Section 54F Denial Set Aside; Matter Remanded to Verify Additional Evidence

Issue

Whether an appellate order confirming the denial of exemption under Section 54F should be set aside and restored to the Assessing Officer (AO) if the assessee produces additional evidence before the Tribunal that was not available or could not be filed during the lower proceedings.

Facts

Assessment Year: 2011-12.
The Claim: The assessee filed a return declaring Nil taxable income, claiming exemption under Section 54F (Capital Gains invested in a residential house).
The Denial: The Assessing Officer (AO) completed the scrutiny assessment under Section 143(3) and rejected the Section 54F claim, making an addition to the income.
First Appeal: The Commissioner (Appeals) confirmed the AO’s order.
Tribunal Stage: Before the ITAT, the assessee filed an application for the admission of additional evidences (likely documents proving the investment/construction) which could not be filed before the subordinate authorities earlier.

Decision

Verification Required: The Tribunal held that the additional evidence produced by the assessee was material to the claim and required factual verification at the ground level.
Interest of Justice: Instead of rejecting the evidence on procedural grounds, the Tribunal deemed it necessary to examine the documents to determine the correct tax liability.
Ruling: The order of the Commissioner (Appeals) regarding the Section 54F denial was set aside. The entire issue was remanded back to the Assessing Officer with directions to verify the new evidence and decide the eligibility for deduction de novo (afresh).

Key Takeaways

Rule 29 (ITAT Rules): Taxpayers have a remedy under Rule 29 of the Income Tax (Appellate Tribunal) Rules to submit fresh evidence at the final appellate stage if they can prove there was sufficient cause for not producing it earlier, or if the documents are crucial for substantial justice.

Remand is a Second Chance: A remand order effectively resets the assessment for that specific issue. It gives the taxpayer a fresh opportunity to prove their claim before the AO without the burden of the previous adverse order.

IN THE ITAT PUNE BENCH ‘A’

Ameetsingh Ajitsingh Rajpal

Deputy Commissioner of Income-tax

R. K. PANDA, Vice President
and Vinay Bhamore, Judicial Member

IT Appeal NO. 1705 (PUNE) OF 2025
[Assessment year 2011-12]

NOVEMBER 25, 2025

Suhas Bora and Riya Oswal for the Appellant. Smt. N.C. Shilpa for the Respondent.

ORDER

Vinay Bhamore, Judicial Member. – This appeal filed by the assessee is directed against the order dated 27.05.2025 passed by Ld. CIT(A)/NFAC for the assessment year 2011-12.

2. The appellant has raised the following grounds of appeal :-

“1. The Ld. CIT(A) has erred in upholding the disallowance of deduction claimed under section 54F of the Income-tax Act, 1961 amounting to Rs. 92,85,214/-solely on the ground that the reinvestment was not made in a residential house.

2. The Ld. CIT(A) and the Ld. AO failed to appreciate that the appellant had invested the entire sale consideration in the property in strict compliance with all conditions prescribed under section 54F of the Act.

3. The authorities below erred in holding that a farmhouse cannot qualify as a residential house without appreciating that:

The appellant has invested in a property permitted to be constructed as per the applicable zoning regulations.

The interpretation that a farmhouse is not a “residential house” is neither correct nor tenable in the absence of any statutory definition of the term under the Income-tax Act.

The provisions of a taxing statute must be interpreted strictly based on the language employed and not by importing any presumed legislative intention.

The term “residential house” not having been defined under the Act ought to be construed in a liberal and purposive manner so as to advance the object of the provision rather than defeat it.

4. The Ld. CIT(A) further erred in concluding that no construction had been carried out and hence the property does not qualify as a residential house, without appreciating that the investment was made within the stipulated period and the property is capable of being used for residential purposes.

5. The Ld. CIT(A) failed to consider that Section 54F does not restrict exemption merely because the property is situated in an agricultural zone, nor does it exclude a farmhouse from the ambit of a residential house.

6. The disallowance so sustained is contrary to the settled principles of interpretation of beneficial provisions under Chapter IV of the Income-tax Act and deserves to be deleted.

7. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.”

3. Facts of the case, in brief, are that the assessee is an individual and engaged in the business of real estate and also in trading of plots and flats and has furnished its return of income on 30.03.2013 declaring taxable income of Rs.Nil. The return was processed u/s 143(1) and subsequently the case was selected for scrutiny through CASS. Notices u/s 143(2) was issued to the assessee. After considering the reply of the assessee, the Assessing Officer completed the assessment proceedings u/s 143(3) of the Act and vide order dated 27.03.2014 passed the assessment order by determining total income at Rs.2,57,18,854/- as against Nil income shown by the assessee. The above assessed income includes addition on account of the disallowance of interest of Rs.6,48,436/- and addition of interest amount of Rs.15,51,839/- to the business income of the assessee, addition of unsecured loan of Rs.1,42,33,365/- u/s 68 as unexplained credits and disallowance on account of denial of deduction u/s 54 of the Act of Rs.92,85,214/-.

4. Being aggrieved with the above assessment order, the assessee preferred an appeal before Ld. CIT(A)/NFAC. After considering the reply of the assessee, Ld. CIT(A)/NFAC deleted the addition made on account of disallowance of interest of Rs.22,00,275/- and also deleted the addition made u/s 68 as unexplained credit on account of unsecured loan of Rs.1,42,33,365/-. However, Ld. CIT(A)/NFAC dismissed the ground of appeal with regard to addition of Rs.92,85,214/- on account of denial of deduction u/s 54F of the Act.

5. It is the above order against which the assessee is in appeal before this Tribunal.

6. Ld. AR appearing from the side of the assessee submitted before us that the order passed by Ld. CIT(A)/NFAC is not justified to the extent of not allowing the benefit of exemption u/s 54F of the Act. Ld. AR submitted before us that the claim of deduction u/s 54F of the Act was disallowed by the Assessing Officer by saying that the assessee has not invested in residential house rather a farmhouse was constructed. Ld. AR also submitted that Ld. CIT(A)/NFAC has also confirmed the finding of the Assessing Officer since the assessee could not furnish all the relevant evidences before the subordinate authorities. Ld. AR submitted before the bench that now the assessee is in possession of all the relevant evidences which support his contention that the assessee is entitled to claim deduction u/s 54F of the Act. Ld. AR also submitted an application under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963 for admission of additional evidences filed in the shape of paper book no.2 starting from page no.101 to 246. Apart from these additional evidences, Ld. AR also relied on legal compilation consisting of 4 case laws. Accordingly, Ld. AR requested before the bench to allow the appeal of the assessee.

7. Ld. DR appearing from the side of the Revenue relied on the orders passed by the subordinate authorities and requested to confirm the same.

8. We have heard Ld. counsels from both the sides and perused the material available on record including the paper books and copy of case laws furnished by the assessee. In this regard, we find that the dispute is with regard to denial of deduction of Rs.92,85,214/- u/s 54F of the Act by the Assessing Officer which was also confirmed by Ld. CIT(A)/NFAC. In this regard, we also find that the assessee has filed an application for admission of additional evidences which could not be filed before the subordinate authorities. We further find that the assessee has relied on coordinate bench decisions passed in the case of Girish Mohan v. ACIT ITD 221 (Delhi – Trib.), ACIT v. Rajat Bhandari [IT Appeal No. 4840/Delhi/2017, dated 16-09-2021], Shyam Sunder Mukhija v. ITO [1991] 38 ITD 125 (Jaipur) and ITO v. Smt. Saroj Devi Agarwal (Jaipur – Trib.)/ITA No.397/JP/2016 order dated 05.10.2017. It is the claim of the assessee that in all the above cases similar/identical issue i.e. with regard to deduction u/s 54 of the Act was the subject matter and in the case of a Rajat Bhandari (supra) deduction u/s 54f of the Act was allowed wherein a farmhouse was constructed by the assessee.

9. Considering the totality of the facts of the case and in the light of our above discussion and also considering the fact that the assessee has produced certain additional evidences which needs verification at the level of the Assessing Officer, we deem it appropriate to set-aside the order passed by Ld. CIT(A)/NFAC only with regard to confirmation of addition of Rs.92,85,214/- on account of denial of exemption u/s 54F of the Act and restore the issue to the file of the Assessing Officer with a direction to decide the issue of deduction u/s 54F of the Act afresh and as per fact and law after providing reasonable opportunity of hearing to the assessee. The assessee is also hereby directed to respond to the notices issued by the Assessing Officer in this regard and is also directed to produce relevant material, documents additional evidences and case laws in support of its contentions. Thus, the grounds of appeal raised by the assessee are allowed for statistical purposes

10. In the result, the appeal filed by the assessee is allowed for statistical purposes.