A 54F claim is valid if funds are used, even with construction delays.

By | October 9, 2025
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A 54F claim is valid if funds are used, even with construction delays.

Issue

Can a taxpayer be denied the capital gains exemption under Section 54F of the Income-tax Act, 1961, for a failure to complete the construction of their new house within the three-year time limit, if they have utilized the entire required amount for the purchase of land and for the construction within that same period?

Facts

  • An assessee sold shares and, in order to claim an exemption under Section 54F, invested the proceeds.
  • They purchased a plot of land which had an old, uninhabitable building on it and began the process of constructing a new residential house.
  • The assessee had set aside the funds in the Capital Gains Account Scheme (CGAS) and had fully utilized the entire amount for the purchase of the land and for the construction of the new property within the three-year period that is allowed by the law, starting from the date of the original sale of the shares.
  • However, the actual completion of the construction and the receipt of the final approvals for the new house happened after this three-year period had already expired.
  • The Assessing Officer (AO) disallowed the exemption, focusing strictly on the failure to complete the construction within the deadline.

Decision

The court ruled in favour of the assessee.

  • It held that the substantive and most important condition of Section 54F is the utilization of the funds for the specified purpose (purchasing or constructing a new house) within the prescribed time limit.
  • Since the assessee had demonstrably spent and utilized the entire required amount for the purchase and construction of the new house within the three-year period, they had met the core requirement of the law.
  • The court concluded that the assessee could not be denied the benefit of the exemption merely because the final completion of the project was delayed beyond the three-year mark, as the investment itself was made in time.

Key Takeways

  • “Utilization” is the Key Test, Not “Completion”: The courts often interpret the condition of “construction” in Section 54F in a liberal and practical manner. The critical test that is applied is whether the taxpayer has invested and utilized the funds in the construction activity within the time limit, not whether the house is 100% ready to move into with all approvals in place.
  • Substance Over Form: This is another classic example of the legal principle of “substance over form.” The substance of the assessee’s action was their timely and full investment in a new house. The formal completion date is considered secondary, especially when the taxpayer has done everything in their power to use the funds correctly.
  • A Beneficial Provision to be Construed Liberally: Section 54F is a beneficial provision that is designed to encourage investment in housing. The courts tend to interpret such provisions in a way that promotes their underlying objective, rather than denying the benefit on hyper-technical or narrow grounds.

An AO cannot expand a limited scrutiny’s scope without approval.

Issue

Can an Assessing Officer, while conducting a “limited scrutiny” assessment, expand the scope of their inquiry to issues that are beyond the specific and limited reasons for which the case was selected, without following the mandatory procedure of converting the case to a “complete scrutiny”?

Facts

  • The assessee’s case was selected by the department for a “limited scrutiny” under the CASS system. The specific and only reason for the selection was to verify a “large investment in property.”
  • The Assessing Officer (AO) first examined this mandated issue and found no discrepancies.
  • However, the AO then went beyond this limited mandate on their own initiative. They started to investigate other matters that were completely unrelated to the reason for the scrutiny, specifically, some exemptions that the assessee had claimed in a completely different and prior assessment year.
  • The crucial procedural failure was that the AO did this without taking the required prior permission from their superior authority to formally convert the limited scrutiny into a complete scrutiny.

Decision

The court ruled in favour of the assessee.

  • It held that an AO’s jurisdiction in a limited scrutiny case is strictly confined and restricted to the specific issues for which the case was selected.
  • If the AO, during the course of the limited scrutiny, finds a reason to investigate other matters, they must follow the prescribed departmental procedure of converting the case to a complete scrutiny, which requires prior administrative approval.
  • Since the AO in this case failed to do so, their action of inquiring into other matters was a violation of their jurisdiction, and any findings or additions resulting from that unauthorized inquiry would be invalid.

Key Takeways

  • Limited Scrutiny Means a Limited Scope: The very purpose of the limited scrutiny framework is to conduct a targeted and quick inquiry without putting the taxpayer through a full-blown audit of all their financial affairs. This limited scope acts as a jurisdictional boundary for the Assessing Officer.
  • Conversion to Complete Scrutiny is a Mandatory Procedure: An AO cannot unilaterally or arbitrarily decide to expand the scope of their inquiry. The instructions issued by the CBDT on this matter are clear and mandatory: prior administrative approval from a superior officer is a must before expanding the scope.
  • This is a Jurisdictional Error: Exceeding the scope of a limited scrutiny without following the proper procedure is not a minor mistake; it is a jurisdictional error. This means the AO acted without legal authority, and any additions they make on the issues that were outside the original mandate can be quashed for this reason alone.
N THE ITAT DELHI BENCH ‘G’
Sneh Gupta
v.
ACIT
SATBEER SINGH GODARA, Judicial Member
and S. Rifaur Rahman, Accountant Member
IT Appeal No. 3928 (DEL) OF 2024
[Assessment year 2016-17]
SEPTEMBER  22, 2025
Dr. Rakesh Gupta and Somil Aggarwal, Advs. for the Appellant. Manoj Kumar, CIT DR for the Respondent.
ORDER
S. Rifaur Rahman, Accountant Member. – This appeal has been filed by the assessee against the order of ld. Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [“ld. CIT(A)”, for short] dated 09.08.2024 for the Assessment Year 2016-17.
2. Brief facts of the case are, assessee filed her return of income on 02.08.2016 declaring total income of Rs.77,98,430/- for the AY 2016-17. The case of the assessee was selected for limited scrutiny under CASS for the reasons – (a) large investment in property (Form 26QB) as compared to total income and (b) large investment in property (AIR) as compared to total income including exempt income and agricultural income. Accordingly, notices under section 143(2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) along with questionnaire were issued and served on the assessee. In response, ld. AR of the assessee submitted the relevant information through ITBA Portal. Further AO observed that during the relevant assessment year, assessee has income from capital gain and income from other sources.
3. During assessment proceedings, the AO verified the investments made by the assessee in the property and not found discrepancies as per the mandate of CASS. Further AO observed that in computation of capital gains for the AY 2013-14, the assessee has claimed deduction u/s 54F amounting to Rs.21,92,00,000/- on account of deposit made by her in the capital gain account. Since the above deduction was claimed by the assessee out of the sale of shares held by her and the above deposit of capital gain was utilized by her in the investment in capital assets. Since the assessee has claimed the exemption u/s 54F, the AO proceeded to verify the above aspect whether the assessee has rightly claimed the exemption u/s 54F in AY 2013-14 and as per the provisions of section 54F, the limitation period ends in this assessment year.
4. At this juncture, the AO has proceeded to verify the exemptions claimed by the assessee in AY 2013-14 which was not the mandate with the AO in the current assessment year, however he proceeded to verify the same in the proceedings initiated with the mandate of limited scrutiny. Since he has expanded the mandate of verifications, the AO should have converted the limited scrutiny into complete scrutiny. There is no record available on record which shows that AO has actually taken permission or taken any action to convert the limited scrutiny into complete scrutiny.
5. Before us, assessee has raised additional Ground No.1 that the case was selected for limited scrutiny to verify whether investment and income relating to properties are duly disclosed but disallowance as made in the assessment order by disallowing the deduction which is not permissible in limited scrutiny. He brought to our notice pages 22 and 23 of the assessment order wherein the AO has disallowed deduction claimed by the assessee in AY 2013-14 u/s 54F of the Act. In this regard, ld. AR relied on the following case laws :-
(i)Deccan Paper Mills Co. Ltd. v. CIT [IT Appeal No. 1013 and 1635(Pune) of 2014, dated 10-10-2017] ITAT Pune Bench.
(ii)Balvinder Kumar v. Pr. CIT  83/187 ITD 454 (Delhi – Trib.) / [IT Appeal No. 485(Delhi) of 2020, dated 10-12-2020], ITAT Delhi Bench.
(iii)R & H Property v. Pr. CIT [IT Appeal No. 1906 (Mum) of 2019, dated 30-7-2019] ITAT Mumbai Bench.
(iv)Aakash Ganga Promoters & Developers v. Pr.CIT [IT Appeal No. 164(Ctk) of 2019, dated 18-12-2019] ITAT Cuttack Bench.
(v)Sonali Hemant Bhavsar v. Pr. CIT [IT Appeal 742(Mum) of 2019, dated 17-5-2019]ITAT Mumbai Bench.
(vi)Ganadhiraj Mazoor Sahakari Sanstha Ltd. v. ITO [IT Appeal No. 10(Pune) of 2019, dated 5-7-2023] (ITAT Pune).
(vii)NazareVikas Karyakari Seva Shakari Society Ltd. v. ITO [IT Appeal No. 1518(PUN)2018, dated 8-2-2019](ITAT Pune)
(viiiCBS International Projects Ltd. v. ACIT [IT Appeal No.144(Delhi) of 2019, dated 28-2-2019] (ITAT Delhi)
6. On the other hand, ld. DR of the Revenue submitted that the present issue is very much related to the current assessment year, which AO has verified considering the fact that the amounts of investment made by the assessee are the same investment which assessee has claimed u/s 54F of the Act and he relied on the orders of the lower authorities.
7. Considered the rival submissions and material placed on record on the issue of expanding the limited scrutiny into complete scrutiny. In this regard, we observe that the coordinate Bench in the case of Balvinder Kumar (supra) held as under:-
“We have gone through the record in the light of the submissions made on either side. There is no dispute that the case of the assessee was picked up for scrutiny under the category of limited scrutiny. This fact is established from the assessment order and also the notice issued under section 143(2) of the Act. It is also not in dispute that the CBDT issued the instructions relied upon by the assessee and for the sake of convenience we extract the relevant portions thereof hereunder: –
“CBDT Instruction No. 7/2014
The reason(s) for selection of cases under CASS are displayed to the Assessing Officer in AST application and notice u/s 143(2), after generation from AST, is issued to the taxpayer with the remark “.Selected under Computer Aided Scrutiny Selection (CASS)”. The functionality in AST is being modified suitably to flag the reasons for scrutiny selection in AIR/CIB/26AS cases. This functionality is expected to be operationalized by 15th October, 2014. Further, the Assessing Officer while issuing notice under section 142(1) of the Act which is enclosed with the first questionnaire would proceed to verify only the specific aspects requiring examination/verification. In such cases, all efforts would be made to ensure that assessment proceedings are completed expeditiously in minimum possible number of hearings without unnecessarily dragging the case till the time-barring date.
CBDT Instruction No. 20/2015
As far as the returns selected for scrutiny through CASS-2015 are concerned, two type of cases have been selected for scrutiny in the current Financial Year- one is ‘Limited Scrutiny’ and other is Complete Scrutiny’. The assessees concerned have duly been intimated about their cases falling either in ‘Limited Scrutiny’ or ‘Complete Scrutiny’ through notices issued under section 143(2) of the Income-tax Act, 1961 (‘Act’). The procedure for handling ‘Limited Scrutiny’ cases shall be as under:
(a)……
(b) The Questionnaire under section 142(1) of the Act in ‘Limited Scrutiny’ cases shall remain confined only to the specific reasons/issues for which case has been picked up for scrutiny. Further, the scope of enquiry shall be restricted to the Limited Scrutiny’ issues.
CBDT Instruction No. 5/2016
“4. It is further clarified that in cases under ‘Limited Scrutiny \ the scrutiny assessment proceedings would initially be confined only to issues under ‘Limited Scrutiny’ and Questionnaires, enquiry, investigation etc. would be restricted to such issues. Only upon comers ion of case to ‘Complete Scrutiny’ after following the procedure outlined above, the AO may examine the additional issues besides the issue(s) involved in ‘Limited Scrutiny’. The AO shall also expeditiously intimate the taxpayer concerned regarding conducting ‘Complete Scrutiny’ in such cases.”
CBDT Letter dated 30.11.2017
Instances have come to notice of CBDT where some Assessing Officers are travelling beyond their jurisdiction while making assessments in Limited scrutiny cases by initiating inquiries on new issues without complying with mandatory requirements of the relevant CBDT Instructions dated 26-9-2014, 29-12-2015 and 14.7.2016. These instances have been viewed very seriously by the CBDT and in one case the Central Inspection Team of the CBDT was tasked with examination of assessment records on receipt of a I lee at ions of several irregularities. Amongst other irregularities, it was found that no reasons had been recorded for expanding the scope of limited scrutiny, no approval was taken from the PCIT for the conversion of the limited scrutiny case to a complete scrutiny case and the order sheet was maintained very perfunctorily. This gave rise to a very strong suspicion of mala fide intentions.”
9. The above CBDT instructions and the letter clearly establish that it’s not open for the learned Assessing Officer to travellers beyond the reason for selection of the matter for limited scrutiny and on that aspect the assessment order in this case is in accordance with the instructions governing the field. In such circumstances it has to be seen whether the Ld. PCIT is justified in holding the assessment order to be erroneous insofar as it is prejudicial to the interest of the Revenue for the learned Assessing Officer not considering the aspects which are beyond the purview of limited scrutiny.
10. In the Deccan Paper Mills Co. Ltd. v. CIT in ITA 1013 AND 1635/pUN/2015, Pune Bench of the Tribunal held, that,
“40. Now, coming to the aspect of book profits which was considered by the Commissioner and the order of the Assessing Officer was held to be erroneous and prejudicial to the interest of revenue. In this regard, it may be pointed out that the case of assessee was picked up for scrutiny under CASS for the limited purpose of verifying the Chapter VI-A deduction. Once the case is picked up for specific purpose under CASS, then it is outside the purview of the Assessing Officer to look into any other aspect other than the aspect for which it is picked up. Hence, the Assessing Officer has not formed any opinion in respect of computation of book profits in the hands of assessee. Once, no such opinion has been formed by the Assessing Officer, the Commissioner has erred in holding the order of the Assessing Officer to be erroneous and prejudicial to the interest of revenue in this regard. Accordingly, we reverse the findings of the Commissioner. Accordingly, we hold that the order passed by the Commissioner under section 263 of the Act is invalid and the same is quashed for both the assessment years.”
In M/s R.H. Property v. PCIT, ITA No. 1906/Mum/2019 it was held that,-
“As a matter of fact, what cannot be done directly cannot be done indirectly. Accordingly, in terms of our aforesaid observations, we are of the considered view that as the A. O had aptly confined himself to the issue for which the case of the assessee was selected for limited scrutiny, therefore, no infirmity can be attributed to his order for the reason. that he had failed to dwell upon certain other issues which were clearly beyond the realm of the reason for which the case of the assessee was selected for limited scrutiny as per the AIR information. We thus not being able to concur with the view taken by the ld. CIT that the order passed by the A.O under Sec. 143(3), dated 10.10.2016is erroneous, therefore, set aside his order and restore the order passed by the A.O. As we have quashed the order passed by the Pr. CIT under Sec. 263 on the ground of invalid assumption of jurisdiction by him, therefore, we refrain from adverting to and therein adjudicating the contentions advanced by the Id. A. Ron the merits of the case, which thus are left open.”
11. Similarly, is the view taken consistently by the benches of this Tribunal in the other two cases also, relied upon by the assessee. In the circumstances, in view of the consistent view taken in similar matters we are of the considered opinion that when the assessing officer is bound to follow the CBDT instructions and while following such instructions and after verification of the material furnished by the assessee on the aspect covered by the limited scrutiny, is not open for the Ld. PCIT to say that not adverting to the other aspects of the competition would render the assessment order erroneous and prejudicial to the interest of the Revenue. With this view of the matter we find that the impugned order cannot be sustained and, therefore, the same is liable to be quashed. We accordingly quash the same.”
8. Respectfully following the above decision, in our considered view, the AO has proceeded to touch upon the issue which was not the mandate of the limited scrutiny and he proceeded to make the addition without converting the limited scrutiny into complete scrutiny. This itself is in violation of jurisdiction of the AO. Accordingly, additional ground raised by the assessee is valid and accordingly, we allow the additional ground raised by the assessee.
9. Be that as it may, we shall also proceed to adjudicate the issue on merits.
10. During assessment proceedings, the AO observed that assessee has claimed deduction u/s 54F in AY 2013-14 and as per the provisions of section 54F, the assessee has to utilize the entire amount of exemption claimed u/s 54F in AY 2013-14 either in the purchase of residential property within one year before or two years after the transfer of original asset or construction of a property within a period of three years from the date of transfer of original asset. The AO observed that assessee has sold the shares on 17.12.2012 while the assessee has purchased a new asset on 09.09.2015 i.e. 2 years and 10 months from the date of sale of original asset, therefore, it is beyond the statutory time limit of 2 years. Since deduction was allowed to the assessee in AY 2013-14, it becomes taxable as income in the current assessment year that is a period of three years from the date of transfer of original asset under the provisions of section 45 of the Act. A notice was issued to the assessee why the above deduction should not be charged to the income in the current assessment year. In response, assessee submitted that the assessee has purchased the property at N-50, Panchsheel Park, New Delhi for construction of property, the property was 70 years old which was in a very bad shape and assessee intend to demolish the same and construct the new residential property on that site. Therefore, the statutory limited period of two years is not applicable and it should be three years from the sale of original asset. After considering the submissions of the assessee, the AO after perusal of the sale deed observed that the property purchased by the assessee was a built up residential building and not a plot of land when it was sold to the assessee. He observed that assessee has purchased this property from Wg. Commander Jag Mohan Nath who has constructed the property which is a freehold constructed residential building and not just a piece of land. He also observed from the registered document that the said property was having built up area of 668.89 sq.mtr. Since the assessee has purchased a property which has built up area, he came to the conclusion that assessee has invested in the abovesaid property by purchasing the new asset. Since the assessee has purchased the property, the period of limitation ends with two years.
11. Assessee also submitted that assessee has invested the amount deposited under the capital gain scheme before the statutory limit of three years and also submitted that the new asset purchased by the assessee was in a dilapidated condition when it was purchased on 09.09.2015 and had to be demolished to be reconstructed again which she did in the time span of three years. Since the assessee has not submitted maps or plan to substantiate the above, AO rejected the submissions of the assessee and further observed that construction needs to be completed by 17.12.2015 while in the case of assessee she failed to even commence the construction of the abovesaid property. By relying on the provisions of section 54F, he proceeded to reject the submissions of the assessee and proceeded to make the addition u/s 45 of the Act. Further with regard to acquiring permission from competent authority, MCD, on 17.12.2015 in order to commence the construction of the property, he rejected the same with the observation that the assessee had only applied for permission on 16.09.2015 well within three years time limit, however she could not have begun the construction on the property without the approval of the plan of the MCD which came only on 23.12.2015, the assessee was asked to submit the approval plan of the MCD to establish the time line, however assessee failed to do so. Accordingly, he proceeded to reject the various pleas raised by the assessee and made the abovesaid addition.
12. Aggrieved, assessee preferred an appeal before the ld. CIT (A) and ld. CIT (A) sustained the addition made by the AO.
13. Aggrieved, assessee is in appeal before us raising following grounds of appeal :-
“1. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs.21,66,00,000/- on account of alleged Long Term Capital Gain.
2. That having regard to the facts and circumstance of the case, Ld. CIT(A) and Ld. AO have erred in not taking into account all the bills and vouchers in respect of construction of the new property.
3. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in taxing the capital gain u/s 45 read with section 54F(4) and that too by recording incorrect facts and findings and in violation of principles or natural justice and without appreciating/considering the submissions and evidences placed on record by the assessee.
4. That in any case and in any view of the matter, action of ld. CIT(A) in confirming the action or Ld. AO in making addition of Rs.21,66,00,000/- on account of alleged long term capital gain, is bad in law and against the facts and circumstances of the case.”
14. At the time of hearing, ld. AR of the assessee submitted as under :-
“Ground No. 1-4: -The Ld. AO has grossly erred in making an addition of Rs.21,66,00,000/- u/s 45 r.w.s. 54F(4) by denying exemption claimed u/s 54F in respect of long-term capital gains arising on the sale of shares by alleging that the assessee failed to construct a residential house within the prescribed period.
The facts in this case are that the assessee is an individual and during the assessment year 2013-14 she earned a long-term capital gain of Rs.32,09,77,830/- on sale of shares of M/s Triveni Polymers Pvt. Ltd. The transfer took place on 20.12.2012 and out of the total capital gain assessee deposited Rs.21,92,00,000/- under section 54F in bank account under capital gain scheme. Further, capital gain of Rs.21,66,00,000/- was claimed as exempt from tax in view of depositing thereof in the bank account opened under the aforesaid scheme.
The amount deposited under capital gain scheme was invested by the assessee in purchase of land for construction of a residential property at N 50, Panchsheel Park, New Delhi on 09.09.2015. However, Ld. AO taxed this amount in the year under consideration vide assessment order dated 26.l2.20 18 on the ground that the assessee had not completed the construction of the house within three years as per section 54F of the Act. Further, Ld. CIT(A) confirmed the addition in impugned order dated 09.08.2024. Hence the present appeal.
The case of the assessee is that she sold shares on 20.12.2012 and deposited capital gain in bank account under capital gain scheme and further she started construction of a residential property. For this purpose, she purchased a residential property on 09.09.2015 which was uninhabitable at the time of purchase. Therefore, assessee demolished the same and obtained approval for the construction from the local authority and commenced construction which is evident from the following voluminous evidence: –
PB 20-40 is the copy of purchase deed dated 09.09.2015 of subject house property at N 50, Panchsheel Park, New Delhi. Form A (PB 40) of deed showing that year of construction is 0.7, meaning the purchased property was built between 1970-79 by erstwhile owner.
PB 53-54 is the copy of HDFC Bank statement showing receipt of sale proceeds of shares on 20.12.2012 amounting to Rs. 32,47,96,4661- and PB 54 showing that on 25.07.2013 she transferred Rs.21,92,00,0001- to saving bank capital gain account scheme of Indian Overseas Bank.
PB 166-167 is the copy of computation of income for the AY 2013-14 showing the calculation of long-term capital gain on equity shares of M/s Triveni Polymers Pvt. Ltd. for Rs.32,09,77,830/- and exemption claimed u/s 54F for Rs.21,66,00,000/-.
PB 179-180 is the copy of show cause notice dated 23.10.2018.
PB 181-182 is the copy of assessee’s reply dated 13.11.2018 before Ld. AO against the show cause notice stating that she purchased the house property for construction and spent entire consideration in purchase of plot and construction there on within 3 years of the sale of original assets.
PB 183 is the copy of detail and source of construction expenses for the subject residential property.
PB 185 is the copy of assessee’s reply dated 18.12.2018 before Ld. AO against the show cause notice stating that there was no map attached with the purchase deed dated 09.09.2015 as it was totally depleted and uninhabitable construction.
PB 186-187 is the copy of grant of permission of National Monuments Authority (Government of India, Ministry of Culture) dated 07.12.2015 in respect of construction of subject residential property stating that it is in response of assessee’s letter dated 16.09.2015.
PB 188-190 is the copy of letter of permission of NCT of Delhi, Competent Authority dated 17.12.2015 in respect of construction of subject residential property stating that it is in reference to permission of National Monuments Authority dated 07.12.2015.
PB 191-201 are the copies of construction bills which shows that construction was started much before 19.12.2015 i.e. before the completion of three years as mentioned u/s 54F and assessee had spent substantial part of capital gain, detail of which is as follows: –
DatePBNo.Vendor NameAmount (Rs.
07.08.2015201Visarg228,000.00
09.09.201548Land219,196,530.00
11.10.2015199Visarg414,000.00
09.11.2015200Visarg314,000.00
12.11.2015198Visarg514,000.00
22.11.2015195D.D. Constructions575,875.00
Total221,242,405.00

 

PB 203 is the copy of completion certificate of MCD dated 31.03.2017 which confirms that the subject residential property was constructed after its demolition.
PB 204-205 is the copy of show cause notice dated 21.12.2018 stating that “After the show cause dated 23.10.2018 you changed your statement and asserted that you have constructed the property”
PB 206-208 is the copy of assessee’s reply dated 25.12.2018 before Ld. AO against the show cause notice stating that there was never an intent to misguide and always submitted the details and documents in support of construction and construction activity of clearing the site, getting material for construction etc. had already started.
PB 254-270 is the copy of written submission before Ld. CIT(A) reiterating the above-mentioned facts and supported the submission with pictures taken before the commencement of construction showing that existing depleted construction on the plot of land was demolished immediately and fresh construction undertaken by assessee (PB 256).
PB 271-273 are the copies of pictures taken before the commencement of construction.
PB 274-300 are the copies of bills related to the construction of subject residential property.
PB 301 is the copy of Circular No. 667 dated 18.10.1993 regarding interpretation of section 54 and 54F of the Act stating that “The. Board are of the view that the cost of the land is an integral part of the cost of the residential house, whether purchased or built. Accordingly, if the amount of capital gain for the purposes of section 54, and the net consideration for the purposes of section 54F, is appropriated towards purchase of a plot and towards construction of a residential house thereon, the aggregate cost should be considered for determining the quantum of deduction under section 54/54F”
Adverse observation by Ld. AO and Ld. CIT(A) :-
1. Ld. AO mentioned in para 5.7, 5.8 & 5.8.1 at page 11-13 of the assessment order and Ld. CIT(A) in para 10.0 at page no. 9 of the impugned order that property purchased by the assessee on 09.09.2015 was a built-up property, instead of a plot of land upon which the assessee claimed to have undertaken the construction.
In this regard it is submitted that assessee though purchased an ostensibly build up property but it was uninhabitable and hence the time limit u/s 54F would apply not in respect of purchase of house property but as construction of house (3 years not 2 years). Further it is submitted that assessee constructed a new residential house and same is discussed by Ld. AO in detail in para 5.9 to para 5.15 of the assessment order Ld. CIT(A) in para 7.0 at page no. 4 of the impugned order.
PB 207-208 is the copy of assessee’s reply dated 24.12.2018 before Ld. AO stating that house property standing on the plot was depleted and uninhabitable. The pictures of the plot have been submitted (PB 271-273).
PB 259 is the copy of written submission before Ld. CIT(A) submitted that there was existing construction on the plot of land which was demolished immediately by assessee and fresh construction was carried out.
PB 203 is the copy of completion certificate of MCD dated 31.03.2017 which confirms that the subject residential property was constructed after its demolition.
2. Ld. AO mentioned in para 5.9.1 at page 14 of the assessment order that assessee failed to submit any maps or plans to substantiate the depleted condition of the original purchased property.
In this regard it is submitted that Form A (PB 40) of deed showing that year of construction is 0.7 which means that the purchased property was constructed somewhere between 1970-79. Further construction was immediately demolished by assessee which also proves that the existing house was depleted and uninhabitable. Assessee got fresh building plan sanctioned and took permission from various authorities which has been discussed by Ld. AO in assessment order.
PB 271-273 are the copies of pictures taken before the commencement of construction to show that property was in depleted condition.
PB 274-300 are the copies of bills related to the construction of subject residential property.
PB 203 is the copy of completion certificate of MCD dated 31.03.2017.
PB 186-187 is the copy of grant of permission of National Monuments Authority for construction of property.
PB 188-190 is the copy of letter of permission of NCT of Delhi, Competent Authority for construction of property.
Above sequence of events show that appellant’s intention was to buy and demolish an old house and construct a new house only which was confirmed by the Ld. AO also in the assessment order. Reliance is placed on following judicial decisions which held that demolition of house for construction of new house would not impact exemption under Section 54F: –
•B. Sivasubramanian v. Income-tax Officer, ITAT Chennai, ITA NO. 1 (MDS.) OF 2013
“Section 54F of the Income Tax Act, 1961 – Capital gains -Exemption – Assessee was entitled to claim exemption u/s 54F as assessee has put up a new construction in place of old residential building as provisions of section 54F mandate construction of a residential house within period specified however, there was no condition that building plan of residential house should be approved by Municipal Corporation or any other competent authority – B. Sivasubramanian v. Income Tax Officer.”
■•.Hon’ble Madras High Court in the case CIT v. Pradeep Kumar [2007] 290 ITR 90 wherein it was held that “.construction must be real one. It should not be a symbolic construction. The intention of the legislation was not for destruction of residential building but for promoting the construction of the residential housing units. Further, it added that the Parliament in its wisdom had enacted section 54F in the Finance Act, 1982 with a view to encourage housing construction.”
3. Ld. AO mentioned in para 5.10 at page 15 of the assessment order and Ld. CIT(A) in para 11.0 at page no. 9 of the impugned order that permission for constructions for construction given by NCT Delhi and National Monumental Authority of India dated 17.12.2015. This permission is dated exactly three years from the date of transfer of the original asset.
In this regard it is submitted that as seen from the bills, construction had started on 07.08.2015, before completion of three years from date of sale of shares.
PB 260 is the copy of written submission before Ld. CIT(A) submitted that “Plot of land is situated in protected area where construction activity requires permission from various authorities like National Monumental Authority, forest department besides getting the plans sanctioned from local authority which in this case is SDMC Assessee applied for the approvals to these agencies immediately on acquiring the plot and simultaneously started the construction activities. The application to National Monumental Authority was made on 16.09.2015 that is within 7 days of acquiring the plot.”
PB 186-187 is the copy of grant of permission of National Monuments Authority (Government of India, Ministry of Culture) dated 07.12.2015 in respect of construction of subject residential property stating that it is in response of assessee’s letter dated 16.09.2015.
Reliance can be placed on following judicial decisions: –
CIT v. Sambandam Udaykumar, HC (Kamataka), Commissioner of Income-tax v. Sambandam Udaykumar 150 (Karnataka)
“Section 54F is a beneficial provision for promoting construction of residential house, and, therefore, it has to be construed liberally for achieving purpose for which it was incorporated in statute. Whether once it is demonstrated that consideration received on transfer of a capital asset has been invested either in purchase or in construction of a residential house, even though these transactions are not complete in all respects as required under law, same would not disentitle assessee from benefit of exemption under section 54F”
•CIT v. Sardarmal Kothari, He (Madras), [2008] 302 ITR 286
“Assessee also produced completion certificates from municipal authority, Assessing Officer was not justified in rejecting assessee s claim for exemption of capital gain under section 54F on ground that construction was not complete within specified period.”
•Subramanian Swaminathan v. ACIT , 72 (Delhi– Trib.)
“Whether since amounts for purchase of property and construction thereon were paid duly within relevant period, as prescribed under law and that too from Capital Gains Account, disallowance of entire exemption only because construction was not completed was without any basis.”
•Sharada Mohan Shetty v. ITO, 122 (Bangalore- Trib.)
“Whether assessee had genuine reason for not constructing building within due date as prescribed by section 54F, though intention of assessee was to construct residential house building. Held, yes- Whether however, assessee would be eligible for proportionate deduction as per section 54F, since entire sale proceeds were not used for new assets. “
Without prejudice to the above impugned disallowance could not be made as per the interpretation of the proviso to Section 54F (4).
A sum of Rs.21,66,00,000/- was claimed as deduction u/s 54F in AY 2013-14 and amount utilised for construction of new asset is Rs.221,242,405/- and hence there remains nothing which could be brought to tax as per proviso to Section 54F(4).
In view of the aforesaid submissions, ground nos. 1-4 may be allowed.”
15. On the other hand, ld. DR of the Revenue submitted that assessee had sold the shares and there is no dispute that assessee deposited the above said exempted income in capital gain account, he submitted that for claiming the exemption, assessee should have utilized the abovesaid fund within the statutory period of three years, also the construction of the property should have been completed within the statutory period of three years. In this regard, he submitted that even for commencing the construction approval was sought and the same was granted beyond the period of limitation and submitted that section has to be interpreted literally; therefore, he supported the findings of lower authorities.
16. Considered the rival submissions and material placed on record. We observe that no doubt, the assessee has sold the shares on 20.12.2012 and claimed the deduction u/s 54F by depositing the amount in the bank account under capital gain scheme. The only issue under consideration before us is that the assessee has utilized the abovesaid fund before expiry of three years from the statutory time limit available for construction of the property from the date of transfer of original asset. The assessee has utilized the funds deposited under capital gain scheme as under :-
DatePBNo.Vendor NameAmount (Rs.
07.08.2015201Visarg228,000.00
09.09.201548Land219,196,530.00
11.10.2015199Visarg414,000.00
09.11.2015200Visarg314,000.00
12.11.2015198Visarg514,000.00
22.11.2015195D.D. Constructions575,875.00
Total221,242,405.00

 

17. We observe from the record submitted before us that assessee had purchased a land and building on 09.09.2015 which is in uninhabitable residential property at Panchsheel Park, New Delhi by paying an amount of Rs.21,91,96,530/- from the deposited amount under capital gain scheme. Since assessee has bought the abovesaid new property for the purpose of construction on 09.09.2015. Since the abovesaid property was in uninhabitable condition, assessee has to obtain permission from the National Monumental Authority for construction of the new residential property, accordingly assessee applied for permission on 16.09.2015. However, the assessee has obtained the permission from National Monumental Authority on 07.12.2015. The relevant certificate was placed at pages 186 & 187 of the paper book and the competent authority, NCT of Delhi, has granted the permission for construction at Panchsheel Park, New Delhi on 17.12.2015. We observe that the completion certificate for the newly constructed property by MCD was issued on 31.03.2017. From the above facts available on record, we observe that no doubt, assessee has purchased the uninhabitable residential property on 09.09.2015 and obtained the permission for construction on 07.12.2015 and 17.12.2015 which is within the statutory period of three years for the purpose of construction. Since assessee has not completed the construction of the property within the statutory period of three years, the tax authorities have rejected the plea of the assessee and brought to tax. After evaluating the facts available on record, we observe that assessee has set aside the amount claimed u/s 54F in the separate bank account under the capital gain scheme with the sole purpose to construct the property. The abovesaid amount was utilized by the assessee within a period of three years for the purchase of old house and land, also utilised the rest of the amount for the purpose of construction of the property before expiry of three years from the date of sale of residential asset. What is relevant is, whether the assessee has utilised the funds set aside for construction. In this case, the assessee has fully complied to utilise the funds. Since the provisions of section 54F are a beneficial provision, it has to be construed liberally for achieving the purpose for which the abovesaid provisions were incorporated in the statute. On the similar issue, the Hon’ble Karnataka High Court in the case of CIT v. Sambandam Udaykumar 150 (Karnataka) held that section 54F is a beneficial provision for promoting construction of residential house and, therefore, it has to be considered liberally for achieving the purpose for which it was incorporated in the statute. Where once it is demonstrated that consideration received on transfer of a capital asset has been invested either in purchase or in construction of a residential house, even though these transactions are not complete in all respect as required under law, the same would not disentitle assessee from benefit of exemption u/s 54F of the Act. In the given case also, the assessee has utilized the total amount earmarked under the capital gain scheme and the same was utilized by the assessee within the statutory period of three years for the purpose of construction and the project was delayed due to acquiring the relevant permission and completion of the construction. No doubt, there is some delay on the part of the assessee for finalizing and completing the purchase of an old residential property for the purpose of construction on the house. In this case, what is relevant is, the assessee has utilized all the funds earmarked for the purpose of construction of the property within the period of limitation as held by the Hon’ble Karnataka High Court in the case of Sambandam Udaykumar (supra) u/s 54F is a beneficial provision for promoting construction of residential house and in the given case also, assessee has utilized the funds for the purpose of construction of residential house and all the funds were utilized within the period of three years. Merely because the approval and construction of the property was completed beyond the period of three years, the same is not disentitled the assessee from the benefit of exemption u/s 54F of the Act. Similar views were expressed by Hon’ble Madras High Court in the case of CIT v. Sardarmal Kothari [2008] 302 ITR 286 (Madras), coordinate Bench of this Tribunal in the case of Subramanian Swaminathan v. ACIT (IT)  72/201 ITD 487 (Delhi – Trib.) and ITAT Bangalore Bench in the case of Sharda Mohan Shetty v. ITO  122/201 ITD 21 (Bangalore – Trib.). In our considered view, the assessee cannot be denied the beneficial provision of section 54F merely because project was completed beyond the period of limitation, therefore, we are inclined to allow the grounds raised by the assessee in this regard.
18. In the result, the appeal filed by the assessee is allowed on both counts on merit as well as jurisdictional issue raised by the assessee in the additional ground of appeal.