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Facts
The assessee claimed a deduction under Section 54F on the sale of agricultural land. The AO disallowed the claim, holding that the new residential house was renovated and not newly constructed, and the construction started before the sale of the original asset. The CIT(A) upheld the AO's order.
Held
The Tribunal held that Section 54F emphasizes the completion of construction of a new residential house, not necessarily the commencement date. Judicial pronouncements support that construction can begin before the sale of the original asset, and the provision should be interpreted liberally.
Key Issues
Whether the commencement of construction of a new residential house before the sale of the original asset disqualifies the assessee from claiming deduction under Section 54F.
Sections Cited
250, 54F, 45, 139
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Income Tax Appellate Tribunal, JAIPUR BENCH “A”, JAIPUR
Before: Dr. S. SEETHALAKSHMI & SHRI GAGAN GOYAL
This appeal by assessee is directed against the order of NFAC, Delhi, dated 25.01.2024 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’). The assessee has raised the following grounds of appeal: -
1. On the facts and circumstances of the case and in law, the Learned CIT (Appeal) erred in upholding the addition of Rs. 1,09,42,400.00 made by Learned A.O on account of disallowance of deduction under section 54F as claimed by assessee in her return of income. The Appellant prays that the addition of Rs. 1,09,42,400.00 be deleted by allowing deduction under section 54F of the Act.
Appellant craves leave to add, amend, alter, vary and/or withdraw any or all above grounds of appeal
at the time of hearing of appeal or earlier.
2. The brief facts of the case are that the assessee lady filed her return of income on 28.09.2015 declaring total income at Rs. 2,64,230/-. The case of the assessee was selected for limited scrutiny under CASS. In the year under consideration the assessee claimed deduction u/s. 54F of the Act on sale of agricultural land amounting to Rs. 1,09,42,400/-. After detailed deliberation on the issue between the assessee and AO, ultimately claim of the deduction u/s. 54F of the Act was denied. The assessee being aggrieved with the same preferred an appeal before the Ld. CIT(A), who in turn dismissed the appeal of the assessee and confirmed the order of the AO. The assessee being further aggrieved, preferred the present appeal before us.
3. We have gone through the order of the AO, order of the Ld. CIT(A) and submissions of the assessee alongwith ground taken before us. It is observed that the assessee under consideration sold an agricultural land for a sale consideration of Rs. 1,26,40,966/- on 20.08.2014. The said land was purchased on 30.09.2014 for Rs. 7,69,203/- (Before indexation). The sales consideration of Rs. 1,26,40,966/- and indexed cost of acquisition amounting to Rs. 16,98,566/- are not under dispute by the department. In nutshell, the basic objections raised by the AO was that no new house property was constructed by the assessee, rather she renovated the existing one and the construction started on 12.09.2013, i.e. before the sale of capital asset under consideration, i.e. 20.08.2014.
For better understanding of the issue, we are reproducing herein below the provisions of section 54F of the Act as under:
Section - 54F, Income-tax Act, 1961 - FA, 2024 Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.
54F. (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 (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":
Provided further that where the cost of new asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purposes of this sub-section. 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 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 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. (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 furnishing 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 , subject to the second proviso to sub-section (1)] 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),
Exceeds
(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 (ii) the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid:
In view of the provisions of section 54F of the Act as enumerated (supra), it is observed vide clause a(iii) of the proviso and sub-section 2 that the assessee has to “constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset”. As far as commencement of construction is concerned there is no stipulation in the section. To substantiate his side of version, the AO relied upon the judicial pronouncements of various Hon’ble High Courts as under:
[2006] 153 TAXMAN 138 (MAD.) CIT, T. Nadu-I vs. V. Pradeep Kumar The burden was on the assessee to prove that they had actually constructed new residential houses for purpose of the exemption under section 54F. It was stated by the assessee that the assessee had constructed new residential houses, but they were unauthorised constructions and the same unauthorised constructions were later demolished for purpose of modernisation. In the instant case, there was no tangible material to even infer that a residential house was constructed. One of the Assessees said that there was an extension to an existing structure and the other said that the out-house was demolished; a new construction was put up in its place and both being unauthorised, had been pulled down on their own voluntarily. Section 54F emphasizes on construction of residential house. The said construction must be real one. It should not be a symbolic construction. Further, it was seen from the finding of the Tribunal that one of the Assessees had undertaken an extension work in the old building in the ground floor and first floor. From the above finding it was clear that there was no residential house and it was only an extension of the old building. A mere extension of the existing building would not give benefit to the assessee as contemplated under section 54F. In the case of another assessee, it was stated by the Tribunal that he had constructed a small building measuring 382 sq. ft. by demolishing the existing A.C.C. roofed outhouse of 324 sq. ft. There was no acceptable proof for such construction. Mere construction by way of extension of the old existing house would not mean constructing a residential house as contemplated under section 54F. The argument of the Assessees about the construction of residential houses was not based on any valid material and the assessee was not entitled to the benefit of section 54F. Also, there was no evidence or contemporaneous documents available to show that there were constructions. The assessee failed to satisfy the conditions contemplated under section 54F. [Para 8] In the instant case, the finding of the Tribunal was not based on any evidence. The order of the Tribunal was perverse and it was patently erroneous and unreasonable because it had overlooked the materials produced by the Assessing Officer and in the absence of any material, the Tribunal had come to an erroneous conclusion, and, hence, the Court could interfere under reference. The documents relied on by the assessee before the Tribunal were mere letters addressed by the architect. The said architect had given a quotation and bill and his acknowledgement of the receipt of a sum of Rs. 75,000 from each of those two Assessees, which were not sufficient to prove that there was construction of residential houses. The said documents and other evidences were produced first time before the Tribunal. But the revenue had relied on the inspection report and also verified with the Corporation and further they had taken photographs of the place and all those documents revealed that there was only an extension of old building. In the instant case, there was no proof for the construction of the residential houses and, hence, the assessee was not entitled to relief under section 54F. [Para 9] [2009] 313 ITR 411 (Ker.) Mrs. Meera Jacob vs. Income-tax Officer Section 54F does not provide for exemption on investment in renovation or modification of an existing house. On the other hand, construction of a house only qualifies for exemption on the investment. Even addition of a floor of a self-contained type to the existing house would have qualified for exemption. However, the assessee would not be entitled to deduction under section 54F in respect of investment in modification/expansion of an existing house. Both the above judicial pronouncements relied upon by the AO are on different set of facts and are not applicable to the facts of the case under consideration.
To substantiate her arguments, the assessee relied upon the following judicial pronouncements as under:
[2014] 41 taxmann.com 50 (Delhi) CIT-XV vs. Bharti Mishra Section 54F(1), if read carefully, states that the assessee being an individual or Hindu Undivided Family, who had earned capital gains from transfer of any long-term capital not being a residential house could claim benefit under the said section provided, any one of the following three conditions were satisfied; (i) the assessee had within a period of one year before the sale, purchased a residential house; (ii) within two years after the date of transfer of the original capital asset, purchased a residential house and (iii) within a period of three years after the date of sale of the original asset, constructed a residential house.[Para 12] For the satisfaction of the third condition, it is not stipulated or indicated in the section that the construction must begin after the date of sale of the original/old asset. There is no condition or reason for ambiguity and confusion which requires moderation or reading the words of the said sub-section in a different manner. The apprehension of the revenue that the entire money collected or received on transfer of the original/capital asset would not be utilised in the construction of the new capital asset, i.e., residential house, is ill-founded and misconceived. The requirement of sub-section (4) is that if consideration was not appropriated towards the purchase of the new asset one year before date of transfer of the original asset or it was not utilised for purchase or construction of the new asset before the date of filing of return under section 139, the balance amount shall be deposited in an authorized bank account under a scheme notified by the Central Government. Further, only the amount which was utilised in construction or purchase of the new asset within the specified time frame stand exempt and not the entire consideration received. [Para 13] Section 54F is a beneficial provision and is applicable to an assessee when the old capital asset is replaced by a new capital asset in form of a residential house. Once an assessee falls within the ambit of a beneficial provision, then the said provision should be liberally interpreted. [Para 14] [2015] 56 taxmann.com 163 (Kar.) CIT, Bangalore vs. K Ramachandra Rao Both the authorities relied upon by the assessee are relevant and substantiates the claim of the assessee on the given set of facts. In the matter under consideration before us, the only question before us is whether the construction of new residential house can be started even before the sale of capital asset under consideration or not, and the answer is yes. Because section as enumerated (supra) deals with the completion of the construction of the house and not the starting of the construction of the residential house.
The assessee entered into an agreement dated: 14.12.2012 for demolition of existing house at pages 14-16 of PB and other relevant details relating to construction of the house were placed before the AO and the Ld. CIT(A) vide para 3, pages no. 3-4 of the appeal order. The fact of submission of these documents were undisputed before the AO also and he has full opportunity to verify the same by summoning the parties involved/site verification by the Income Tax Inspector. No deficiency in the documents furnished by the assessee pointed out by the AO and it tantamount to acceptance of factual positions as claimed by the assessee. In view of this, facts as presented by the assessee are not under challenge. The only question involved was a pure question of law and that goes in favour of the Assessee. As far as question of deposit in Capital Gain Account Scheme is concerned, same has been discussed and decided in favour of the assessee by the Hon’ble Apex Court in the case of [2016] 73 taxmann.com 34 (SC) Xavier J. Pulikkal vs. DCIT, hence there is no question of further discussion on the same. Resultantly, ground taken by the assessee is allowed and the AO is directed to allow the claim of the assessee amounting to Rs. 1,09,42,400/- u/s. 54F of the Act.
In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on the 25th day of March 2025.