Section 54F exemption allowed as assessee met substantive conditions, with house transfers to daughter and under-construction house not counting as “more than one house,” and deposit made within extended due date.
Issue:
Whether an individual assessee can be denied exemption under Section 54F of the Income-tax Act, 1961, on the sale of unquoted equity shares, on the grounds that:
(a) the assessee owned more than one residential house on the date of transfer,
(b) investments in residential property and the Capital Gains Deposit Account (CGAS) were made beyond the initial due date of July 31, 2022, and
(c) the investment was made in land, not a completed residential house, when the assessee had fulfilled all substantive conditions.
Facts:
- For Assessment Year 2022-23, the assessee, an individual, sold unquoted equity shares of two companies.
- The assessee claimed exemption under Section 54F by investing the sale consideration in the purchase of a residential property and depositing the unutilized capital gains in a Capital Gains Deposit Account (CGAS).
- The Assessing Officer (AO) disallowed the exemption based on three grounds:
- Ownership of multiple houses: The AO claimed the assessee owned more than one residential house on the date of transfer of the shares.
- Delay in investment/deposit: The investments in residential property and CGAS were made beyond the due date of July 31, 2022.
- Nature of investment: The investment was made in land, not in a completed residential house, and therefore did not qualify under Section 54F.
- The Commissioner (Appeals) allowed the exemption.
- It was observed that:
- Regarding multiple houses: One house was gifted to the daughter in 2015 on her marriage, which was later formalized through a registered gift deed and supported by a “Streedhan Agreement” and the daughter’s ITRs. Another house was under construction and self-occupied, not yielding income chargeable under “Income from house property.”
- Regarding due date of investment/deposit: The assessee, being a partner in a firm whose accounts were audited under Section 44AB, was eligible for an extended due date of October 31, 2022, for filing the return of income. The deposit in CGAS was made within this extended due date.
- Regarding nature of investment: The construction of the residential house was completed within three years (as required by Section 54F) and was supported by a valid occupancy certificate.
Decision:
The court held in favor of the assessee. It ruled that since the assessee had fulfilled all substantive conditions, the denial of exemption on technical grounds was unjustified. Therefore, the Commissioner (Appeals) had rightly deleted the impugned addition.
Key Takeaways:
- Section 54F Conditions: Section 54F allows an individual or HUF to claim exemption from long-term capital gains on the transfer of any long-term capital asset (other than a residential house property) if the net consideration is invested in the purchase of a new residential house within one year before or two years after the date of transfer, or1 in the construction of a new residential house within three years after the date of transfer.
- Crucial Condition: The assessee should not own more than one residential house on the date of transfer of the original asset, and should not purchase any additional residential house (other than the new one) within one year or construct any additional residential house within three years from the date of transfer.
- Deposit in CGAS: If the entire net consideration is not invested before the due date of furnishing the return of income, the unutilized amount must be deposited in the Capital Gains Deposit Account Scheme (CGAS) by that due date.
- “More than One Residential House” Interpretation:
- Gifted House: A house gifted to a daughter on her marriage in 2015, formalized by a registered gift deed and reflected in her ITRs, legally ceases to be the assessee’s property. It cannot be counted as a house owned by the assessee for Section 54F purposes.
- Under-Construction/Self-Occupied House: A house under construction and self-occupied, not yielding income chargeable under “Income from house property,” is typically treated as a single self-occupied property. Unless it is explicitly rented out or held for investment purposes and generating taxable income under the “House Property” head, it may not trigger the “more than one residential house” disqualification, especially if it’s the only other house apart from the new one. The spirit of the law is to encourage investment in one new house for self-residence.
- Due Date for Investment/Deposit (Section 139(1)): The “due date of furnishing the return of income” under Section 139(1) varies based on the assessee’s category. For partners in audited firms (under Section 44AB), the due date is extended (to October 31st of the assessment year). The court correctly held that the deposit in CGAS was made within the applicable extended due date.
- Investment in Land for Construction: Section 54F explicitly allows investment in the construction of a new residential house within three years. This naturally implies investment in land first, followed by construction. If construction is completed within the stipulated three years and an occupancy certificate is obtained, the condition is met.
- Substantive Compliance vs. Technicality: The judgment emphasizes that all substantive conditions of Section 54F were met. The AO’s objections were seen as technical and without merit in light of the factual evidence.
- Favorable to Assessee: The allowance of the Section 54F exemption provides significant tax relief to the assessee.
IN THE ITAT HYDERABAD BENCH ‘B’
Income-tax Officer
v.
Narasimha Reddy Duthala
Manjunatha G., Accountant Member
AND Ravish Sood, Judicial Member
AND Ravish Sood, Judicial Member
IT Appeal No.1113 (Hyd.) of 2024
[Assessment Year 2022-23]
[Assessment Year 2022-23]
MAY 9, 2025
Ms. M. Narmada, CIT-DR, for the Appellant. Mohd. Afzal, Adv., for the Respondent.
ORDER
Manjunatha G., Accountant Member.- This appeal has been filed by the Revenue against the order dated 27.08.2024 of the learned CIT(A)-National Faceless Appeal Centre [in short the “NFAC”] Delhi, relating to the assessment year 2022-2023.
2. The Revenue has raised the following grounds in the instant appeal :
1. “The CIT(A) has erred both in law and on facts of the case.
2. Whether on the facts and circumstances of the case and in law, the CT(A) has erred in ignoring the fact of the ownership of two residential houses prior to the transfer of original asset dated 16.06.2021 as evidenced by the Schedule Al, of asset and liabilities as on 31.03.2021 as per the return of income filed for the A.Y. 2021-22.
3. Whether on the facts and circumstances of the case and in law, the CT(A) has erred in holding the house property at Nizampet as transferred to the daughter of assessee based on an unregistered Sreedhan Agreement dated 30.11.2017, contrary to the requirement of registration of an immovable property under the transfer of property Act, 1982 and ignoring the assessee’s own return filed for the A.Y. 2021-22 where in such said property continued to be shown as owned by the assessee.
4. Whether on the facts and circumstances of the case and in law, the CT(A) has erred is not considering the residential house purchased on 19.01.2021 in A.Y 2020-21, where in another 54F claim was made.
5. Without prejudice to the above contentions, CIT(A) ought to have considered the residential house in My Home Bhuja Apts registered in the name of assessee on 7th July 2021 which is subsequent to the sale of original asset (16 June 2021) and thereby violating the provisions of 54F as per the proviso a(i) of sec 54F(1).
6. Any other ground(s) that may be urged at the time of hearing.”
3. Briefly stated facts of the case are that, the assessee is an individual and filed return of income for the assessment year 2022- 2023 on 07.11.2022 declaring total income of Rs.42,52,70,700. The case was selected for scrutiny under CASS for the reason of deduction/exemption claimed under section 54 to 54GA of the Act. During the course of assessment proceeding, the Assessing Officer noted that, during the financial year 2021-2022 relevant to assessment year under consideration i.e., A.Y. 2022-2023, the assessee on 16.06.2021 sold unquoted equity shares of two companies namely M/s. Vandana Life Sciences Pvt. Ltd., and M/s. Vindhya Pharma (India) Pvt. Ltd., for a total consideration of Rs.92,49,92,793/-. The assessee has computed long term capital gains of Rs.92,28,20,193/- after deducting indexed cost of acquisition of Rs.2,21,72,590/-. Further, out of the total long term capital gains, the assessee has claimed exemption under section 54F of the Act to the tune of Rs.53,22,48,667/- being investment made for purchase of land for Rs.43,83,37,000/- and further deposited Rs.10,67,00,000/- under capital gain deposit account scheme and declared net capital gain of Rs.39.05 crores.
4. During the course of assessment proceedings, in order to verify the claim of the assessee, the Assessing Officer called-upon the assessee to furnish relevant evidences including details of sale of shares, computation of indexed cost of acquisition and details of investment made for claiming exemption under section 54F of the Act. In response, the assessee has filed relevant details including details of sale of shares of two companies, indexed cost of acquisition, copy of sale deed dated 18.10.2022 in respect of purchase of land, IDBI Bank account statement in respect of capital gains account scheme, copy of gift deed in favour of his daughter in respect of residential house property at Gayatri Gardens, copy of Streedhan agreement dated 30.11.2017, copy of construction contract dated 08.12.2022 with M/s. Advitha Infra for construction of residential house, copy of revised construction contract dated 03.01.2023 and claimed that, he is eligible for claiming exemption under section 54F of the Act towards capital gain derived from transfer of unquoted equity shares of two companies for investing part of sale consideration for purchase/construction of new residential house property.
5. The Assessing Officer, after considering relevant submissions of the assessee and also taking note of various details filed during the course of assessment proceedings observed that, the assessee is not entitled for claiming exemption under section 54F of the Act towards capital gain derived from transfer of equity shares because, the assessee is having more than one residential house as on the date of transfer of original asset i.e., unquoted equity shares as on 16.06.2021 and in view of proviso to section 54F of the Act, the assessee is not eligible for claiming exemption when he had more than one residential house as on the date of transfer of original asset. The Assessing Officer has further observed that, although the assessee claimed to have gifted one residential house property i.e., Flat at Gayatri Gardens, Balaji Hill, Nizampet, Hyderabad to his daughter viz., Sahiti Duthala way back in the year 2015 on the occasion of her marriage with Shri Mohan Reddy, but, the fact remains that, the assessee claimed to have executed Gift without any formal gift deed registered by paying relevant stamp duty and, therefore, in view of provisions of section 123 of the Transfer of Property Act, 1882, for making a gift of immovable property, the transfer must be executed by a registered instrument signed by donor and attested by at least two witnesses. Therefore, the Assessing Officer observed that, in absence of registered Gift Deed, proper conveyance of the title of property cannot be passed on to the Donee i.e., in the present case daughter of the assessee viz., Sahiti Duthala and, therefore, the arguments of the assessee that, he had gifted the property to her daughter way back in the year 2015 on the occasion of her marriage is devoid of merit and cannot be accepted.
5.1. The Assessing Officer further observed that, the assessee also not eligible for claiming exemption under section 54F of the Act because, the assessee has not made investment in purchase of new residential house property on or before the due date provided under section 139(1) for filing of return of income and the assessee had made investment in purchase of property only on 18.10.2022 and also made investment in capital gains deposit account scheme on 28.10.2022 beyond the due date prescribed under the Act and in view of provisions of section 54F(4) of the Act, once the assessee made investment beyond the due date provided under section 139(1) of the Act, then, the assessee needs to deposit capital gain amount in the capital gain deposit scheme on or before the due date applicable in the case of the assessee for furnishing return of income under section 139(1) of the Act. Although, the assessee claims that, due date for filing his return of income was 31.10.2022 and later extended to 07.11.2022, but, going by the provisions of section 44AB of the Act, the assessee is not required to get his accounts audited from an Accountant because, in a case where the expenditure incurred in cash does not exceed 5% of the total payment, then, the turnover limit for getting accounts audited is Rs.10 crore and since the turnover of the assessee is less than Rs.10 crore, the assessee is not required to file audit report under section 44AB of the Act. Therefore, opined that, the assessee need to file his return of income on or before 31.07.2022. Since the assessee has filed return of income beyond the due date provided under section 139(1) and further, the investment made in new asset is also beyond the due date, held that, the assessee is not eligible for deduction under section 54F of the Act.
5.2. The Assessing Officer further observed that, the assessee is also not eligible for claiming exemption under section 54F of the Act on investment made in purchase of land because, the assessee has purchased 4153.57 square metres of land, however, constructed residential house only on 291.52 square metre, which means, the assessee has utilised roughly 6% of the land area for the purpose of construction of residential house property leaving behind 94% vacant land. Therefore, the Assessing Officer observed that, the assessee is not eligible for claiming exemption under section 54F of the Act. In other words, the Assessing Officer rejected exemption claimed by the assessee under section 54F of the Act on three grounds including having more than one residential house as on the date of transfer of original asset i.e., shares of companies and further, no investment was made in capital gain account on or before the due date provided under section 139(1) of the Act and further, investing capital gain amount only in purchase of land and constructing residential house in less than 6% of land area. The relevant observations of the Assessing Officer are as under.
“Part V – Conclusion :
42. In the case of the assessee, the following conclusions are drawn :
| A. | The assessee, as per his own I.T. R. furnished for AY. 2021-22, claimed that he owned more than one residential house as on March 31, 2021. However, during the course of assessment proceedings, the assessee claims that one of the houses is not owned by him since he had orally gifted the same to his daughter at the time of her marriage in 2015. As per discussion above, the argument cannot be accepted since registered gift deed was made only in June 2023 and oral gift cannot be regarded as valid as per provisions of Section 123 of Transfer of Property Act, 1882. |
| B. | Further, since the assessee claims that he has purchased another house property (My Homes Bhooja) (other than the house on which exemption is claimed) within one year from date of transfer of shares, the claim of assessee for exemption is not allowable. |
| C. | As discussed above, the due date applicable under section 139(1) in the case of assessee is 31st July 2022 for A.Y.2022-23 Since, the assessee has purchased land in October 2022 and placed an amount of Rs.10.67 crores in Capital Gains Account Scheme in October 2022, the claim for exemption is not allowable due to Section 54F(4) of the IT Act: |
| D. | The assessee purchased a plot of land in October 2022 for a total consideration of Rs. 43,83,37,000 (inclusive of stamp duty and other charges). He further places an amount of Rs.10.67 crores in Capital Gains Account Scheme in October 2022 but agreement with Construction contractor is only for Rs.2,02,30,000, |
| E. | Only 6 per cent of total area of land is being constructed upon. The intention of legislature is to allow exemption for purchase/construction of residential house and not towards purchase of vacant plot of land; |
42) Conclusion drawn
In view of the facts of the case and discussion as above, the exemption claimed under section 54F of Rs.53,22,48,667/- is being disallowed. Penalty proceedings u/s.270A(9) of the Act are being initiated for under-reporting of income inconsequence of misreporting as the assessee has misrepresented facts. Late fees u/s. 234F of the Act is being levied since the return of income is belated.”
6. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee has reiterated his submissions made before the Assessing Officer and argued that, the assessee has satisfied substantive provisions of section 54F of the Act. The assessee had also satisfied the conditions of filing a return of income on or before the due date provided under section 139(1) and also invested the amount of capital gain before the said date for purchase of residential house and also investment in capital gain deposit account scheme. The Assessing Officer never disputed these facts, however, disallowed exemption claimed under section 54F of the Act only on technical ground of not satisfying the conditions of proviso to section 54F(1) of the Act, even though, the assessee has filed relevant evidences to prove that, as on the date of transfer of original asset i.e., shares of the two companies, the assessee is not having more than one residential house property. The assessee had also negated the observations of the Assessing Officer with regard to the due date for filing return of income and utilisation of land for construction of residential house property by filing relevant evidences including construction agreement with the contractor, occupancy certificate issued by the Municipal Authorities for completion of house construction on or before the due date.
7. The learned CIT(A) after considering relevant submissions of the assessee and also taken note of various facts and also taken note of provisions of section 54F of the Act and by following various judicial precedents including the decision of Hon’ble Supreme Court in the case of Bajaj Tempo Ltd., vs., CIT 188 (SC) on the issue of interpretation of taxing statute, more particularly, the benevolent provisions of exemption and deduction provisions like the present one held that, the assessee entitled for exemption under section 54F(1) of the Act because, the assessee has satisfied the substantive provisions of section 54F of the Act by investing the amount of capital gains for purchase of new residential house property on or before the due date of filing the return of income provided under section 139(1) of the Act. Further, the Assessing Officer never disputed the fact of satisfying the conditions provided under section 54F of the Act. However, denied the exemption only on technical grounds of not satisfying certain venial breach of negative conditions, even though, the assessee has proved that, all conditions provided thereunder are satisfied. Therefore, the learned CIT(A) observed that, the assessee is eligible for deduction under section 54F of the Act and accordingly deleted the addition made by the Assessing Officer for disallowance of exemption under section 54F of the Act. The relevant observations of the CIT(A) are as under
“Decision
6.7. I have carefully considered the relevant and material facts on record, in respect of this ground of appeal, as brought out in the assessment order and submissions made during appeal proceedings. The only issue involved in these grounds is the allowabililty of claim of exemption under section 54F, in respect of part of Long Term Capital Gains (LTCG), which has arisen on sale of certain shares during the year. This is an undisputed fact that the appellant has sold shares of two companies, namely M/s Vandana Life Sciences Pvt Ltd and M/s Vindhya Pharma (India) Pvt Ltd. for a total sale consideration of Rs.94,49,92,783/- on 16.06.2021, i.e. during the Financial Year 21-22. These shares are not quoted on any recognised Stock Exchange. AO has verified the respective Valuation Reports, and found that Fair Market Value (FMV) of the shares was less than the actual sale consideration for which these shares were actually sold. In other words, the deeming provisions of Section 50C were not attracted. AO has also made independent verification from buyer of these unquoted shares, and found that the purchase of shares was duly reflected in their financial statements, and the source of funds in their hands was adequately explained. The appellant has computed LTCG of Rs.92,28,20,193/- arising on sale of these shares (after taking indexed cost of acquisition at Rs.2,21,72,590/-) during the year. AO has examined the Share Register and noted that the appellant has followed the First-In First-Out (FIFO) method for the purpose of computation of Capital Gains. Out of the total LTCG, the appellant has claimed exemption under section 54F to the tune of Rs.53,22,48,667/-, and has offered the remaining LTCG of Rs.39,05,71,526/-for taxation. The claim of exemption under section 54F has been made by the appellant, in proportion to the investment made towards construction of residential house (the new asset), and partly towards amount deposited in Capital Gains Account Scheme. These investments have been made by the appellant in October 2022. In his return of income for the year, the appellant has declared total income of Rs.42.52 Crore (including LTCG to the tune of Rs.39.05 Crore) and has paid the due taxes thereon (including Rs.11.76 Crore by way of SelfAssessment Tax and Rs.1 Crore by way of Advance Tax). There is no dispute on these facts relevant and material to the impugned transaction.
6.8 AO has, however, denied the claim of exemption under section 54F, holding that the appellant violated some of the disqualification criterion prescribed therein, such as (i) he was owning more than one residential house (other than the new asset) as on the date of transfer, (ii) he has purchased another residential house, other than the new asset, within a period of one year (iii) the due date of filing return of income for the appellant was 31st July 2022, whereas the qualifying investments were made in October’ 2022, hence not within the due date; and (iv) purchase of vacant land cannot be considered eligible for exemption under section 54F.
6.9 The moot point for adjudication is whether, on the given facts and circumstances, the appellant was eligible to claim the exemption from Capital Gains under section 54F, on proportionate basis, in respect of the qualifying investment made towards construction of residential house (new asset) and deposits made in the Capital Gains Accounts Scheme. I find that this issue has to be addressed having regard to all the relevant and material facts relating to the said transaction. I find that the appellant, in the course of assessment proceedings, has brought on record the necessary particulars of transactions of purchase and sale of shares, along with the supporting documents relating to the qualifying investments/deposits made for the purpose of claim of exemption. During the appellate proceedings, the appellant has uploaded copies of the relevant documentary evidence in support of his claim, as under: –
| 1. | Computation of Income for the Assessment Year 2022-23; |
| 2. | Copy of Return of Income for the Assessment Year 2022-23; |
| 3. | Copy of sale deed dated 18.10.2022 in respect of purchase of land (showing sale consideration of Rs.40.73 Crore, Stamp Duty and Registration Charges of Rs.3.09 Crore): |
| 4 | IDBI Bank Account Statement in respect of Capital Gains Account Scheme (showing deposit of Rs.10.67 Crore made on 28.10.2022); |
| 5 | Copy of Gift deed in favour of daughter in respect of the house at Gayatri Gardens; |
| 6. | Copy of Streedhan Agreement dated 30.11.2017; |
| 7. | Copy of Construction Contract dated 08.12.2022 with the Builder (M/s Advitha Infra) in respect of construction of residential house (new asset) for total consideration of Rs.2.02 Crore; |
| 8 | Copy of Revised Construction Contract dated 03.01.2023 with the Builder in respect of construction of residential house (new asset) for escalated consideration of Rs.11 Crore; |
| 9. | Copy of Occupancy Certificate dated 18.06.2024 issued by the Municipal Authority in favour of the appellant. |
6.10 On a careful perusal of evidence brought on record, I find that the appellant has satisfactorily discharged the primary onus cast upon it to produce sufficient material to establish the fact of investment made in construction of residential house (the new asset) and also the deposits made in Capital Gains Account Scheme, within the prescribed time period, for the purpose of claiming exemption under section 54F, by furnishing all the relevant and material evidence. In respect of investment made towards construction of residential house (the new asset); the qualifying amount, date and genuineness of investment are duly evidenced by- (i) sale deed of land dated 18.10.2022; (ii) construction agreement with Builder dated 08.12.2022; (iii) revised construction agreement dated 03.01.2023; and (iv) the Occupancy Certificate. In respect of deposits made towards Capital Gains Accounts Scheme, the qualifying amount and the date of deposits made are duly evidenced from the relevant bank account statement itself.
6.11 In this context, it is pertinent to refer to the relevant provisions of the Act. Section 54F has been inserted by the Finance Act’ 1982 with effect from 1st Apirl 1983. Section 54F grants exemption from tax on Capital Gains, arising from transfer of certain long term capital assets, in case of investment of net sale consideration into a residential house. The relevant provisions are reproduced as under,-
54F. Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.-
(1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or [two years] after the date on which the transfer took place purchased, or has within a period of three years after that date [constructed, one residential house in India] (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-
| (a) | if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45; |
| (b) | if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45: |
Provided that nothing contained in this sub-section shall apply where-
| (a) | the assessee,- |
| (i) | owns more than one residential house, other than the new asset, on the date of transfer of the original asset, or |
| (ii) | purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or |
| (iii) | constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and |
| (b) | the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.] |
Explanation-For the purposes of this section,-
[****]
[***] “net consideration”, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.
(2) Where the assessee purchases, within the period of [two years] after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head “Income from house property”, other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of subsection (1), shall be deemed to be income chargeable under the head “Capital gains” relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.
(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head “Capital gains” relating to long-term capital assets of the previous year in which such new asset is transferred.
(4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for fumishing the return of income under subsection (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 subsection (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 subsection is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,-
| (i) | the amount by which- |
| (a) | the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), – |
| (b) | the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset, shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and |
| (ii) | the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid.” |
6.12. On a plain reading of the above provisions, and in the light of evidence brought on record, it is evident that the appellant has fulfilled all the eligibility criterion prescribed therein to claim the benefit of exemption from chargeability of Capital Gains (arising from sale of shares in his hands). The quantum and date of qualifying investments made towards construction of residential house (and deposit of unutilized net consideration in the Capital Gains Accounts Scheme) by the appellant are not disputed by the AO. The peculiar feature of the present case is that the AO has denied the benefit of exemption, mainly on grounds of technical breach of certain disqualification criterion laid down therein; and not for failure to fulfil the substantive criterion of having made the qualifying investment towards construction of new residential house, or having deposited the unutilized sale consideration in the Capital Gains Accounts Scheme.
6.13 Section 54F is a beneficial provision allowing for exemption from chargeability of Capital Gains in certain cases, where the net sale consideration is invested in new residential house. In a plethora of judgements, Courts have firmly laid down the rule that a provision for deduction, exemption or relief should be interpreted liberally, reasonably in favour of the assessee; and it should be construed so as to effectuate the object of the legislature, and not to defeat it.
6.13.1. In a case involving interpretation of provisions of Section 54F. Hon’ble Gujrat High Court in the case of Kishorbhai Harjibhai Patel v. ITOITR 547 (Gujarat)) (Gujarat), has held that once an assessee falls within the ambit of a beneficial provision, then the said provision should be liberally interpreted.
6.13.2. In another case involving interpretation of similar provisions of Section 54EA, Hon’ble Karnataka High Court in the case of CIT v. J. Palemar KrishnaITR 366 (Karnataka)) (Karnataka) has upheld the view that an interpretation to extend the benefit intended by the Legislature should definitely be preferred to an interpretation to deny the benefit by resorting to technical interpretation.
6.13.3. Hon’ble Supreme Court in the case of Bajaj Tempo Ltd. v. CIT ITR 188 (SC)) (SC) has held that a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the section and not to frustrate it
6.14. The facts of the present case are required to be considered in the light of principles laid down in the aforementioned judicial precedents. There is no dispute on the fact that the appellant has fulfilled the substantive requirements in order to claim the exemption of LTCG under section 54F, on a proportionate basis, by way of investing part of the sale consideration towards construction of residential house, and depositing certain unutilized sale consideration in the Capital Gains Account Scheme, within the prescribed time period. This is duly and adequately supported by documentary evidence on record, as elaborated at Para 6.10 above. AO has, however, denied the benefit of exemption purely on certain technical grounds. The material facts relating to each such ground of denial of exemption are discussed in detail, in the succeeding paragraphs.
The due date applicable to the appellant
6.15. Sub-section (4) of Section 54F stipulates that the net sale consideration should be invested in the new asset, or the unutilized sale consideration should be deposited in the Capital Gains Account Scheme, within the due date for furnishing return of income under section 139(1). There is no dispute on the fact that the appellant is one of the partners in the partnership firm M/s Duthala Pharma, having fifty percent share in profits thereof. The said partnership firm submitted its Tax Audit Report, required under section 44AB of the Act, for the Financial Year ending 31st March 2022 in Form 3CB on 7th October 2022. The Explanation below sub-section (1) of section 139 lays down that “due date” for the said sub-section, in case of partner of a firm, whose accounts are required to be audited under the Act, or under any other law, shall be 31st October’ 2022. On these facts, it is evident that the “due date” for furnishing return of income under section 139(1), as applicable to the appellant being partner in a firm, whose accounts have indeed been audited under section 44AB of the Act, for the year under consideration, was 31st October 2022. The appellant has made the qualifying investment towards construction of new house, by way for purchase of land, on 18th October’ 2022. Further, the appellant has made the qualifying deposit of unutilized part of the sale consideration in the Capital Gains Accounts Scheme on 28th October’ 2022. In other words, the appellant has duly satisfied the technical requirements enjoined under sub-section (4) of section 54F, by investing part of the sale consideration towards new asset, as also depositing the unutilized part in the Capital Gains Accounts Scheme, within the due date under section 139(1)as applicable to him, i.e. within 31st October’ 2022.
6.15.1. The view of the AO on this issue is that the accounts of the said partnership firm M/s Duthala Pharma were not required to be audited under section 44AB of the Act, and therefore the due date applicable to the appellant was 31st July’ 2022, and not 31st October’ 2022. It is noted from the Tax Audit Report of the said partnership firm, that the Turnover for the year under consideration is to the tune of Rs. 6.24 Crore, as against which it has declared a net loss of (-) Rs. 23.75 Lakh. Therefore, the said partnership firm has got its books of accounts audited, and furnished the Audit Report, as required under section 44AB of the Act. AO has, however, made out a case that the account of the firm were not required to be audited under section 44AB, by virtue of applicability of Proviso thereto; which lays down that the Turnover criterion for getting the accounts audited shall be extended up to Rs. Ten Crore, in certain cases (whereas the declared Turnover of the firm was only Rs. 6.24 Crore). I am not inclined to concur with the view of the AO. The view taken by the AO is too pedantic, to say the least. In case of an individual, the due date of furnishing return of income under section 139(1), ordinarily, is 31st July of the relevant assessment year. However, in case of an individual, being partner in a firm whose accounts are required to be audited, the due date of furnishing return of income under section 139(1), ordinarily, is 31st October of the relevant assessment year. The simple reason for allowing partner of a firm extended time to furnish his return of income, is that the details of remuneration, interest etc. paid by the partnership firm are required to be audited by the Tax Auditors of the firm. These details are necessary for the partner to finalize his return of income. In the instant case, the partnership firm M/s Duthala Pharma has got audited its books of accounts for the year, as the Turnover was in excess of Rs.One Crore, and the firm has claimed losses for the year. Therefore, it is only logical that the appellant being partner in such firm, must be allowed extended time up to 31st October of the relevant assessment year (i.e. 31st October’ 2022), to finalise his return of income. The argument of the AO is that the aggregate cash payments by the said partnership firm does not exceed five percent of the total payments, and therefore by virtue of Proviso, the partnership firm was not required to get the books audited. Firstly, the fact whether or not the cash payments/receipts exceed five percent of total payments/receipts, is a question which can scarcely be answered with any certainty, in absence of detailed audit of books of accounts. Secondly, this Proviso merely serves to relax the Turnover limit prescribed for statutory audit of an assessee, carrying on business or profession; by stipulating that in case where cash transactions do not exceed five percent of total transactions, the Turnover limit shall stand increased from One Crore to Ten Crore. It is for the assessee (the partnership firm here) to claim that its case is covered by the said relaxation; hence books of accounts are not mandatorily required to be audited. However, in the instant case, when the partnership firm has actually got the books of accounts audited, under clause (a) of section 44AB (as the declared Turnover was in excess of Rs. One Crore), it cannot be the case of AO that there was no requirement to conduct audit, by virtue of applying the said Proviso.
6.15.2. In view of the above, I find that “due date for furnishing return of income for the appellant, being partner in a firm whose books of accounts have been audited under the Act, was 31st October 2022. Therefore, the appellant has duly satisfied the requirements under section 54F(4), by making investment towards construction of new residential house, and depositing the unutilized sale consideration in the Capital Gains Accounts Scheme’, within the said “due date”.
6.15.3. On similar issue, Hon’ble ITAT, Ahmedabad in the case of ITO v. Jhaveri Sandeep Bipinchandra (HUF)ITD 622 (Ahmedabad – Trib.)) (Ahmedabad Trib.) has held that where assessee fulfilled basic condition for claiming exemption under section 54F by investing net consideration received on sale of original asset in a new asset/residential house within prescribed period of two years from sale of original asset, exemption could not be denied merely for reason that majority of investment was made subsequent to due date of filing of return of income under section 139(1).
Applicability of Proviso below sub-section (1) of Section 54F
6.16. The proviso below sub-section (1) of section 54F lays down certain disqualifications for the claim of exemption under the said section. The proviso lays down that the benefit of exemption shall not be available to an assessee, who either owns more than one residential house (other than the new asset) on the date of transfer of original asset; or purchases another residential house (other than the new asset), within a period of one year of transfer, or constructs another residential house (other than the new asset) within a period of three years of transfer. This is subject to further condition that the income from such other residential house is chargeable to tax under the head ‘Income from House Property’.
6.16.1. In the instant case, AO has noted from the ITR filed by the appellant for the earlier years i.e. for Assessment Year 2021-22, that the appellant already owned two house properties. Therefore, AO has taken a view that the appellant was not eligible to claim exemption under section 54F, as he had violated either of the first two conditions, namely (i) the appellant was owning more than one residential house (other than the new asset) as on the date of transfer of original, or (ii) the appellant had purchased another residential house, other than the new asset, within a period of one year. The relevant and material facts relating to these house properties are discussed below.
6.16.2. In respect of the residential House Property at Plot No. 7, Gayatri Gardens, Balaji Hills, Nizampet, Hyderabad-500090, the appellant has contended that the said property was gifted by him to his daughter Ms. Sahithi Duthala, at the time of her marriage, way back in 2015. The appellant has claimed that the gift was made by way of oral gift to his daughter, as per the prevalent customs and traditions. The appellant has furnished copy of registered Streedhan Agreement dated 30.11.2017. wherein the aforesaid residential House Property has been mentioned as gift received from father, i.e. the appellant. The appellant has also furnished copy of Gift Settlement Deed dated 25th June 2022 in respect of the said property, between the donor (the appellant) and the donee (his daughter). In this regard, the appellant has clarified that though the formal Gift deed was executed and registered much later, the appellant had gifted away the property to his daughter in 2015 itself; therefore he was not the owner of the said property at the time of sale of shares i.e. as on June 2021. The appellant has also furnished copies of ITRs filed by his daughter Mrs Sahithi Duthala for the Assessment Years 2020-21, 2021-22 and 2022-23, wherefrom it is noted that his daughter has been mentioning address of the said residential House property in her return of income. In view of a plethora of evidence brought on record, it is evident that the appellant was not the actual owner of the said residential House property (on the date of sale shares in June 2021), as the same had been gifted away to his daughter long back in 2015. The gift was given at the time of a social occasion (ie. marriage), in accordance with prevailing traditions; and it was made between two natural persons having bonds of natural love and affection. The gift has been later recognized in two registered documents also, namely the Streedhan Agreement (between daughter and her husband), and by way of Gift Deed (between father and daughter). AO has rejected the validity of Gift transaction merely relying because it was not registered and executed. However, on considering the totality of facts, and in the light of documentary evidence, I am inclined to concur with the appellant’s contention that he had validly made a Gift of the aforesaid residential House property to his daughter, Mrs Sahithi Duthala, at the time of her marriage in 2015; even though the same was formalized at a later date. Therefore, the appellant cannot be regarded as owner of the said residential House Property at Gayatri Gardens, as on the sale of shares in June 2021.
6.16.3. In respect of the other residential House Property being Flat No. 1605, Block G, My Homes Bhooja, Gachibowli Raidurgam Village, Hyderabad-500036, the appellant has contended that booking amount for the said house property was paid by his daughter in 2020 (Rs.50,000/- on 30.09.2020 and Rs.79,11,500/-on 18.12.2020), and the remaining amount was paid by the appellant. The total consideration for the said flat was to the tune of Rs.4.17 Crore. The appellant has stated that substantial part of the sale consideration (to the tune of Rs.3.30 Crore) was paid prior to the date of transfer of original asset (i.e sale of shares on 16.06.2021). On these facts, the appellant has argued that this cannot be considered a case of purchase of new residential house, after the date of transfer of original asset. The appellant has stated another fact in support of his plea that the Proviso does not apply to his case. The sale of deed of the said flat (Flat No. 1605, My Homes Bhooja) was executed and registered later on 07.07.2021, and possession of the flat was taken from the builder. As on the date of transfer of the original asset (i.e. sale of shares on 16.06.2021), the said flat was under construction, and not habitable. The said flat is a selfoccupied house. Therefore, the appellant has claimed that income from the said house property was not chargeable under the head ‘Income from House Property’, and therefore the conditions prescribed in the Proviso are not violated. On the given facts, I am inclined to concur with this alternative plea of the appellant. There are two limbs to the Proviso to section 54F. In a case where assessee violates any of the conditions prescribed in clause (a) thereof, the further conditions mentioned in clause (b) are also required to be satisfied, namely that the income from such other residential house (other than the new asset) should be chargeable under the head ‘Income from House Property’. The use of word ‘and’ makes it evident that the conditions are to be read together, and should be satisfied cumulatively. In the present case, this new residential house (Flat No. 1605, My Homes Bhooja) was under construction as on the date of transfer of shares, ie in June 2021. The possession was taken later, and the house was selfoccupied by the appellant. As such, the Annual Value of the said residential house has to be taken as Nil, as per provision of section 23 of the Act. On the given facts, I find that the appellant has not violated the cumulative conditions prescribed under Proviso to the section 54F of the Act.
6.16.4. On similar facts, Hon’ble ITAT, Mumbai in the case of Anant R Gawande v. ACIT198 ITD 58 (Mumbai – Trib.)) (Mumbai – Trib.) has held that where Assessing Officer denied exemption under section 54F(1), holding that assessee was owner of two residential properties at time of transfer of original asset, since one property was under construction and income from said property was not chargeable under head “Income from house property” till time of possession, therefore, condition stipulated in clause (b) of proviso to section 54F(1) was not satisfied and, accordingly, consequential relief was to be granted to assessee.
6.16.5. On similar facts, Hon’ble ITAT, Mumbai in the case of Shweta Singh v. ITO (2024) (Mumbai – Trib.) ) (Mumbai – Trib.) has held that Joint ownership in two residential properties at time of sale of original asset would not disentitle assessee to claim deduction under section 54F.
6.16.6. On similar facts, Hon’ble ITAT Bangalore in the case of Smt. Sajida Begum v. ITO SOT 497 (Bangalore – Trib.)) (Bangalore Trib.) has held that exemption under section 54F cannot be denied on pretext of two houses, when assessee had had made an oral gift in respect of one such property in favour of her daughter. In that case also, the Assessing Officer had rejected assessee’s claim taking a view that gift had not been executed by a registered document. This view was confirmed by CIT (Appeals), but overruled by the Tribunal.
Exemption not admissible on purchase of vacant land
6.17. AO has also denied the claim of exemption on the ground that intention of legislature is to allow exemption for purchase or construction of new residential house, and not towards purchase of vacant plot of land. Brief facts on this issue are that the appellant has purchased land for construction of new house, as per the sale deed executed on 18.10.2022, for total sale consideration of Rs.40.73 Crore. The appellant has paid Stamp Duty and Registration Charges to the tune of Rs.3.09 Crore thereon. Thereafter, the appellant has entered into an agreement for house construction, with the builder M/s Advitha Infra on 08.12.2022 for construction of residential house for total consideration of Rs.2.02 Crore. The agreement for house construction with the builder was later revised on 03.01.2023, wherein an escalated total consideration to the tune of Rs.11 Crore was agreed upon for completion of all works to be undertaken. On completion of construction work, an occupancy certificate for the said residential house was issued by the Municipal Authority on 18.06.2024. The appellant has brought on record the necessary documentary evidence to establish all these facts (as already listed at Para 6.9 above). On the given facts, I find that the appellant has duly invested the sale consideration towards construction of new residential house (and not towards purchase of vacant plot of land), and further that the construction of residential house has been completed within the prescribed period of three years, reckoned from the date of transfer of original asset (i.e. sale of shares on 16.06.2021). As such, the findings of AO that the exemption is not admissible for purchase of vacant plot of land, is not borne out from facts of the case, as the investment was made towards construction of new residential house, which was completed within the prescribed period.
7. In view of the facts and circumstances of the case, and respectfully following the above binding judicial precedents, I find that the appellant is eligible to claim the exemption under section 54F, to the extent of Rs.53,22,48,667/-, from chargeability of Long Term Capital Gains arising on sale of shares during the year. The appellant has brought on record the requisite evidence, which is adequate to establish the material fact that part of the net sale consideration was invested towards construction of new residential house, and certain unutilized sale consideration was deposited in the Capital Gains Account Scheme, within the period prescribed therein. The facts on record do not indicate that the appellant has violated any of the conditions prescribed under the Proviso to section 54F, or laid down in sub-section (4) thereof. The completion of construction of new residential house within the permissible period of three years from the date of transfer of original asset is also duly evidenced. On these facts, the action of AO in denying the benefit of exemption under section 54F is not sustained. The Jurisdictional Assessing Officer (JAO) is accordingly directed to delete the addition of Rs.43,22,48,667/- made on this account. These grounds of appeal are allowed.”
8. Shri Mohd. Afzal, Advocate-Learned Counsel for the Assessee referring to the provisions of sec.54F of the Act submitted that, the provisions of said section deals with exemption from capital gain, in case the assessee invests the amount of capital gain derived from transfer of any asset other than the residential property for purchasing/ construction of a new residential house property, a deduction towards the entire amount of capital gain or proportionate amount of capital gain as the case may be, depending upon the amount of investment made by the assessee. Further, provisions of sec.54F is a benevolent provision provided by the statute to encourage investment in residential house by an assessee and, therefore, same needs to be interpreted to achieve the objects of the Legislature. Learned Counsel for the Assessee further referring to various evidences including date of sale of shares by the assessee submitted that, as on the date of sale of shares i.e., on 16.06.2021 the assessee does not own more than one residential house. Although, the assessee has considered the house property given to the assessee’s daughter by way of gift as assessee’s house property, but, the fact remains that, assessee has gifted the said house property to his daughter in the year 2015 on the occasion of her marriage out of natural love and affection. Further, the said gift has been further regularised by executing a registered Gift Deed dated 25.06.2022 and registered on 28.06.2022. Further the assessee has also filed a copy of Streedhan Agreement dated 30.11.2017, to prove that, the residential house property i.e., Flat No.7, Gayatri Gardens, Balaji Hills, Nizampet, Hyderabad has been gifted to the daughter and once we exclude the said house property, the assessee is having only one property and, therefore, the assessee fulfilled the conditions of proviso to sec.54F(1) of the Act. Learned Counsel for the Assessee further referring to the decision of Hon’ble Supreme Court in the case of Sanjeev Lal vs., CIT & Anr ITR 389 (SC) submitted that, when the assessee has made an oral gift on the occasion of the marriage of his daughter way back in the year 2015, a right in personam is created in favour of the donee and, therefore, even in absence of registered Gift Deed, the right and interest in the property is transferred to the donee when the gift has been made by the assessee. Further, it is a customary in India, more particularly, in Hindu Society that between the close family Members including between father and daughter oral gifts is recognized and going by the Indian custom, the claim of the assessee that, he has gifted one of the residential house property to his daughter on the occasion of her marriage should be accepted. More particularly, subsequently, the said gift has been registered under the Transfer of Property Act. Therefore, the reasons given by the Assessing Officer that, unless the Gift Deed is registered, there is no valid Gift of property and consequently, the assessee cannot claim that property has been gifted by him is not correct.
8.1. Learned Counsel for the Assessee further referring to the provisions of sec.54F(1), Sec.139(1) and proviso 44AB of the Act submitted that, the observation of the Assessing Officer in light of “due date” for filing return of income u/sec.139(1) is totally incorrect because, as per the provisions of sec.139, the due date for an assessee who is partner of any Firm and books of accounts of the said Firm is required to be audited u/sec.44AB of the Act is 31st October, but, not 31st July as claimed by the learned Assessing Officer. The Assessing Officer without appreciating the relevant facts, on his own imagination and understanding of law, interpreted that, the due date for the assessee for filing return of income is 31.07.2022 by bringing proviso to sec.44AB of the Act, even though, the material placed on record clearly shows that the books of accounts of the Firm is audited by an Accountant and the assessee has filed his return of income as per the due date provided u/sec.139(1) of the Act. Learned Counsel for the Assessee further referring to the third observation of the Assessing Officer with regard to utilization of land for the purpose of construction of residential house property submitted that, there is no prohibition for purchase of land for the purpose of construction of the residential house property. The only condition is that on or before three years from the date of transfer of an asset, the assessee should complete the construction of residential house property. In the present case, the assessee has purchased the land and also constructed house property on or before the due date provided u/sec.54F of the Act. For this, the assessee has furnished copy of occupancy certificate dated 18.06.2024 issued by the Municipal Authorities in favour of the assessee. Although, the assessee has satisfied all the conditions provided u/sec.54F of the Act, but, the Assessing Officer has denied exemption only on technical grounds. The learned CIT(A) after considering all the relevant facts, has rightly deleted the addition made by the Assessing Officer and thus, the order of the learned CIT(A) should be upheld.
9. MS. M. Narmada, learned CIT-DR for the Revenue, on the other hand, supporting the order of the learned CIT(A) submitted that, the learned CIT(A) has erred in law and on facts in deleting the addition made by the Assessing Officer towards disallowance of exemption u/sec.54F of the Act, even though the assessee has not satisfied the conditions provided thereunder which is evident from facts brought on record by the Assessing Officer where the Assessing Officer has brought-out number of deviations. The learned CIT-DR further submitted that, the assessee is having more than one residential house as on the date of transfer of original asset which is evident from the return of income filed by the assessee for the relevant assessment year where the assessee himself has admitted two residential house properties. Although, the assessee has claimed that one house property said to have been gifted to her daughter in the year 2015 on the occasion of her marriage, but, the Gift Deed has been executed in the year 2022. Further, the assessee has mortgaged the property in favour of Bank for loan purpose. Therefore, the argument of the assessee that he was not owner of the said house is devoid of merit and cannot be accepted. Further, the Assessing Officer had brought out the fact that of not investing the consideration in capital gain deposit account scheme on or before the due date for filing return of income by bringing on record relevant provisions of sec.44AB of the Act, where the assessee is not required to get his accounts audited. Further, the Assessing Officer had also brought out clear facts that, assessee has not utilised the total land area for construction of house property and, therefore, observed that, assessee is not eligible for claiming exemption u/sec.54F of the Act. Although, the Assessing Officer has brought on record all the relevant facts and also relied on relevant provisions of the Act, but, the learned CIT(A), without appreciating the reasons given by the learned Assessing Officer, deleted the addition made by the Assessing Officer. Therefore, she submitted that the order of the learned CIT(A) should be set aside and the addition made by the Assessing Officer should be confirmed.
10. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the assessee has sold unquoted equity shares of two companies for a consideration of Rs.94,49,92,783/- and computed long term capital gains of Rs.92,28,29,193/- after deducting indexed cost of acquisition of Rs.2,21,72,590/-. The assessee has claimed exemption u/sec.54F of the Act to the tune of Rs.53,22,48,667/- which consists of investment made for purchase of land to the tune of Rs.43,83,37,000/-and investment made in capital gain deposit account scheme of Rs.10,67,00,000/-. The Assessing Officer never disputed these facts. However, disallowed the claim u/sec.54F of the Act on the ground that assessee has not satisfied the conditions provided thereunder. The Assessing Officer has given three reasons for denying exemption u/sec.54F of the Act. The first and foremost reason given by the Assessing Officer is that, the assessee has not satisfied the clause-(a) of proviso to sec.54F(1) of the act. The Assessing Officer further observed that, the assessee has not satisfied proviso to sec.54F(4) of the Act by investing the amount of capital gain in the capital gain deposit account scheme on or before the due date provided for filing return of income u/sec.139(1) of the Act. The Assessing Officer had also observed that the assessee had only purchased the land and has constructed residential house property only in 6% of the land leaving behind 94% vacant land and, therefore, observed that, exemption cannot be allowed for investing capital gain for purchase of vacant land.
11. We have given our thoughtful consideration to the reasons given by the learned CIT(A) to delete the addition made by the Assessing Officer towards disallowance of exemption u/sec.54F of the Act for re-investment of capital gain for purchase of residential house property, in light of various arguments advanced by the Learned Counsel for the Assessee and we, ourselves fully subscribe to the reasons given by the learned CIT(A) for the simple reason that although, the Assessing Officer has not disputed the satisfaction of substantive provisions of sec.54F of the Act by investing long term capital gains for purchase of residential house property, but, disallowed exemption only on the ground of certain technical breaches. Therefore, it is necessary for us to examine the reasons given by the learned CIT(A) to allow exemption u/sec.54F of the Act in light of the observations of the Assessing Officer and evidences placed on record by the assessee. The moot point for adjudication is, whether on the facts and circumstances of the case, the appellant-assessee is eligible to claim exemption u/sec.54F of the Act in respect of qualifying investment made towards construction of residential house property and amount deposited in the capital gain deposit account scheme ? The assessee has placed various evidences including copy of Gift Deed in favour of his daughter, copy of Streedhan Agreement, copy of construction contract and copy of occupancy certificate issued by Municipal Authorities for completion of house property on or before the due date and also IDBI Bank A/c statement in support of capital gain account deposit scheme. In fact, the Assessing Officer never disputed these facts. Therefore, it is necessary for us to understand the reasons given by the Assessing Officer to deny exemption on technical grounds. Admittedly, there is no dispute that the assessee has satisfied substantive provisions of sec.54F of the Act by investing capital gain for purchase of residential house property. The provisions to sec.54F of the Act deals with exemption from capital gain for re-investment of the amount of capital gain for purchase/construction of residential house property. Sec.54F is a benevolent provision allowing exemption from chargeability of capital gain in certain cases, where the net sale consideration is invested in purchase/construction of residential house property. The provisions of sec.54F has been interpreted by various Courts and held that, once an assessee falls within the ambit of benevolent provision, then, the said provision should be liberally interpreted and this view is supported by the decision of Hon’ble High Court of Gujarat in the case of Kishorbhai Harjibhai Patel vs., ITR 547 (Gujarat) (Guj.). Similar view has been taken by Hon’ble High Court of Karnataka in the case of CIT vs., Jurisdiction Palemar KrishnaITR 366 (Karnataka) (Kar.). The Hon’ble Supreme Court in the case of Bajaj Tempo Ltd., vs., CIT has considered the interpretation of taxing statute and more particularly, the benevolent provision of sec.54F and held that, incentive/exemption provisions should be construed liberally, since the provision intended for promoting economic growth is to be read in the context of the purpose of insertion of such provision in the statute. The sum and substance of ratio laid down by various Courts is that, benevolent provision should be interpreted liberally so as to achieve larger objectives of the legislature to provide benefit to the taxpayers. Therefore, in light of the above legal position, if we examine the facts of the present case, we find that, the Assessing Officer having not disputed the fact that the assessee has satisfied substantive provision of sec.54F by investing the capital gain amount for purchase of residential house property, he ought not to have denied the exemption only on technical grounds.
12. Having said so, let us come back to the reasons given by the Assessing Officer. The Assessing Officer has denied exemption on three grounds. The first and foremost reason given by the Assessing Officer is applicability of proviso to sec.54F(1) of the Act. The proviso below sub-sec.(1) of sec.54F lays down certain disqualification for claiming exemption under the said section. As per the said proviso, the benefit of exemption shall not be available to an assessee, if the assessee owns more than one residential house [other than the new asset] as on the date of transfer of original asset and further, purchase any residential house [other than the new asset] within one year of transfer or construction of another residential house. This is subject to further condition that the income from such other residential house is chargeable to tax under the Head “Income from house property”. In the present case, it was the contention of the Assessing Officer that, the assessee owns more than one residential house as on the date of transfer of original asset. The assessee claims that one residential house property at Flat No.7, Gayatri Gardens, Balaji Hills, Nizampet, Hyderabad has been gifted to his daughter viz., Sahiti Duthala at the time of her marriage way back in the year 2015. The Assessing Officer disputed the gift of the property in absence of registered Gift Deed at the time of gift of the property. In other words, there is a gift deed executed in the year 2022. However, there was no gift deed when the property was gifted in the year 2015. The assessee contended that as per the Hindu Customs and Traditions, oral gifts are common that too at the time of marriage of their children. In the present case, the assessee claims to have gifted one residential house property as promised in favour of her daughter on the occasion of her marriage out of natural love and affection which was solemnised by executing a registered Gift Deed dated 25.06.2022 and further verified by the ‘Streedhan Agreement’ between the daughter of the assessee and her husband, as per which, both parties have agreed that the property has been gifted by her father in the year 2015 and the benefits of the property is for the daughter. Further, the assessee had also proved the gift of the property by filing the income tax return filed by the daughter of the assessee for the relevant assessment year where she claimed her residential address from above house property gifted by the assessee. From the details filed by the assessee, there is no dispute with regard to the gift of property to her daughter in the year 2015 on the occasion of her marriage. In so far as reasoning of the Assessing Officer that in absence of registered Gift Deed, proper Gift cannot be executed in view of provisions of sec.123 of the Transfer of Property Act, 1882, in our considered view, there is no dispute with regard to the legal position that Gift of immovable property can be given only by way of a registered instrument signed by donor and attested at atleast two witnesses. However, going by the Indian Customs and Traditions, the arguments of the assessee that, he has made oral gift to her daughter on the occasion of her marriage in the year 2015 needs to be accepted because, it is common in Indian Hindu Society that property have been gifted to sons and daughters out of natural love and affection even without a registered document. Therefore, we are of the considered view that, argument of the Assessing Officer that, in absence of any valid registered gift deed, gift cannot be considered is devoid of merit and accepted. Further, at this stage, it is relevant to consider the decision of Hon’ble Supreme Court in the case of Sanjeev Lal vs., CIT & Anr. (supra), where the Hon’ble Supreme Court in light of provisions of sec.54 considered the term ‘Transfer’ as defined u/sec.2(47) of the Act and held that when a right in personam is created in favour of the vendee, the vendor is restrained from selling the property to someone else because the vendee, in whose favour the right in personam is created, has a legitimate right to enforce specific performance of the agreement, if the vendor, for some reason is not executing the sale deed. Although, the facts of the above case before the Hon’ble Supreme Court is in light of Agreement to Sell between the parties, but, if we apply the ratio laid down by the Hon’ble Supreme Court, in our considered view, the Gift can be considered as a valid Gift going by the practice prevailing in Indian Society.
13. In so far as the argument of the Learned DR in light of mortgage of the gifted property to Kotak Mahindra Bank, in our considered view, merely for the reason of mortgaging the said property to a Bank for availing loan by the assessee, it cannot be said that the assessee is not gifted the property in favour of his daughter. Admittedly, the gift is between father and daughter. Going by the relationship between the parties, it is not surprised for us that, the property belong to daughter has been used by the father to avail Bank loan because, it is common in our society that, a related-party property has been given as collateral for availing loan with the consent of the other party. In the present case, it was the claim of the Learned Counsel for the Assessee that, the property has been mortgaged by the appellant-assessee to Kotak Mahindra Bank for availing loan with the consent of his daughter and further, as per the No Objection Certificate issued by the Bank, the appellant-assessee and his daughter both have consented to give the property as security for availing loan. From the above, it is undisputedly clear that, the assessee not as a owner of the property has mortgaged the property, but, mortgaged the property with the consent of his daughter. Therefore, we are of the considered view that, the said facts does not alter the fact with regard to entitlement of the assessee for claiming exemption u/sec.54F of the Act. Thus, we reject the arguments of the Learned DR. Therefore, we are of the considered view that, once the Gift given by the assessee is considered as valid Gift, then, the assessee is left with only one residential house property as on the date of transfer of original asset dated 16.06.2021 and, therefore, the assessee satisfied the condition of proviso below to sub-sec.(1) of sec.54F of the Act and eligible for exemption u/sec.54F of the Act.
14. Coming back to another argument of the Assessing Officer in light of second property held by the assessee i.e., Block-G, Flat No.1605, My Homes Bhoja, Gachibowli, Raidurgam Village, Hyderabad. The assessee has purchased the Flat No.1605, My Homes Bhoja, Gachibowli by way of registered sale deed dated 07.07.2021. The assessee has booked the Flat by paying initial investment of Rs.50,000/-on 30.09.2020 and the said amount has been paid by assessee’s daughter. The assessee has paid substantial amount of consideration of Rs.3,29,61,500/- on or before 25.05.2021. The builder has completed the construction of the Flat and handed over the possession in the year 2022. The assessee claims to have performed his House Warming Ceremony in the year 2022. The Assessing Officer did not consider the argument of the assessee and held that, the assessee has purchased the property vide sale deed dated 07.07.2021 and once it is registered, the assessee gets right over the property and, therefore, the argument of the assessee that, he did not get the possession up-to June, 2022 is incorrect. In our considered view, the observation of the Assessing Officer is totally incorrect and contrary to the facts on record. It is an admitted fact that, if a person books a Flat in a Society, the builder takes substantial time for completing the building. In the present case, going by the date of booking the Flat i.e., on 30.09.2020 and the subsequent execution of sale deed dated 07.07.2021, there is no reason to disbelieve the argument of the assessee that the builder has completed the construction and handed over the possession in the year June 2022 because, in normal course from the date of booking the Flat, the builder will take 2 or 3 years time for completion of the construction of a project and to handing-over the possession to the prospective customers. If we consider the date of booking the Flat and payment of substantial consideration, then, the assessee has paid the substantial consideration on 25.05.2021 which means, he has paid substantial amount of consideration before the date of transfer of original asset dated 16.06.2021 and, therefore, the argument of the Assessing Officer that the assessee has purchased new residential house property within one year from the date of transfer is incorrect. Further, going by the argument of the assessee that he has received physical possession of the property in June, 2022, then, also the observation of the Assessing Officer is incorrect that, assessee has purchased one more residential property within one year from the date of transfer of the original asset because, if we consider date of transfer of original asset dated 16.06.2021 and actual possession of the property in June, 2022, then, it is more than one year from the date of transfer of original asset and, therefore, in our considered view, the assessee did not purchase another residential house property in violation of proviso to sec.54F of the Act and thus, eligible to claim exemption u/sec.54F of the Act.
15. Coming back to the second observation of the Assessing Officer in light of “due date” for filing return of income and investment as provided u/sec.54F(4) of the Act. Sec.54F(4) stipulates that, net sale consideration should be invested in the new asset or the unutilized sale consideration should be deposited in the capital gain deposit account scheme on or before the due date for furnishing return of income u/sec.139(1) of the Act. The assessee claims that due date for filing his return of income for the impugned assessment year 2022-2023 is 31.10.2022 later extended up-to 07.11.2022 because, he was a partner in a Firm viz., M/s. Duthala Firm which is subjected to tax audit as required u/sec.44AB of the Act and the assessee has furnished relevant tax audit report on 07.10.2022. The provisions of sec.139 deals with “due date” for filing return of income of various classes of assessee’s. The Explanation below to sub-sec.(1) of sec.139 lays down that “due date” for the said sub-section in case of a partnership firm, whose accounts are required to be audited under the Act shall be 31st October of every year. Going by the above provisions of the Act and the facts of the present case, in our considered view, the “due date” for the assessee for filing his return of income for the year under consideration is 31.10.2022 and later extended up-to 07.11.2022. The Assessing Officer has brought in an artificial due date i.e., 31.07.2022 by interpreting the provisions of sec.44AB of the Act in light of proviso provided thereunder and held that, in view of clause-(b) of proviso to sec.44AB, if aggregate of all payments made including amount incurred for expenditure in cash during the previous year does not exceed 5% of the said payment, then, the turnover limit for getting accounts audited is Rs.10 crores instead of Rs.1 crore. For this purpose, the Assessing Officer has considered the relevant ledger accounts of receipts and payments and observed that, cash payments and cash receipts is less than 5% and, therefore, the assessee falls under clause-(b) of proviso to sec.44AB of the Act and as per the said provisions, if the turnover does not exceed Rs.10 crores, then, there is no requirement of filing audit report in Form-3CB and Form 3CD.
15.1. We find that, assessee is a partner in a partnership firm and partnership firm is subjected to audit u/sec.44AB of the Act. It is also on record that, the assessee has filed relevant audit report issued by an Accountant of partnership firm and as per the said audit report, the Auditor’s specified the “due date” of filing audit report is 31.10.2022. Once, there is no dispute with regard to the fact that, the assessee is a partner in a firm, whose accounts are required to be audited and in fact, the assessee has filed relevant audit report in prescribed Forms to prove it’s case, in our considered view, the Assessing Officer ought not to have artificially inserted a “due date” as per his own understanding of law, even though, the evidences clearly shows that actual “due date” for filing return of income in the present case is 31.10.2022. In our considered view, the observation of the Assessing Officer without any factual details with regard to transaction of the assessee that the assessee cash payment is less than 5% is also not based on any evidence and only a suspicion. Therefore, in our considered view, the observation of the Assessing Officer in light of proviso to sec.44AB of the Act and the relevant reasons with respect to the due date is 31.07.2022 and that the investment made by the assessee towards capital gain for purchase of residential house on 18.10.2022 and investment made in capital gain account scheme on 28.10.2022 is beyond due date and assessee is not eligible for exemption, is contrary to law and cannot be accepted. Therefore, we are of the view that the learned CIT(A) after considering relevant facts, has rightly observed that assessee has satisfied the provisions of sec.54F of the Act and eligible for exemption is in accordance with Law and accordingly upheld.
16. Coming back to the third observation of the Assessing Officer. The Assessing Officer observed that, the assessee is not eligible for exemption u/sec.54F of the Act for purchase of vacant land. To support his arguments, the Assessing Officer has brought-out certain facts including purchase of land by the assessee and subsequent construction of residential house property. According to the Assessing Officer, the assessee has purchased 4153.57 sq. metres of land and has utilised only 291.52 sq. metres of the land which works to only 6% of actual land and, therefore, the investment made by the assessee is only for the land and, therefore, the assessee is not entitled for exemption. In our considered view, the Assessing Officer is completely erred in coming to the above conclusion going by the facts available on record. Admittedly, the assessee has purchased the 4153.57 sq. metres of vacant land on 18.10.2022 by way of registered sale deed. The assessee had also obtained relevant sanction from the Municipal Authorities for construction of residential building. In fact, the assessee has constructed residential building and obtained occupancy certificate from the Municipal Authorities on or before the due date as provided u/sec.54F of the Act and from the evidences filed by the assessee, it is undisputedly clear that, the assessee has purchased land for the purpose of construction of house property and also constructed residential house within three years from the date of transfer of original asset and, therefore, in our considered view, it is irrelevant whether the assessee has constructed building on entire portion of land and has only utilised portion of land for residential house and kept remaining land vacant. In our considered view, what is required to be seen is, whether the land purchased by the assessee for construction of residential house or not ? Once the land is purchased for the purpose of construction of house property, then, there is no reason to disallow deduction only on the ground that the assessee has used part of land for construction of house property. In the present case, going by the facts available on record, we find that, the assessee has purchased land and also constructed residential house property within the “due date” provided under the Act. Therefore, the assessee is eligible for exemption u/sec.54F of the Act.
16.1. At this stage, it is relevant to consider certain judicial precedents, where it was held that, the cost of land includes the cost of new residential house property which is eligible for exemption u/sec.54F of the Act. In this regard, it is relevant to consider the Judgment of Hon’ble Madra High Court in the case of C. Aryama Sundaram vs., CIT [1977] 107 ITR 1 (SC) wherein the Hon’ble Madras High Court held as under :
“20. What has to be adjusted and/or set off against the capital gain is, the cost of the residential house that is purchased or constructed. Section 54(1) of the said Act is specific and clear. It is the cost of the new residential house and not just the cost of construction of the new residential house, which is to be adjusted. The cost of the new residential house would necessarily include the cost of the land, the cost of materials used in the construction, the cost of labour and any other cost relatable to the acquisition and/or construction of the residential house.
21. A reading of Section 54(1) makes it amply clear that capital gain is to be adjusted against the cost of new residential house. The condition precedent for such adjustment is that the new residential house should have been purchased within one year before or two years after the transfer of the residential house, which resulted in the capital gain or alternatively, a new residential house has been constructed in India, within three years from the date of the transfer, which resulted in the capital gain. The said section does not exclude the cost of land from the cost of residential house.
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.
23. 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 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.
24. 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.”
16.2. In this view of the matter and considering the facts of the case and also by following the ratio of various Courts discussed hereinabove, we are of the considered view that, the assessee is eligible for exemption u/sec.54F of the Act towards amount invested for purchase of residential house property. The Assessing Officer without appreciating the relevant facts simply disallowed the exemption u/sec.54F of the Act. The learned CIT(A) after considering all the relevant facts has rightly deleted the addition made by the Assessing Officer. Thus, we are inclined to uphold the order of the learned CIT(A) and dismiss the appeal filed by the Revenue. Accordingly, the grounds of the appeal of Revenue are dismissed.
17. In the result, appeal of the Revenue is dismissed.