Section 54F Exemption Cannot Be Denied for Using Other Funds: ITAT Agra

Kamlesh Tandon Vs ACIT (ITAT Agra)

Section 54F Exemption Cannot Be Denied Merely Because New House Was Funded from Sources Other Than Capital Gains Account: ITAT Agra

Summary: The Agra Bench of the Income Tax Appellate Tribunal has held that section 54F does not require the very same sale consideration received from the original asset to be utilised for purchasing or constructing the new residential house. If the assessee purchases or constructs the eligible residential house within the prescribed period and otherwise satisfies the statutory conditions, the exemption cannot be denied merely because a part of the investment was made from another bank account or from independent sources.

The assessee sold a plot of land situated at Tulsi Enclave, Agra, on 16.04.2013 for ₹65.22 lakh. The resultant capital gain was deposited in a Capital Gains Account with Andhra Bank on 27.09.2013, before the due date for filing the return under section 139(1). In the return of income filed for A.Y. 2014-15, the assessee claimed exemption of ₹59,58,600 under section 54F.

The original assessment was completed under section 143(3) accepting the returned income. Subsequently, the PCIT invoked section 263 and held that the assessment was erroneous and prejudicial to the interests of the Revenue because the Assessing Officer had not properly examined the assessee’s claim under section 54F. The assessment was consequently set aside with a direction to conduct fresh verification.

In the consequential assessment proceedings, the Assessing Officer questioned the payment of ₹25 lakh made on 02.05.2015 towards the purchase of a plot, since the amount had not been withdrawn from the Capital Gains Account. The Assessing Officer further observed that the assessee had withdrawn only ₹45 lakh from that account up to 31.12.2015 and that further amounts were withdrawn subsequently. According to the Assessing Officer, the assessee had also failed to satisfactorily establish that the residential house was completed within three years from the date of sale of the original asset.

The assessee explained that the source of investment in the new house need not necessarily be confined to the amount withdrawn from the Capital Gains Account. The plot was purchased jointly with her son, Shri Amit Tandon, on 02.05.2015 for ₹1,10,37,000, in which both had equal shares. A residential house was thereafter constructed on the plot. According to the assessee, the total investment attributable to her share in the land and construction amounted to ₹86,83,448, and the construction was completed by 09.03.2016, which was within three years from the sale of the original plot on 16.04.2013.

The Assessing Officer rejected the explanation and disallowed the entire exemption of ₹59,58,600. The CIT(A) confirmed the disallowance, compelling the assessee to approach the Tribunal.

The Tribunal observed that it was undisputed that the sale consideration had been deposited in the Capital Gains Account before the due date under section 139(1). It was also established that the assessee had purchased a new plot jointly with her son and constructed a residential house on it. The details produced by the assessee showed investment of ₹86.83 lakh, including ₹2.50 lakh stated to have been spent through self-made vouchers. Even after excluding this amount, the investment of ₹84.33 lakh was reflected in the assessment order itself.

The Tribunal rejected the Revenue’s objection that the payment of ₹25 lakh towards the plot had been made from a source other than the Capital Gains Account. Relying upon the Punjab and Haryana High Court decision in CIT v. Kapil Kumar Agarwal, it held that section 54F does not mandate that the sale consideration received on transfer of the original asset must itself be used for the new residential house. The statutory requirement is that the assessee must purchase or construct the eligible residential house within the prescribed period.

The Tribunal also referred to the decision in Vikesh Garg v. DC/ACIT, wherein it was held that once the sale consideration is deposited in the Capital Gains Account within the prescribed time, the amount deposited is deemed to be the cost of the new asset for the purposes of section 54F. The taxability of any amount ultimately remaining unutilised would arise only after the expiry of the stipulated period.

On the question of completion of construction, the Tribunal noticed that the Assessing Officer himself had recorded that the Capital Gains Account was closed on 09.03.2016, which the assessee claimed as the date of completion of construction. The assessee had time up to 15.04.2016 to complete the residential house. More importantly, the assessee produced a municipal tax assessment certificate issued by Agra Nagar Nigam, corroborating the existence and construction of the residential house.

Reliance was also placed on the Madras High Court decision in CIT v. Sardarmal Kothari, which recognised that section 54F should not be denied merely because some minor construction work remained incomplete when the substantial investment had been made and a residential house had, in substance, been constructed.

The Tribunal emphasised that section 54F is a beneficial provision intended to encourage investment in residential houses and should receive a liberal interpretation. Its purpose cannot be defeated by adopting a hyper-technical approach.

Accordingly, the Tribunal held that the assessee had complied with the requirements of sections 54F(1) and 54F(4) and was entitled to exemption of ₹59,58,600. The disallowance was deleted and the appeal was allowed.

Author’s Comments

The decision reiterates the important distinction between the amount eligible for exemption and the immediate source from which payment for the new house is made. Section 54F prescribes the quantum and time limits for investment, but it does not insist on a direct rupee-to-rupee nexus between the sale proceeds of the original asset and the payments made for the new residential house.

Therefore, an assessee may temporarily use personal savings, borrowed funds or another bank account to make the investment. The exemption cannot be denied solely because the cheque issued to the seller or contractor did not originate from the Capital Gains Account. What is essential is that the required amount is invested in the eligible residential house within the stipulated period and that the assessee complies with section 54F(4) regarding deposit of the unutilised consideration.

The ruling is also useful where the plot is purchased beyond two years but the residential house is constructed within three years. In such a case, the claim may fall within the construction limb of section 54F. However, the assessee must maintain convincing evidence of the construction, its cost and its completion within three years. Municipal assessment records, contractor bills, bank statements, building approvals, electricity connections and contemporaneous photographs can become crucial evidence.

Cases Discussed

• CIT Faridabad v. Shri Kapil Kumar Agarwal, 2015 (12) TMI 1075 (P&H-H.C.), order dated 04.11.2015 – relied upon for the proposition that section 54F does not mandate utilisation of the sale proceeds of the original asset themselves for meeting the cost of the new asset.
• Vikesh Garg v. DC-ACIT (2) Gorakhpur, ITA No. 13/VNS/2024, 2024 (10) TMI 1564 (ITAT-Varanasi), order dated 22.10.2024 – relied upon regarding deposit in the Capital Gains Account and the deeming provision under section 54F(4).
• CIT v. Sardarmal Kothari and Another, 2008 (6) TMI 15 (Mad-H.C.) – relied upon on construction of a residential house and compliance with section 54F.

FULL TEXT OF THE ORDER OF ITAT AGRA

This appeal is directed against the impugned order dated 30.01.2026 passed in appeal No CIT(Appeal) 2, Agra/10551/2019-20 by the ld. Commissioner of Income Tax, NFAC(Delhi) [(hereinafter referred to as the “CIT(A)] u/s. 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) for the A.Y. 2014-15, wherein ld CIT(A) has dismissed assessee’s appeal, confirming the additions made by the assessing officer.

2.(i) The brief facts state that appellant e-filed her original return for A.Y. 2014-15 on 29.10.2014, declaring total income of Rs. 86,68,760/-. Subsequently, the case was selected for scrutiny under CASS and assessment u/s 143(3) of the Act was completed on 09.05.2016, accepting the returned income. Thereafter ld PCIT-2, Agra, in exercise of power u/s 263 of the Act, held the assessment dated 09.05.2016 as erroneous in so far as it is prejudicial to the interest of revenue on the ground that the assessment remained without making inquiries and verification in respect of the assessee’s claim of deduction of long term capital gain u/s 54F of the Act on the sale of property. Ld PCIT directed the assessing officer for making a fresh assessment after inquiries/ verification in respect of assessee’s claim of long term capital gain, vide order dated 31.03.2019 passed u/s 263 of the Act.

(ii) Thereafter, the assessing officer initiated the assessment proceedings in compliance of order u/s 263 of the Act, dated 31.03.2019 by issuance of show cause notice, seeking assessee’s explanations on two points – firstly, as to why the payment of Rs. 25,00,000/- made on 02.05.2015 for the purchase of plot without withdrawing the said amount from the capital gain account be not disallowed, secondly, the assessee withdrew only Rs. 45,00,000/- from the capital gain account till 31.12.2015, which was not sufficient till the said construction dated 09.03.2016.

(iii) The assessee submitted his reply and contended that she could invest the amount from any bank account and it was not necessary for her to withdraw the same from the capital gain account. Assessee further submitted that the total investment made towards the purchase of land and construction of the house was at Rs. 86,83,448/-, which was within 3 years from the sale of original capital asset in accordance with the stipulation provided u/s 54F of the Act.

(iv) The assessing officer could not be convinced by assessee’s submissions and observed that the said plot was purchased jointly by the assessee on 02.05.2015 beyond the period of 2 years from the execution of sale deed on 16.04.2013, which was not treated as residential house. Further the assessing officer observed that assessee’s claim of construction of one residential hose was not justified as the funds for the construction of the property came from the source other than the amount deposited in the capital gain account scheme. Ld Assessing Officer, further observed that the assessee received account closure amount of Rs. 1,18,48,336/- on 09.03.2016, which assessee claims the date of completion of construction, however, disallowed assessee’s claim of deduction of long term capital gain of Rs. 59,58,600/- u/s 54F of the Act and added in the income of the assessee, vide assessment order dated 29.12.2019 passed u/s 143(3)/263 of the Act.

3. Aggrieved, assessee preferred an appeal before ld CIT(A), who dismissed assessee’s appeal and confirmed the assessment order.

4. Aggrieved, assessee preferred this second appeal on the following grounds:

“1. That the learned Commissioner of Income Tax (Appeals), NFAC, Delhi, vide Appellate order bearing DIN & Order No. ITBA/NFAC/S/250/2025-26/1085376976(1) dated 30.01.2026 has grossly erred in law and on facts in confirming the disallowance amounting to Rs. 59,58,600/- made by the Assessing Officer u/s 54F of the Income Tax Act, 1961 vide order of assessment framed u/s143(3)/263 of the Income Tax Act, 1961 on 29.12.2019.

2. That the learned Commissioner of Income Tax (Appeals) has further erred in law and on facts in holding that the house was not constructed (i.e. made habitable) within three years, whereas, on the contrary the payment made to the contractors for carrying out the construction work itself goes to prove that the construction work was completed within a period of three years form the date of earning the capital gain.

3. That the learned Commissioner of Income Tax (Appeals) has grossly erred in law and on facts in not accepting the Nagar Nigam assessment as a conclusive proof of completion of the house under reference, whereas assessment of house is only done by the said Autonomous body when the house is found to have been completed.

4. That the learned Commissioner of Income Tax (Appeals), NFAC has blatantly failed to appreciate that entire payments of capital gain have been utilised in the construction of the work duly supported by the copies of the ledger Accounts and the Bank statement duly furnished before both the lower authorities.

5. That the learned Commissioner of Income Tax (Appeals) has wrongly and illegally held that the later withdrawals and the closing balances were ostensibly for outstanding payments which contravenes section 54(F) of the Income Tax Act, 1961, whereas on the contrary there are enough material and evidences available on record to prove that these payments were exclusively utilised for the construction of the house within the prescribed period of time.”

5. Perused the records. Heard ld representatives for the appellant assessee and ld CIT DR for the respondent revenue.

6. The main point for determination, on the basis of the grounds raised under appeal, is as to whether ld CIT(A) has erred in confirming the disallowance of long term capital gain amounting to Rs. 59,58,600/- claimed by the assessee u/s 54F of the Act?

7. Ld representative for the assessee has submitted that assessee sold plot of land situated at 1/141, Tulsi Enclave, Agra on 16.04.2013 for a consideration of Rs. 65,22,000/-. The sale consideration was deposited in the capital gain account on 27.09.2013 i.e. before the last date of filing return u/s 139(1) of the Act in compliance of section 54F(4) of the Act. The appellant’s claim of exemption u/s 54F of the Act, by investing the capital gain in purchase of another plot jointly with her son Shri Amit Tandon and completion/ construction of residential house thereon within the stipulation provided u/s 54F(1) of the Act, has wrongly been disallowed by the revenue, ignoring the fact that the assessee, deposited the capital gain timely in the capital gain account and utilized the sale consideration deposited in the capital gain account in accordance with law. Assessee has depicted the details of withdrawals made from capital gain accounts in her statement of facts as under:

8. Ld AR, thus, submits that the assessee utilized the entire capital gain in the construction of the house and in the land purchased on 02.05.2015 along with her son for the consideration of Rs. 1,10,37,000/- at 39, Parinay Kunj, Agra, where both of them had equal share in the same proportion. The investment in the purchase of the said new asset has accordingly been made by them. The assessee has further submitted that the source of fund for the purchase of land and constructing a residential house on it is not limited to the funds withdrawn from the capital gain account but can be utilized from the other sources and the purchase of plot beyond 2 years from the sale of assessee’s original asset on 16.04.2013 does not disqualify the assessee from her claim of exemption u/s 54F because the residential house was constructed on the plot by 09.03.2016 i.e. before the stipulated period of 3 years from the date of sale of original asset as provided u/s 54F(1) of the Act.

9. Ld AR has referred – (i) CIT Faridabad v. Shri Kapil Kumar Agarwal, 2015 (12) TMI 1075 (P&H- H.C.) order dated 04.11.2015, (ii) ITA No. 13/VNS/2024, Vikesh Garg v. DC-ACIT (2) Gorakhpur, 2024 (10) TMI 1564 (ITAT-Varanasi), order dated 22.10.2024, and (iii) CIT v. Sardarmal Kothari and Another, 2008 (6) TMI 15 (Mad- H.C.), in support of his arguments.

10. Ld CIT DR has supported the impugned order.

11. The revenue has rejected assessee’s claim mainly on the grounds that assessee failed to prove completion of the construction of the residential house within 3 years period ending on 15.04.2016. Further that the major construction payments were made from other sources.

12. It transpires from the perusal of records that the disallowance of exemption of Rs. 59,58,600/- claimed by the assessee u/s 54F of the Act on long term capital gain raising from the sale of original asset (plot) has been confirmed vide impugned order passed by the ld CIT(A). It is an undisputed fact that the sale consideration was deposited by the assessee in the capital gain account with Andhra bank on 27.09.2013 before the last date of filing of return u/s 139(1) of the Act as mandatory requirement under the scheme. The assessee purchased new asset (plot) on 02.05.2015 jointly with her son and constructed a residential house thereon. According to assessee, the residential house was constructed over it finally on 09.03.2016 i.e. within 3 years from the date of sale of assessee’s original asset (plot) on 16.04.2013 in accordance with the stipulation provided u/s 54F of the Act.

13. It is pertinent to note that section 54F of the Act is a beneficial provision brought into effect with the object of promoting investment in the residential house. Such beneficial provision deserves to be liberally interpreted and the intention of the legislature cannot be defeated mainly on hyper technical approach. Assessee’s submissions produced before the assessing officer in respect of the details of the investment in the new asset have also been produced before this tribunal which is part of assessee’s supplementary paper book at page no. 111 showing the details of investment in the new asset (plot) and construction for a total sum of Rs. 86,83,448/-(including the construction cost through self dated 21.03.2016 amounting to Rs. 2,50,000/-). This figure (Rs. 86,83,448 – Rs. 2,50,000 = Rs. 84,33,448/-) also finds place in the assessment order at page no. 7. This apart, the amount of Rs. 25,00,000/- as part consideration of plot paid on 02.05.2015 from the external source than the capital gain account, may not be sufficient to disentitle the appellant assessee from her claim of exemption u/s 54F of the Act if other stipulated conditions are fulfilled by the assessee.

14. In Kapil Kumar Agarwal (supra), the issue before the P&H High Court was as to whether the assessee in order to avail the benefit of section 54F of the Act is required to utilize the amount for the purchase of the new asset from the sale proceeds of the original capital assets only. The Hon’ble High Court after analyzing the relevant section 54F at length held vide para 14 as under:

“14. The assessee has to purchase or construct a house property during the period specified under Section 54F of the Act in order to get benefit thereunder. Section 54F of the Act nowhere envisages that the sale consideration obtained by the assessee from the original capital asset is mandatorily required to be utilized for the purchase or construction of a house property. No provision has been made by the statute that in order to avail benefit of Section 54F of the Act, the assessee has to utilize the amount received by him on sale of original capital asset for the purposes of meeting the cost of the new asset. Once that is so, the assessee was entitled for benefit under section 54F of the Act.”

15. The coordinate bench of this tribunal in Vikesh Garg (supra) has held as under:

“7. We heard rival contentions and perused the record. The Ld.AR submitted that the claim u/s 54F is allowable to the assessee u/s 54F (4) of the Act. The said sub-section reads as under:-

“Sec. 54F (4): The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139 in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset:

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then, (1) the amount by which-

(a) the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds,

(b) the amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset, shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid.”

In the instant case there is no dispute with regard to the fact that the assessee has deposited the entire sale consideration in Capital gains account scheme before the due date for filing return of income. Hence as per the deeming provision mentioned in sec. 54F (4) of the Act, the amount so deposited in the capital gains account scheme shall be treated as “cost of new asset” in terms of sec. 54F (1) of the Act. As per the proviso to sec. 54F (4) of the Act, the question of assessing the unutilized amount out of the above said deposit shall arise only after expiry of three years from the date of transfer of the original asset.

8. Accordingly, we are of the view that the tax authorities are not right in taking into consideration the events that took place in the subsequent years. Accordingly, we are of the view that they are not justified in rejecting the deduction claimed by the assessee u/s 54F of the Act. With regard to the events that took place subsequently, i.e., purchase of land, the Ld.AR disputed the assertion of the AO that the said land consisted of residential building. He submitted that the same was watchman out house, which cannot be considered to be a house. He further submitted that the assessee has started construction of the building thereon subsequently. In any case, in our view, all these facts need to be examined only in the subsequent years and not during the year under consideration. Accordingly, we set aside the order passed by Ld.CIT(A) on this issue and direct the AO to allow deduction u/s. 54F of the Act claimed by the assessee.”

16. In view of the aforesaid decisions, we are of the consistent view that in order to avail benefit of section 54F of the Act, the assessee is not mandatorily required to utilize the amount received by him on the sale of original asset for the purpose of meeting the cost of new asset.

17. As regards the revenue, rejecting the claim of assessee in respect of construction, not being within stipulated period of 3 years as provided u/s 54F(1) of the Act, the assessing officer has himself stated in the assessment order that the capital gain account was closed on 09.03.2016, which assessee claimed the date of completion of construction. The tax assessment by Nagar Nigam, Agra is said to be done in the year 2015, whereas the time to construct the new asset was available till 15.04.2016.

18. The Madras High Court in Sardarmal Kothari (supra), has held as under:

“3. There is no dispute about the fact that the assessees have invested the entire net consideration of sale of capital asset in the land itself and subsequently the assessees have invested large sums of money in the construction of the house. The cost of investment in land and the cost of expenditure towards the construction of the houses is not in dispute. The one and only ground on which the Assessing Officer has non suited the assessees for the claim of exemption was that the houses have not been completed. There remains some more construction to be made.

4. The requirement of the provision is that the assessee, within a period of three years after the date of transfer, has to construct a residential house in order to become eligible for exemption. In the cases on hand, it is not in dispute that the assessees have purchased the lands by investing the capital gain and they have also constructed residential houses. In order to establish the same, the assessees submitted before the Commissioner of Income Tax (Appeals) several material evidence, viz., invitation card printed for the house warming ceremony to be held on 12.07.2003. The assessees have also produced the completion certificates from the Municipal authority on 30.01.2004. On the basis of the above documents, the Commissioner of Income Tax (Appeals) concluded that the requirement of the statutory provision has been complied with by the assessees and that was reconfirmed by the Tribunal in the orders impugned.”

19. In order to establish the construction of residential house on the purchased plot, the assessee also procured Municipal tax assessment certificate of Agra, Nagar Nigam (Municipal Authority), which corroborates the fact of construction and compliance of the requirement of the above referred statutory provision. Respectfully following the above decisions, we hold that the assessee having complied the stipulations provided u/s 54F(1) and 54F(4) of the Act, is entitled to claim exemption of capital gain arising out of the property sold on 16.04.2013. Therefore, the aforesaid point is determined in positive in favour of the appellant assessee and against the respondent revenue. The appeal is thus, liable to be allowed.

20. In the result, the appeal of the assessee is allowed.

Order pronounced in the Open Court on – 17.09.2026