On these facts, the appellant has argued that this cannot be considered a case of purchase of new residential house, after the date of transfer of original asset. The appellant has stated another fact in support of his plea that the Proviso does not apply to his case. The sale of deed of the said flat (Flat No. 1605, My Homes Bhooja) was executed and registered later on 07.07.2021, and possession of the flat was taken from the builder. As on the date of transfer of the original asset (i.e. sale of shares on 16.06.2021), the said flat was under construction, and not habitable. The said flat is a self- occupied house. Therefore, the appellant has claimed that income from the said house property was not chargeable under the head 'Income from House Property', and therefore the conditions prescribed in the Proviso are not violated. On the given facts, I am inclined to concur with this alternative plea of the appellant. There are two limbs to the Proviso to section 54F. In a case where assessee violates any of the conditions prescribed in clause (a)

25 ITA.No.1113/Hyd./2024 thereof, the further conditions mentioned in clause (b) are also required to be satisfied, namely that the income from such other residential house (other than the new asset) should be chargeable under the head 'Income from House Property'. The use of word 'and' makes it evident that the conditions are to be read together, and should be satisfied cumulatively. In the present case, this new residential house (Flat No. 1605, My Homes Bhooja) was under construction as on the date of transfer of shares, ie in June 2021. The possession was taken later, and the house was self- occupied by the appellant. As such, the Annual Value of the said residential house has to be taken as Nil, as per provision of section 23 of the Act. On the given facts, I find that the appellant has not violated the cumulative conditions prescribed under Proviso to the section 54F of the Act. 6.16.4. On similar facts, Hon'ble ITAT, Mumbai in the case of Anant R Gawande Vs ACIT (2022) (144 taxmann.com 127) (Mumbai - Trib.) has held that where Assessing Officer denied exemption under section 54F(1), holding that assessee was owner of two residential properties at time of transfer of original asset, since one property was under construction and income from said property was not chargeable under head "Income from house property" till time of possession, therefore, condition stipulated in clause (b) of proviso to section 54F(1) was not satisfied and, accordingly, consequential relief was to be granted to assessee. 6.16.5. On similar facts, Hon'ble ITAT, Mumbai in the case of Shweta Singh Vs ITO (2024) (161 taxmann.com 302) (Mumbai - Trib.) has held that Joint ownership in two residential properties at time of sale of original asset would not disentitle assessee to claim deduction under section 54F. 6.16.6. On similar facts, Hon'ble ITAT Bangalore in the case of Smt. Sajida Begum Vs ITO (2015) (56 taxmann.com 269) (Bangalore Trib.) has held that exemption under section 54F cannot be denied on pretext of two houses, when assessee had had made an oral gift in respect of one such property in favour of her daughter. In that case also, the Assessing Officer had rejected assessee's claim taking a view that gift had not been executed by a registered document. This view was confirmed by CIT (Appeals), but overruled by the Tribunal.

26 ITA.No.1113/Hyd./2024 Exemption not admissible on purchase of vacant land 6.17. AO has also denied the claim of exemption on the ground that intention of legislature is to allow exemption for purchase or construction of new residential house, and not towards purchase of vacant plot of land. Brief facts on this issue are that the appellant has purchased land for construction of new house, as per the sale deed executed on 18.10.2022, for total sale consideration of Rs.40.73 Crore. The appellant has paid Stamp Duty and Registration Charges to the tune of Rs.3.09 Crore thereon. Thereafter, the appellant has entered into an agreement for house construction, with the builder M/s Advitha Infra on 08.12.2022 for construction of residential house for total consideration of Rs.2.02 Crore. The agreement for house construction with the builder was later revised on 03.01.2023, wherein an escalated total consideration to the tune of Rs.11 Crore was agreed upon for completion of all works to be undertaken. On completion of construction work, an occupancy certificate for the said residential house was issued by the Municipal Authority on 18.06.2024. The appellant has brought on record the necessary documentary evidence to establish all these facts (as already listed at Para 6.9 above). On the given facts, I find that the appellant has duly invested the sale consideration towards construction of new residential house (and not towards purchase of vacant plot of land), and further that the construction of residential house has been completed within the prescribed period of three years, reckoned from the date of transfer of original asset (i.e. sale of shares on 16.06.2021). As such, the findings of AO that the exemption is not admissible for purchase of vacant plot of land, is not borne out from facts of the case, as the investment was made towards construction of new residential house, which was completed within the prescribed period.

7. In view of the facts and circumstances of the case, and respectfully following the above binding judicial precedents, I find that the appellant is eligible to claim the exemption under section 54F, to the extent of Rs.53,22,48,667/-, from chargeability of Long Term Capital Gains arising on sale of shares during the year. The appellant has brought on record the requisite evidence, which is adequate to establish the material fact that part of the net sale consideration was invested towards construction of new residential house, and certain unutilized sale consideration was deposited in the Capital Gains Account Scheme, within the period prescribed therein. The facts on record do not indicate that the appellant has violated any of the 27 ITA.No.1113/Hyd./2024 conditions prescribed under the Proviso to section 54F, or laid down in sub-section (4) thereof. The completion of construction of new residential house within the permissible period of three years from the date of transfer of original asset is also duly evidenced. On these facts, the action of AO in denying the benefit of exemption under section 54F is not sustained. The Jurisdictional Assessing Officer (JAO) is accordingly directed to delete the addition of Rs.43,22,48,667/- made on this account. These grounds of appeal are allowed.”

29 ITA.No.1113/Hyd./2024 submitted that, when the assessee has made an oral gift on the occasion of the marriage of his daughter way back in the year 2015, a right in personam is created in favour of the donee and, therefore, even in absence of registered Gift Deed, the right and interest in the property is transferred to the donee when the gift has been made by the assessee. Further, it is a customary in India, more particularly, in Hindu Society that between the close family Members including between father and daughter oral gifts is recognized and going by the Indian custom, the claim of the assessee that, he has gifted one of the residential house property to his daughter on the occasion of her marriage should be accepted. More particularly, subsequently, the said gift has been registered under the Transfer of Property Act. Therefore, the reasons given by the Assessing Officer that, unless the Gift Deed is registered, there is no valid Gift of property and consequently, the assessee cannot claim that property has been gifted by him is not correct.

30 ITA.No.1113/Hyd./2024 8.1. Learned Counsel for the Assessee further referring to the provisions of sec.54F(1), Sec.139(1) and proviso 44AB of the Act submitted that, the observation of the Assessing Officer in light of “due date” for filing return of income u/sec.139(1) is totally incorrect because, as per the provisions of sec.139, the due date for an assessee who is partner of any Firm and books of accounts of the said Firm is required to be audited u/sec.44AB of the Act is 31st October, but, not 31st July as claimed by the learned Assessing Officer. The Assessing Officer without appreciating the relevant facts, on his own imagination and understanding of law, interpreted that, the due date for the assessee for filing return of income is 31.07.2022 by bringing proviso to sec.44AB of the Act, even though, the material placed on record clearly shows that the books of accounts of the Firm is audited by an Accountant and the assessee has filed his return of income as per the due date provided u/sec.139(1) of the Act. Learned Counsel for the Assessee further referring to the third observation of the Assessing Officer with regard to utilization of land for the 31 ITA.No.1113/Hyd./2024 purpose of construction of residential house property submitted that, there is no prohibition for purchase of land for the purpose of construction of the residential house property. The only condition is that on or before three years from the date of transfer of an asset, the assessee should complete the construction of residential house property. In the present case, the assessee has purchased the land and also constructed house property on or before the due date provided u/sec.54F of the Act. For this, the assessee has furnished copy of occupancy certificate dated 18.06.2024 issued by the Municipal Authorities in favour of the assessee. Although, the assessee has satisfied all the conditions provided u/sec.54F of the Act, but, the Assessing Officer has denied exemption only on technical grounds. The learned CIT(A) after considering all the relevant facts, has rightly deleted the addition made by the Assessing Officer and thus, the order of the learned CIT(A) should be upheld.

32 ITA.No.1113/Hyd./2024 9. MS. M. Narmada, learned CIT-DR for the Revenue, on the other hand, supporting the order of the learned CIT(A) submitted that, the learned CIT(A) has erred in law and on facts in deleting the addition made by the Assessing Officer towards disallowance of exemption u/sec.54F of the Act, even though the assessee has not satisfied the conditions provided thereunder which is evident from facts brought on record by the Assessing Officer where the Assessing Officer has brought-out number of deviations. The learned CIT-DR further submitted that, the assessee is having more than one residential house as on the date of transfer of original asset which is evident from the return of income filed by the assessee for the relevant assessment year where the assessee himself has admitted two residential house properties. Although, the assessee has claimed that one house property said to have been gifted to her daughter in the year 2015 on the occasion of her marriage, but, the Gift Deed has been executed in the year 2022. Further, the assessee has mortgaged the property in favour of Bank for loan purpose. Therefore, the 33 ITA.No.1113/Hyd./2024 argument of the assessee that he was not owner of the said house is devoid of merit and cannot be accepted. Further, the Assessing Officer had brought out the fact that of not investing the consideration in capital gain deposit account scheme on or before the due date for filing return of income by bringing on record relevant provisions of sec.44AB of the Act, where the assessee is not required to get his accounts audited. Further, the Assessing Officer had also brought out clear facts that, assessee has not utilised the total land area for construction of house property and, therefore, observed that, assessee is not eligible for claiming exemption u/sec.54F of the Act. Although, the Assessing Officer has brought on record all the relevant facts and also relied on relevant provisions of the Act, but, the learned CIT(A), without appreciating the reasons given by the learned Assessing Officer, deleted the addition made by the Assessing Officer. Therefore, she submitted that the order of the learned CIT(A) should be set aside and the addition made by the Assessing Officer should be confirmed.

34 ITA.No.1113/Hyd./2024 10. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the assessee has sold unquoted equity shares of two companies for a consideration of Rs.94,49,92,783/- and computed long term capital gains of Rs.92,28,29,193/- after deducting indexed cost of acquisition of Rs.2,21,72,590/-. The assessee has claimed exemption u/sec.54F of the Act to the tune of Rs.53,22,48,667/- which consists of investment made for purchase of land to the tune of Rs.43,83,37,000/- and investment made in capital gain deposit account scheme of Rs.10,67,00,000/-. The Assessing Officer never disputed these facts. However, disallowed the claim u/sec.54F of the Act on the ground that assessee has not satisfied the conditions provided thereunder. The Assessing Officer has given three reasons for denying exemption u/sec.54F of the Act. The first and foremost reason given by the Assessing Officer is that, the assessee has not satisfied the clause-(a) of proviso to sec.54F(1) of the act. The Assessing Officer further observed that, the assessee has 35 ITA.No.1113/Hyd./2024 not satisfied proviso to sec.54F(4) of the Act by investing the amount of capital gain in the capital gain deposit account scheme on or before the due date provided for filing return of income u/sec.139(1) of the Act. The Assessing Officer had also observed that the assessee had only purchased the land and has constructed residential house property only in 6% of the land leaving behind 94% vacant land and, therefore, observed that, exemption cannot be allowed for investing capital gain for purchase of vacant land.

39 ITA.No.1113/Hyd./2024 12. Having said so, let us come back to the reasons given by the Assessing Officer. The Assessing Officer has denied exemption on three grounds. The first and foremost reason given by the Assessing Officer is applicability of proviso to sec.54F(1) of the Act. The proviso below sub- sec.(1) of sec.54F lays down certain disqualification for claiming exemption under the said section. As per the said proviso, the benefit of exemption shall not be available to an assessee, if the assessee owns more than one residential house [other than the new asset] as on the date of transfer of original asset and further, purchase any residential house [other than the new asset] within one year of transfer or construction of another residential house. This is subject to further condition that the income from such other residential house is chargeable to tax under the Head “Income from house property”. In the present case, it was the contention of the Assessing Officer that, the assessee owns more than one residential house as on the date of transfer of original asset. The assessee claims that one residential house property at Flat No.7, Gayatri Gardens, 40 ITA.No.1113/Hyd./2024 Balaji Hills, Nizampet, Hyderabad has been gifted to his daughter viz., Sahiti Duthala at the time of her marriage way back in the year 2015. The Assessing Officer disputed the gift of the property in absence of registered Gift Deed at the time of gift of the property. In other words, there is a gift deed executed in the year 2022. However, there was no gift deed when the property was gifted in the year 2015. The assessee contended that as per the Hindu Customs and Traditions, oral gifts are common that too at the time of marriage of their children. In the present case, the assessee claims to have gifted one residential house property as promised in favour of her daughter on the occasion of her marriage out of natural love and affection which was solemnised by executing a registered Gift Deed dated 25.06.2022 and further verified by the ‘Streedhan Agreement’ between the daughter of the assessee and her husband, as per which, both parties have agreed that the property has been gifted by her father in the year 2015 and the benefits of the property is for the daughter. Further, the assessee had also proved the gift of the property by filing the 41 ITA.No.1113/Hyd./2024 income tax return filed by the daughter of the assessee for the relevant assessment year where she claimed her residential address from above house property gifted by the assessee. From the details filed by the assessee, there is no dispute with regard to the gift of property to her daughter in the year 2015 on the occasion of her marriage. In so far as reasoning of the Assessing Officer that in absence of registered Gift Deed, proper Gift cannot be executed in view of provisions of sec.123 of the Transfer of Property Act, 1882, in our considered view, there is no dispute with regard to the legal position that Gift of immovable property can be given only by way of a registered instrument signed by donor and attested at atleast two witnesses. However, going by the Indian Customs and Traditions, the arguments of the assessee that, he has made oral gift to her daughter on the occasion of her marriage in the year 2015 needs to be accepted because, it is common in Indian Hindu Society that property have been gifted to sons and daughters out of natural love and affection even without a registered document. Therefore, we are of the considered view that, 42 ITA.No.1113/Hyd./2024 argument of the Assessing Officer that, in absence of any valid registered gift deed, gift cannot be considered is devoid of merit and accepted. Further, at this stage, it is relevant to consider the decision of Hon’ble Supreme Court in the case of Sanjeev Lal vs., CIT & Anr. (supra), where the Hon’ble Supreme Court in light of provisions of sec.54 considered the term ‘Transfer’ as defined u/sec.2(47) of the Act and held that when a right in personam is created in favour of the vendee, the vendor is restrained from selling the property to someone else because the vendee, in whose favour the right in personam is created, has a legitimate right to enforce specific performance of the agreement, if the vendor, for some reason is not executing the sale deed. Although, the facts of the above case before the Hon’ble Supreme Court is in light of Agreement to Sell between the parties, but, if we apply the ratio laid down by the Hon’ble Supreme Court, in our considered view, the Gift can be considered as a valid Gift going by the practice prevailing in Indian Society.

43 ITA.No.1113/Hyd./2024 13. In so far as the argument of the Learned DR in light of mortgage of the gifted property to Kotak Mahindra Bank, in our considered view, merely for the reason of mortgaging the said property to a Bank for availing loan by the assessee, it cannot be said that the assessee is not gifted the property in favour of his daughter. Admittedly, the gift is between father and daughter. Going by the relationship between the parties, it is not surprised for us that, the property belong to daughter has been used by the father to avail Bank loan because, it is common in our society that, a related-party property has been given as collateral for availing loan with the consent of the other party. In the present case, it was the claim of the Learned Counsel for the Assessee that, the property has been mortgaged by the appellant-assessee to Kotak Mahindra Bank for availing loan with the consent of his daughter and further, as per the No Objection Certificate issued by the Bank, the appellant-assessee and his daughter both have consented to give the property as security for availing loan. From the above, it is undisputedly clear that, the assessee 44 ITA.No.1113/Hyd./2024 not as a owner of the property has mortgaged the property, but, mortgaged the property with the consent of his daughter. Therefore, we are of the considered view that, the said facts does not alter the fact with regard to entitlement of the assessee for claiming exemption u/sec.54F of the Act. Thus, we reject the arguments of the Learned DR. Therefore, we are of the considered view that, once the Gift given by the assessee is considered as valid Gift, then, the assessee is left with only one residential house property as on the date of transfer of original asset dated 16.06.2021 and, therefore, the assessee satisfied the condition of proviso below to sub-sec.(1) of sec.54F of the Act and eligible for exemption u/sec.54F of the Act.

15.1. We find that, assessee is a partner in a partnership firm and partnership firm is subjected to audit u/sec.44AB of the Act. It is also on record that, the assessee has filed relevant audit report issued by an Accountant of partnership firm and as per the said audit report, the Auditor’s specified the “due date” of filing audit report is 31.10.2022. Once, there is no dispute with regard to the fact that, the assessee is a partner in a firm, whose accounts are required to be audited and in fact, the assessee has filed relevant audit report in prescribed Forms to prove it’s case, in our considered view, the Assessing Officer ought not to have artificially inserted a “due date” as per his own understanding of law, even though, the evidences clearly shows that actual “due date” for filing 50 ITA.No.1113/Hyd./2024 return of income in the present case is 31.10.2022. In our considered view, the observation of the Assessing Officer without any factual details with regard to transaction of the assessee that the assessee cash payment is less than 5% is also not based on any evidence and only a suspicion. Therefore, in our considered view, the observation of the Assessing Officer in light of proviso to sec.44AB of the Act and the relevant reasons with respect to the due date is 31.07.2022 and that the investment made by the assessee towards capital gain for purchase of residential house on 18.10.2022 and investment made in capital gain account scheme on 28.10.2022 is beyond due date and assessee is not eligible for exemption, is contrary to law and cannot be accepted. Therefore, we are of the view that the learned CIT(A) after considering relevant facts, has rightly observed that assessee has satisfied the provisions of sec.54F of the Act and eligible for exemption is in accordance with Law and accordingly upheld.

53 ITA.No.1113/Hyd./2024 16.1. At this stage, it is relevant to consider certain judicial precedents, where it was held that, the cost of land includes the cost of new residential house property which is eligible for exemption u/sec.54F of the Act. In this regard, it is relevant to consider the Judgment of Hon’ble Madra High Court in the case of C. Aryama Sundaram vs., CIT [2018] 107 ITR 1 (Mad.) wherein the Hon’ble Madras High Court held as under :

“20. What has to be adjusted and/or set off against the capital gain is, the cost of the residential house that is purchased or constructed. Section 54(1) of the said Act is specific and clear. It is the cost of the new residential house and not just the cost of construction of the new residential house, which is to be adjusted. The cost of the new residential house would necessarily include the cost of the land, the cost of materials used in the construction, the cost of labour and any other cost relatable to the acquisition and/or construction of the residential house.

54 ITA.No.1113/Hyd./2024 22. It is axiomatic that Section 54(1) of the said Act does not contemplate that the same money received from the sale of a residential house should be used in the acquisition of new residential house. Had it been the intention of the Legislature that the very same money that had been received as consideration for transfer of a residential house should be used for acquisition of the new asset, Section 54(1) would not have allowed adjustment and/or exemption in respect of property purchased one year prior to the transfer, which gave rise to the capital gain or may be in the alternative have expressly made the exemption in case of prior purchase, subject to purchase from any advance that might have been received for the transfer of the residential house which resulted in the capital gain.

55 ITA.No.1113/Hyd./2024 16.2. In this view of the matter and considering the facts of the case and also by following the ratio of various Courts discussed hereinabove, we are of the considered view that, the assessee is eligible for exemption u/sec.54F of the Act towards amount invested for purchase of residential house property. The Assessing Officer without appreciating the relevant facts simply disallowed the exemption u/sec.54F of the Act. The learned CIT(A) after considering all the relevant facts has rightly deleted the addition made by the Assessing Officer. Thus, we are inclined to uphold the order of the learned CIT(A) and dismiss the appeal filed by the Revenue. Accordingly, the grounds of the appeal of Revenue are dismissed.

Order pronounced in the open Court on 09.05.2025.