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Facts
The assessee sold an immovable property on 19.08.2014, generating a long-term capital gain, and claimed a deduction under Section 54F for investing in an under-construction villa. A significant portion of the consideration for the new property was paid before the sale of the old property, and the entire consideration was paid between February 2014 and May 2014. However, the purchase deed for the new property was dated 26.04.2017. The Assessing Officer reopened the assessment and disallowed the deduction, a decision upheld by the CIT(A), on the grounds that the acquisition date of the new property fell outside the prescribed time limits under Section 54F.
Held
The Tribunal, relying on the Madras High Court decision in C. Aryama Sundaram (upheld by the Supreme Court), ruled that the assessee was eligible for the deduction under Section 54F. It observed that the payment for the under-construction property was made within the statutory timeframes, and Section 54F does not require the new asset to be acquired with the exact proceeds of the old asset, nor does it preclude construction commencing before the sale of the old property, as long as the investment is within the overall time limits. Consequently, the reassessment order disallowing the deduction was quashed.
Key Issues
Whether the assessee is entitled to deduction under Section 54F for investment in an under-construction property where payment was made before the sale of the original asset, and the formal purchase deed was executed beyond the two-year purchase window but within the three-year construction period.
Sections Cited
Section 144, Section 144B, Section 148, Section 54F, Section 54(1), Section 45
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Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH
Before: DR. BRR Kumar & Shri T. R. Senthil Kumar
Romaben Keyur Thakore The DCIT, Legal heir of Late Anandiben Circle-1(1)(1), Jitendrabhai Shah, Vs Vadodara. 11/A Saimy Society, Subhanpura, Vadodara-390023. PAN: AFOPS8299C (Appellant) (Respondent) Assessee Represented: Shri Prashant Upadhyay, AR Revenue Represented: Shri Abhijit, Sr.D.R. Date of hearing : 05.03.2026 Date of pronouncement : 10.03.2026 आदेश/ORDER PER : T.R. SENTHIL KUMAR, JUDICIAL MEMBER:-
This appeal is filed by the Assessee as against the appellate order dated 29.10.2025 passed by the Commissioner of Income Tax (Appeals) National Faceless Appeal Centre, Delhi arising out of the reassessment order passed u/s.144 r.w.s 144B of the of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2015-16.
Page no 2 A.Y. 2015-16
Brief facts of the case are that the assessee is an individual, filed his return of income for the Assessment Year 2015-16 on 24.08.2015 declaring total income of Rs.47,66,097/-. The case was selected for scrutiny assessment and the claim of deduction u/s.54F of the Act was accepted. The Assessing Officer found that assessee had disclosed sale of immovable property for consideration of Rs.85,04,201/- and claimed wrong deduction u/s.54F of the Act to the tune of Rs.79,07,696/-. Hence, the assessment was reopened by issuing a notice u/s.148 of the Act, which was served upon the assessee on 27.07.2022 and reassessment was completed by disallowing the claim of deduction u/s.54F of the Act at Rs.79,07,696/-
Aggrieved against the reassessment Order, the assessee filed appeal before the Ld.CIT(A), who has confirmed the disallowance made by the Assessing Officer by observing as follows:
“…on going through the aforesaid section it can be seen that the date of sale as per the sale deed is 19.08.2014 and the date of purchase of the property as per the purchase deed is 26.04.2017. It can be seen that the provisions of section 54F of the Act cannot be taken into consideration in the case of the assessee as the assessee should have purchased the property one year before or two years after the date of sale of the property. It can be seen that the execution of sale deed and actual possession of property both the circumstances in the case of the assessee is fulfilled only on 26.04.2017 which is beyond the two year limit as stipulated under section 54F of the Act. Further, the time barring date for purchase of property was 18.08.2016 and before this date the assessee had neither taken the possession of property nor executed the sale deed. The assessee has not fulfilled the above conditions for claiming the deduction u/s 54F of the Act. It can be seen that the letter from the builder dated 25.11.2017 also mentions the date of possession of the said property on 26.04.2017. On perusal of the said letter from the builder it can be seen that the agreement for sale was executed on 17.08.2016 as per the requirement of the assessee.
5.4. In view of the facts discussed above, the submission of the assessee as discussed above cannot be accepted. I therefore have no excuse to take a divergent view from the findings of the AO and therefore upheld the addition made by the AO. It can be seen that as the assessee had decided to purchase the immoveable property and paid the full consideration of Rs. 1,43,38,429/- during the period February 2014 to May 2014 i,e before the sale of immovable property on 19.08.2014 the deduction claimed u/s.54F of the Act by the assessee cannot be accepted and the addition made by the AO is hereby upheld. Hence the addition made by the AO of Rs.79,07,696/- is hereby confirmed. Accordingly, Ground No. 2 and 3 are dismissed…”
Aggrieved against the appellate order, assessee is in appeal before us raising the following Grounds of Appeal : “…1. The order of Commissioner of Income Tax (Appeals) National Faceless Appeal Centre (hereinafter referred to as CIT (A)) is bad in law.
2. The learned Commissioner of Income Tax (Appeals) erred in upholding the addition of Rs. 79,07/896/- and in dismissing the appellant's claim of deduction under section 54F of the Income Tax Act, 1961, despite the fact that the appellant had invested the net sale consideration in an under-construction residential property within the prescribed time limits as stipulated under section 54F, and had produced all relevant documentary evidence including sale deed, purchase deed and contractor's confirmation.
3. That the appellant craves leave to add, alter, amend or withdraw any of the above grounds at the time of hearing.…”
The Ld.Counsel for the assessee submitted before us that during the course of reassessment proceedings, vide submission dated 04.05.2023, as well as during the appellate proceedings before the Ld.CIT(A), the assessee contended that purchase of under construction house should be considered as construction house (to be completed within 3 years) and not as purchase of house within 2 years. The assessee in this case had invested net sale consideration in an under construction of residential property within the prescribed time limit stipulated u/s.54F of the Act and Page no 4 A.Y. 2015-16 produced all relevant documentary evidences including contractor’s confirmation. It was further submitted that the Builders confirmed full consideration was received between February 2014 to May 2014, therefore, the lower authorities are not correct in denying benefit u/s.54F of the Act. The Ld.Counsel for the assessee relied on the following judicial preedents:
Kothari Sanjy Manilal Vs. Deputy Commissioner of Income- tax [2024] 169 taxmann.com 618 (Ahmedabad-Trib.) 2. Mustasir I Tehsildar Vs. Income-tax Officer 21(2)(3) [2017] 88 taxmann.com 275 (Mumbai-Trib.
The Ld. Sr. DR appearing for the Revenue, supported the orders passed by the Lower Authorities and requested to uphold the same.
We have considered the rival submission and perused the material available on record. The undisputed fact is assessee sold immovable property for consideration of Rs.85,04,201/- vide sale deed 19.08.2014 resulting in Long Term Capital Gain of Rs.71,32,965/-.The assessee booked an under construction villa, unit no.64 in “North Park”, Shantigram Township, Ahmedabad for total consideration of Rs.1,43,38,429/- vide purchase deed dated 26.04.2017, against which the assessee paid Rs.93,39,429/- prior to the filing of return (i.e 24.08.2015) and accordingly claimed deduction u/s.54F of the Act. The contractor also confirmed that though the Agreement of Sale was executed in 2016, the assessee had paid the entire sale consideration in 2014 itself. Despite the Page no 5 A.Y. 2015-16 above facts, the Assessing Officer made addition of Rs.79,07,696/- on the ground that the assessee had merely purchased an immovable property and not constructed the said villa, thereby disallowing the benefit u/s.54F of the Act, which was confirmed by the Ld.CIT(A).
7.1 On identical facts the Hon’ble Madras High Court in the case of C. Aryama Sundaram Vs. Commissioner of Income-tax-3, Chennai [2018] 97 taxmann.com 74, wherein it was held that not only cost of construction of new property incurred after sale of old property would be eligible for exemption under section 54(1), but also cost to land on which new property was constructed, even if such land had been purchased three years prior to sale of old property, by observation as follows:
“…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.
At the cost of repetition, it is reiterated that exemption of capital gain from being charged to income tax as income of the previous year is attracted when another residential house has been purchased within a period of one year before or two years after the date of transfer or has been constructed within a period of three years after the date of transfer of the residential house. It is not in dispute that the new residential house has been constructed within the time stipulated in Section 54(1) of the said Act. It is not a requisite of Section 54 that construction could not have commenced prior to the date of transfer of the asset resulting in Page no 6 A.Y. 2015-16 capital gain. If the amount of capital gain is greater than the cost of the new house, the difference between the amount of capital gain and the cost of the new asset is to be charged under Section 45 as the income of the previous year. If the amount of capital gain is equal to or less than the cost of the new residential house, including the land on which the residential house is constructed, the capital gain is not to be charged under Section 45 of the said Act.
For the reasons discussed above, the appeal is allowed. The questions framed above are answered in favour of the appellant assessee and against the respondent revenue. The first question is answered in the affirmative and the second question is answered in the negative. No costs…”
7.2 This judgment of Hon’ble Madras High Court is upheld by the Hon’ble Supreme Court, wherein Revenue’s appeal was dismissed on the ground of Low Tax Effect reported in [2023] 148 taxmann.com 364. Respectfully following the above judgment of Madras High Court we hold that the assessee is eligible for claiming deduction u/s.54F of the Act and the entire reassessment is liable to be quashed on wrong appreciation of fact of the case.
In the result the appeal filed by the assessee is allowed.