Section 54F: Exemption from Capital Gain

The exemption is available only an individual or a HUF who transfers (or sells) a capital asset that results in a long-term capital gain, and then invests the amount of gain in acquiring a new residential house. This exemption is available subject to fulfillment of the following requirements:
(i) The transferor assessee should purchase or a residential house in India within a period of one year before or two years from the date of transfer or construct a residential house within three years from the date of the transfer of the original house. (Construction must be completed within these 3 years.), and

(ii) the new house property purchased or constructed has not been transferred within a period of three years from the date of purchase or construction.

In case the whole consideration is not invested and only a part of the sale consideration is invested, exemption shall be allowed proportionately i.e.

Amount exempt = Capital Gain x Amount invested

Net Sale Consideration

The above exemption shall be available only when the assessee does not own more than one Residential house property on the date of transfer of such asset exclusive of the one he has bought for claiming exemption u/s 54F.

The assessee also has the option of depositing the amount in the Capital Gains Accounts scheme before the due date of furnishing the Income Tax Return.

S. 54F can be summarized as under:

Related Cases:

S. 54F(4), 139 of IT Act, 1961—Capital gain—The assessee purchased a new house property availing of loan on Capital Gains Deposit Scheme within a period of two years from the date of transfer of property. The assessee did not have any other income than sale consideration which was invested in the purchase of property within the stipulated period as contemplated under the provisions of S. 54F of the Act. Since the assessee having had time to file the return of income u/s 139(4) of the Act, therefore, the assessee is entitled to claim deduction u/s 54F of the Act—P. Thirumoorthy vs. ITO (2011) 7 ITR (Trib) 10 (ITAT-Chennai)

S. 54F, r/w S. 143(1)(a) of IT Act, 1961—Capital gain—u/s 54F, in order to qualify for exemption of capital gains, the net sale consideration should be deposited in any bank account specified by the Government for that purpose before the last date for filing the return. The requirement of sub-s. (4) of S. 54F is that the assessee should produce along with the return, proof of deposit of the amount under the specified scheme in a nationalised bank. Since assessee neither deposited sale proceeds for construction of building in bank in terms of S. 54F(4) before date of filing of return nor were sale proceeds utilized for construction in terms of S. 54F(3), therefore, assessee is entitled to exemption u/s 54F of the Act—CIT  vs. V. R. Desai

S. 54F of the IT Act, 1961—Capital gain—The assessee, an HUF, sold its agriculture land in September, 1995 giving rise to a long-term capital gain. The assessee claimed to have purchased a flat in a co-operative group housing society and, therefore claimed the entitlement to the benefit of S. 54F of the Act. Most of the payment to co-operative society with regard to said flat had been made before one year of sale of agricultural land and amount invested for purpose of purchasing flat was not entire amount of capital gain but only a part of it and balance was not deposited in account in terms of sub-s. (4) of S. 54F. Therefore, since the amount received from sale of agricultuta land is not utilized for purchase of flat, hence, purchase of such residential house by the assessee cannot come within meaning of S. 54F of the Act—Vipin Malik (HUF) vs. CIT [2009] 227 CTR 66 (Delhi)

S. 54F of IT Act, 1961—Capital gain—S. 54F exempts tax on long-term capital gains arising from transfer of any long-term capital asset (not being a residential house) invested in a residential house. Merely extention of the existing building will not give benefit to the assessee u/s 54 of the Act—ACIT vs. T. N. Gopal [2010] 1 ITR (Trib) 309 (Chennai)—ACIT vs. T. N. Gopal [2009] 121 ITD 352 (ITAT-Chennai C)—ACIT vs. T. N. Gopal (2009) 125 TTJ 1 (ITAT-Chennai)

S. 54F of IT Act, 1961—Capital gain—As per S. 54F of the Act, where the assessee in order to save himself from payment of tax of capital gains decides to either purchase a house or construct a house within the specified period and if he fails to do so the statute provides as to when the capital gains are to be treated as having arisen and in which year they are to be treated. The amount of capital gains which has not been utilized u/s 54F of the Act has to be charged u/s 45 as income of the previous year after the three years from the date of sale of asset—Ranjit Narang vs. CIT (2009) 317 ITR 332 (All)

S. 54F, r/w S. 48  and 50C of IT Act, 1961—Capital gain—The Capital gains and the net consideration have to be worked out within the framework of S. 54F, without imposing any fiction created by any other section. Thus, capital gains arising from the transfer of any long-term capital asset for the purpose of S. 54 has to be worked out applying S. 48 without imposing S. 50C into it—Shri Gouli Mahadevappa vs. ITO (2011) 128 ITD 503 (ITAT-Bang)

S. 54F of IT Act, 1961—Capital gain—Exemption u/s 54F is allowable to the investment made by the assessee in construction of house property on the land of his spouse—CIT vs. P. R. Seshadri [2010] 228 CTR 334 (Kar)

S. 54F of IT Act, 1961—Capital gain—Assessee purchased ground floor and first floor in two deeds on two consecutive days and stated that both the premises in fact constituted one residential unit, there is only one staircase, which is internal and led to the first floor and there is no independent entry to the first floor and further there is only one kitchen in the entire house. Therefore, said purchase ground floor and first floor have to be treated one single residential unit and not two comprising two floors of one and the same double storey residential house and thus, the assessee would be eligible for deduction u/s 54F of the Act—ACIT vs. Sudha Gurtoo (2011) 7 ITR (Trib) 653 (ITAT-Delhi)

S. 54F of IT Act, 1961—Capital gain—Under the provisions of S. 54F, the requirement is that where capital gain arises on the transfer of any asset, not being a residential house, the assessee can take the benefit of exemption of the said capital gain provided the assessee has within a period of one year or two years after the date of transfer purchased a residential house or within  a period of three years after that day constructed a residential house. Where the assessee has invested the consideration received on sale of original asset in the purchase of the plot of land and started construction though not completed, the assessee has complied with the provisions of S. 54F and hence, is entitled to the benefit of exemption u/s 54F of the Act—Smt. Ranjeet Sandhu vs. CIT (2010) 133 TTJ (UO) 64 (ITAT-Chd)

S. 54F of IT Act, 1961—Capital gain—Any amount not utilized for the purchase or constructions of the new house should be deposited by the assessee within the time and in the manner required by sub-s. (4) of S. 54F, and should be utilized by the assessee in accordance with the notified scheme, in order to avail himself of the benefit of sub-s. (1) of the IT Act, 1961. Hence, where the assessee has not deposited the sale proceedings as per S. 54F(4) in the Capital Gains Accounts Scheme but it kept the amount in saving bank account which can be utilized by assessee in any manner as he wished, exemption u/s 54F is not allowable—Thakorlal  Harkishandas Intwala vs. ITO (2011) 140 TTJ 21 (ITAT-Ahd.)

S. 54F of IT Act, 1961—Capital gain—It is well settled principle that taxing statute shall have to be interpreted on the basis of the language. S. 54F encourages investment in residential house and the same is required to be interpreted in such a manner as not to nullify the object. There is no condition u/s 54F for claiming exemption from capital gains that the investment in the new asset  should be from the sale consideration of the original asset as the provisions of S. 54F provides an option to the assessee to invest even within a period of one year before the date of transfer of the original asset. The assessee having purchased the house within a period of one year before the sale of capital asset, is entitled to the relief u/s 54f of the Act—CIT vs. R. Srinivasan (2010) 235 CTR 588 (Mad)

S. 54F,  proviso of 54F of IT Act, 1961—Capital gain—Proviso to S. 54F(1) is applicable in case the assessee purchases residential house within a period of one year or constructs a residential house within a period of 3 years after the date of transfer of the original asset. Due to prohibition provided in S. 54F(1), the capital gain allowed in the year of deduction u/s 54F is to be deemed to be income of the previous year in which residential house is purchased or constructed. When the assessee has purchased a flat after one year of sale of original asset and constructed a new house within three years of sale of original asset, proviso (ii) to S. 54 of the Act is not applicable and the assessee is entitled to exemption u/s 54F in respect of new house constructed by him—P. R. Kulkarni & Sons (HUF) vs. Addl. CIT (2011) 135 TTJ 630 (ITAT-Bang)

S. 54F of the IT Act, 1961—Capital gain—S. 54 mandates that the house should be purchased by the assessee and it does not stipulate that the house should be purchased in the name of the assessee only. Here is a case where the house was purchased by the assessee and that too in his name and wife’s name was also included additionally. Such inclusion of the name of the wife for such peculiar factual reason should not stand in the way of deduction legitimately accruing to the assessee. S. 54 is the beneficial provision which should be interpreted liberally in favour of the exemption/deduction to the tax-payer and deduction should not be denied on hyper-technical ground. Thus, the exemption u/s 54F is extendable to the assessee for the total consideration paid by him for the purpose of the asset in the joint name—CIT vs. Ravinder Kumar Arora

S. 54F of the IT Act, 1961—Capital gain—Since the assessee has proved on record that within a period of two years from the date of sale of plot in question, he had utilized the amount of capital gain for purchasing another residential house, therefore the claim of assessee of capital gain amount u/s 54F of the Act is considerable—CIT vs. David Prem Narain Bhatia

S. 54F of the IT Act, 1961—Capital gain—Assistant Commissioner of Income-tax vs. Vijay S. Shirodkar [2012] 146 TTJ 685 (ITAT-MUMBAI)

S. 54F of IT Act, 1961—Capital gain—Provision of sub-s. (4) of S. 54F specifically require that the amount of net consideration not appropriated towards purchase/construction of residential house be deposited in the specified account before the due date for filing of return u/s 139(1) of the Act. In this matter the assessee sold the land to MTCDC on 31st March, 2005 and the possession of new constructed bungalow was given by the MTCDC to the assessee on 31st March, 2008 but the entire purchase price of the new house property was adjusted on 31 March, 2005 itself i.e. the date of transfer of the land by assessee to MTCDC and, therefore, assessee is entitled to exemption u/s 54F of the Act—Chetan Vithal Tupe vs. ACIT (2011) 142 TTJ 834 (ITAT-Pune)

S. 54F of IT Act, 1961—Capital gain—The Income Tax Appellate Tribunal, referred the question of law for opinion of Madras High Court. “Whether, on the facts and in the circumstances of the case, the Appellate Tribunal had valid materials to give a finding that the assessee had constructed a residential house before June 21, 1988, and thus eligible for exemption u/s 54F of the Income-tax Act?” While answering the question in favour of the Revenue and against the assessees, the Madras High Court held that:— “The Revenue had relied on the inspection report and also verified with the Madras Corporation and further they have taken photographs of the place and all these documents reveal that there were only an extension of the old building. Further learned counsel submitted that S. 54F is a beneficial provision and the same should be construed liberally. For the purpose of exemption u/s 54F, the assessees must construct residential houses within three years from the date of transfer. The question here is whether the assessees constructed residential houses or not. In this case, there is no proof for the construction of the same and hence the assessees are not entitled to relief u/s 54F of the Act. The argument that construing the provision liberally does not arise here when we are concerned with the factual issue for the foregoing reasons, we are of the opinion that there were no construction and the claim made by the assessee for exemptions u/s 54f were factually unacceptable.” Commissioner of Income tax Vs. V. Pradeep Kumar and another (HC)

S. 2(42A), 54F & 54EC of IT Act, 1961—Capital gain—Capital gains arising in 2006 on sale of property bequeathed to assessee by her late husband in 1989 through a will duly amended by codicil conveying full ownership right to assessee are long-term capital gains, notwithstanding the fact that relinquishment by her sons and daughters was made in April, 2006—DCIT vs. Smt. Raj. Rajpal (2011) 141 TTJ (UO) 44 (ITAT-Delhi)

S. 14A & 54F of IT Act, 1961—AY 2004-05—Capital Gain—The provision of S. 54F clearly allows the assessee to appropriate the consideration on account of capital gains to the extent that the new asset that had come into being. CBDT cricular No. 667 clarifies that for exemption it was meant for construction of a residential house after demolishing the existing/old structure.

S. 54F of the Act, 1961—Capital gain—Where the sale proceeds of the capital assets when invested in the construction of the residential house within the stipulated period, the assessee is entitled to relief u/s 54F and complition of construction or occupation is not essential in view of the CBDT Circular Nos. 471 and 672—Nimish Ajmera vs. DCIT

S. 54F of the IT Act, 1961—Capital gain—Amounts to appropriation of the capital gains u/s 54F supported by the CBDT Circular No. 667 which clarifies that for exemption it is meant for construction of a residential house after demolishing the existing/old structure—M. Vijaya Kumar vs. ITO.

S. 54F of the IT Act, 1961—Capital Gain—Exemptions—If assessee invest the amount of long term capital gain for purchase of a residential house under construction, the same will be treated as investment in construction of a house and not for purchase of a new house, therefore, the time limit for investment will be three years & not two years—Mukesh G. Desai (HUF) vs. ITO (ITAT-Mumbai)

S. 54, 54F of the IT Act, 1961—Capital Gain—Purchase of the two flats as one unit in the sale deed by the assessee has to be treated as one single residential unit and the assessee is entitled for full exemption u/s 54 of the Act—CIT vs. D. Ananda Basappa (Karn)

S. 54, 54F of the IT Act, 1961—Capital Gain—Exemption in case of investment in residential house—Whether exemption u/s 54F can be allowed in respect of the amount spent by the assessee, after the purchase of inhabitable house, to make the house habitable? While allowing the appeal pronto, the Income Tax Appellate Tribunal held that:—“In the present case, the Assessing Officer as well as the learned CIT(A) had rejected the claim of the assessee on the ground that no expenditure could be considered for exemption u/s 54F which was incurred after the date of purchase. The Assessing Officer had no occasion to examine the state of the condition of the house purchased by the assessee. Though, the list of expenditure has been provided by the assessee, yet it is to be examined whether such expenditure was incurred to make the house habitable or just to make the house more comfortable. This aspect of the matter requires examination by the Assessing Officer.” Saleem Fazelbhoy vs. DCIT, Circle-6(1), Mumbai (ITAT, Mumbai)

S. 54F of the IT Act, 1961—Capital gain—Sub-s. (1) should be read along with sub-s. (4) and it cannot be read in induction because the benefit of S. 54 is to be allowed subject of the provisions of sub-s. (4) of S. 54F of the Act; If the assessee constructs or purchases a residential house out of the borrowed funds, he is not eligible for deduction u/s 54F of the Act—Milan Sharad Ruparel vs. ACIT (2009) 121 TTJ 770 (ITAT-Mum)

S. 54F of IT Act, 1961—Exemption—Assessee claimed exemption u/s 54F that he had built two small rooms which constituted an independent dwelling unit and therefore he is entitled to clarification of circular No. 667, dt. Oct. 18, 1993 issued by CBDT which came to be rejected that the construction of two rooms does not constitute a dwelling unit and there is virtually no construction at site and the assessee had to prove such investment but in which he failed. Therefore, he is not entitled to the exemption u/s 54F of the Act—Pawan Kumar Garg vs. CIT (2009) 311 ITR 397 (P&H)

S. 54F of the IT Act, 1961—Capital gain—”The essence of the grounds in the appeal is that the CIT(A) has erred in confirming the addition of Rs. 5,71,200 on account of long-term capital gains by withdrawing the claim of exemption u/s 54F by holding that the assessee owns two houses before due date.” While allowing the appeal, the ITAT, Mumbai ‘H’ Bench held that:—”We are of the considered opinion that acquiring two houses in the manner described above at a different point of time does not bar him from claim of exemption u/s 54F. Now, issue about the absence of proper occupancy certificate and alleged incompletion of construction of the house, both these issues are not relevant in the light of the dominant fact on investment of capital gains, an act which is already completed in the month of December, 1992. This is an accepted proposition as approved by the Madras Bench of the Tribunal in the case of Mrs. Seetha Subramanian (supra). Therefore, we are of the considered opinion that the order of the CIT(A) needs to be set aside. AO is directed to look into the exemption as claimed by the assessee u/s 54F. Accordingly, grounds are allowed.” Nimish Ajmera vs. Deputy Commissioner of Income Tax [2009] 9 ITCD 43 (ITAT-Mumbai)

S. 54F of the IT Act, 1961—Capital gain—Benifit of deduction u/s 54F of the Act is not available to the addition made only to the plinth area, which is in the form of modification of an existing house—Mrs. Meera Jacob vs. ITO (2009) 313 ITR 411 (Ker)

S. 54F, r/w S. 254 of IT Act, 1961—Capital gain—Assessee claimed exemption u/s 54F of the Act saying that she purchased a residential house by investing the sale proceeds of certain shares. The house was purchased by the assessee partly from bank loan and partly from loan taken from family members and others instead of utilizing sale consideration of shares. Since sale proceeds of shares were not appropriated towards purchase of residential house, deduction u/s 54F of the Act is not permissible. The power to rectify a mistake u/s 254(2) cannot be used by Tribunal for recalling the entire order. No power of review has been given to the Tribunal under the Act, 1961—Smt. V. Kumuda vs. DCIT (2012) 135 ITD 116 (ITAT-Hyd)

S. 54F of IT Act, 1961—Capital gain—The exemption u/s 54F is available where the assessee has utilize the amount of net consideration on the construction of a residential house within a period of three years after the date  on which the transfer took place. S. 54F emphasizes on construction of a residential house and such construction must be real one. Hence, where assessee has claimed exemption u/s 54F but till date even possession of plot has not been handed over to him, exemption u/s 54F is not available to assessee—Pankaj Wadhwani vs. CIT (2012) 135 ITD 109 (ITAT-Indore)

S. 54F, r/w S. 2(47), of IT Act, 1961—Capital gain—Since the investment made by the assessee in residential property was well within period of one year prior to date of transfer, the deduction u/s 54F is available—ACIT vs. P. R. Chockalingam (2012) 135 ITD 75 (ITAT-Chennai)

S. 54F, 263 of IT Act, 1961—Revision—In cases where settled norms are ignored and assessment is made, revisional jurisdiction u/s 263 can certainly be exercised—CIT vs. Jawahar Bhattacharjee (2012) 342 ITR 74 (Gauhati)

S. 54F of IT Act, 1961—Capital gain—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 transaction are not complete in all respects and as required under the law, that would not disentitle the assessee from the benefit of exemption u/s 54F of the Act—CIT vs. Sambandam Udaykumar

S. 54F of IT Act, 1961—Capital gain—Without purchasing land, the house could not be construed. The first step should be purchase of land and same has been done in the present case. Therefore, the entire amount spent by the assessee in purchasing the land should be construed as amount invested in purchase or construction of residential house. Hence, the assessee is entitled to exemption u/s 54F as the intention of the statute provided in S. 54F have been satisfied by the assessee—Smt. V. A. Tharabai vs. DCIT (2012) 14 ITR (Trib) 15 (ITAT-Chennai)

Reference:

As Per Section 54F, of the Income Tax Act, 1961-

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, a residential house (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”.]

1. —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 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 unutilized amount in accordance with the scheme aforesaid.