Sarika Sahil Koli Vs ITO (ITAT Pune)
Section 54F – Investment in a Residential House Out of Borrowed Funds Cannot Be Denied Exemption Merely Because Sale Proceeds Were Not Utilised – Pune ITAT
Section 54F – When Law Permits Purchase of a House Before Sale of Original Asset, Revenue Cannot Insist on Investment Out of Sale Proceeds – Pune ITAT
Background of the Case
The assessee filed her return of income for AY 2021-22 declaring a total income of ₹6,33,800. The case was selected for scrutiny, and the Assessing Officer completed the assessment under Section 143(3) read with Section 144B, determining the total income at ₹40,33,800 after making additions aggregating to ₹34 lakh.
The assessee’s father had sold ancestral agricultural land on 24.12.2020 for a total consideration of ₹1.60 crore. The assessee, being a shareholder in the ancestral property, was made a consenting party to the sale deed and received ₹30 lakh towards her share in the sale consideration.
Interestingly, the assessee had purchased a residential flat on 17.12.2020, just seven days before the sale of the ancestral property, for an agreement value of ₹65,34,723. For purchasing the residential flat, she had availed a housing loan of ₹30 lakh from Bank of Maharashtra.
The assessee claimed exemption under Section 54F in respect of the investment made in the residential property.
However, the Assessing Officer disallowed the claim, resulting in an addition of ₹30 lakh towards capital gains. A further addition of ₹4 lakh was made under Section 69A towards unexplained cash deposits.
CIT(A) Restricts Exemption on the Ground That Sale Proceeds Were Not Utilised
During the appellate proceedings, the assessee furnished additional evidence, which was forwarded to the Assessing Officer for examination under Rule 46A.
In the remand report, the Assessing Officer acknowledged that the assessee had purchased the residential flat for ₹65,34,723 and had availed a housing loan of ₹30 lakh.
However, on verification of the bank statements, the Assessing Officer observed that only ₹3.79 lakh out of the ₹30 lakh received from the sale of ancestral property could be directly traced to the purchase of the residential flat.
According to the Assessing Officer, the assessee had failed to substantiate the utilisation of the remaining ₹26.21 lakh towards the purchase of the residential property.
Accepting this reasoning, the CIT(A) restricted the exemption under Section 54F to ₹4 lakh, holding that the balance amount had not been demonstrated to have been invested out of the capital gains arising from the transfer of the original asset.
Thus, the controversy before the Tribunal was whether exemption under Section 54F could be restricted merely because the assessee had purchased the residential property using borrowed funds instead of directly investing the sale consideration received from the original asset.
Tribunal Holds That Section 54F Does Not Require Investment of the Very Same Sale Proceeds
The Pune Tribunal examined the provisions of Section 54F and observed that the section permits an individual or HUF to claim exemption where capital gains arise from the transfer of a long-term capital asset other than a residential house, provided the assessee purchases a residential house within one year before or two years after the date of transfer, or constructs a residential house within three years after such transfer.
In the present case, the assessee had admittedly purchased the residential flat on 17.12.2020, whereas the ancestral property was sold on 24.12.2020.
Therefore, the residential property had been purchased within the period expressly permitted under Section 54F.
The Tribunal observed that the only reason for restricting the exemption was that the assessee had financed the purchase partly through a housing loan rather than utilising the actual sale proceeds.
Rejecting this approach, the Tribunal categorically held:
“There is no such condition in the section that the amount received by the assessee from sale of original asset shall only be invested in the purchase of new asset.”
The Tribunal emphasised that the statutory provision requires the purchase of a residential house within the prescribed period. It does not impose any additional condition requiring the assessee to establish that the very same money received from the sale of the original asset was utilised for purchasing the new residential property.
Consequently, the Tribunal held that the CIT(A) had erred in restricting the exemption to ₹4 lakh merely because the assessee had availed a housing loan.
The Assessing Officer was directed to allow the deduction under Section 54F in respect of the entire investment made in the new residential property.
The Tribunal further observed that since the investment in the residential property exceeded the capital gains, no addition under the head capital gains would survive after allowing the exemption.
Accordingly, the assessee’s ground challenging the restriction of exemption under Section 54F was allowed.
Addition of ₹4 Lakh Under Section 69A Sustained for Want of Evidence
The assessee had also challenged a separate addition of ₹4 lakh made under Section 69A in respect of cash deposits in her bank account.
Before the lower authorities, the assessee had offered contradictory explanations regarding the source of these deposits. At one stage, she claimed that the amount represented proceeds from a gold loan, whereas subsequently she contended that the deposits arose from the sale of gold.
However, the assessee failed to furnish supporting documentary evidence regarding the acquisition or sale of gold or the alleged gold loan.
The CIT(A) confirmed the addition, observing that the assessee had failed to discharge the burden of explaining the source of the cash deposits.
Before the Tribunal also, no evidence was produced to rebut these findings.
The Tribunal therefore upheld the addition of ₹4 lakh under Section 69A, holding that the explanation offered by the assessee remained unsubstantiated.
Consequently, the appeal was partly allowed, with relief granted under Section 54F while the addition under Section 69A was sustained.
Author’s Comments – When Investment Is Permitted Before Sale, How Can Revenue Insist on Utilisation of Sale Proceeds?
This decision reiterates an important principle concerning the interpretation of Section 54F, particularly the distinction between investment in a residential property and utilisation of the actual sale consideration received from the transfer of the original asset.
Section 54F expressly permits an assessee to purchase a residential house within one year before the date of transfer of the original asset.
This statutory provision itself provides a compelling answer to the Revenue’s contention that the investment must necessarily be made out of the sale proceeds.
When the legislature expressly permits the purchase of a residential house even before the original asset is sold, how can the Revenue insist that the investment should be made out of the sale consideration received from that very transfer?
Obviously, where the residential property is purchased before the original asset is sold, the sale consideration may not even have been received at the time of investment.
Therefore, insisting upon a direct nexus between the sale proceeds and the investment would render the statutory provision permitting purchase within one year before the transfer practically meaningless.
Such an interpretation would amount to introducing an additional condition which the legislature has not prescribed.
The assessee may purchase the residential property using accumulated savings, borrowed funds or any other legitimate source. The relevant consideration is whether the assessee has acquired the residential property within the prescribed period and satisfied the other conditions stipulated under Section 54F.
In fact, the present case provides a classic illustration of the practical significance of this principle. The assessee purchased the residential flat on 17.12.2020, whereas the ancestral property was sold only on 24.12.2020. Therefore, insisting that the earlier investment should have been financed from the subsequent sale proceeds would be contrary to the very scheme of Section 54F.
It is equally important to appreciate that Section 54F does not require the assessee to establish a one-to-one correlation between the sale consideration received and the funds utilised for acquiring the new residential property.
Money is fungible, and the source of funds used for purchasing the residential house cannot, by itself, determine the eligibility for exemption.
However, one aspect of the Tribunal’s reasoning deserves attention.
The Tribunal observed that since the investment in the residential property exceeded the capital gains, the entire capital gains would qualify for exemption. Strictly speaking, Section 54F provides for full exemption only where the cost of the new residential property is not less than the net consideration received from the transfer of the original asset.
Where the cost of the new residential property is lower than the net consideration, the exemption is proportionately restricted in accordance with Section 54F(1)(b).
Therefore, the Tribunal’s observation regarding investment exceeding capital gains should not be understood as dispensing with the statutory requirement relating to net consideration. The precise amount of exemption must always be determined in accordance with the formula prescribed under Section 54F.
The decision is nevertheless significant because it reinforces the proposition that the source of investment and the quantum of eligible investment are two entirely different considerations.
While the quantum of exemption is governed by the relationship between the cost of the new asset and the net consideration received, the statute does not insist that the purchase must be financed from the actual proceeds of the original asset.
At the same time, the Tribunal’s decision to sustain the addition under Section 69A demonstrates that the beneficial interpretation of Section 54F does not relieve an assessee of the obligation to substantiate the source of unexplained cash deposits.
The legal principle emerging from this decision is simple but significant: When the statute itself permits the purchase of a residential house before the transfer of the original asset, the Revenue cannot insist that the investment must necessarily be made out of the proceeds of that very transfer. To interpret the provision otherwise would defeat the express intention of the legislature and introduce a restriction which finds no place in the statute.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT PUNE
This is an appeal filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals), NFAC, Delhi [Ld.CIT(A)], passed u/s. 250 of the Income Tax Act, 1961 (‘the Act’) for AY 2021-22 on 26.11.2025, emanating from the Assessment Order u/s 143(3) r.w.s. 144B of the Act, dated 22.12.2022.
2. Basic Facts :
> On 06.04.2026, none appeared on behalf of the assessee, hence, case was adjourned to 09.04.2026.
> On 09.04.2026, none appeared on behalf of the assessee, hence, case was adjourned to 28.04.2026.
> On 28.04.2026, none appeared on behalf of the assessee, hence, case was adjourned to 24.06.2026.
> On 24.06.2026, none appeared on behalf of the assessee, hence, case was adjourned to 10.08.2026.
> On 10.08.2026, none appeared on behalf of the assessee, hence, case was adjourned to 01.10.2026.
2.1 In all the dates of hearings, notices were sent on email id mentioned in Form No. 36 i.e. [email protected]. In these backgrounds, we heard the case on 01.10.2026 ex-parte qua the assessee. We heard Ld. DR and perused the records.
Findings and Analysis :
3. In this case, the assessee had filed return of income for AY 2021-22 on 31.10.2021 declaring total income of Rs.6,33,800/- claiming exemption. The assessee’s case was selected for scrutiny. During scrutiny proceedings, as per the assessment order, the assessee had not filed any reply, however, before the Ld. CIT(A), the assessee pleaded that the assessee had filed reply during the assessment proceedings.
3.1 Be that as it may be, the Assessing Officer (AO) assessed the total income at Rs.40,33,800/- making addition of Rs.34,00,000/-.
3.2 Aggrieved by the assessment order, the assessee filed an appeal before the Ld. CIT(A). The assessee filed additional evidence. The Ld. CIT(A) provided opportunity to the AO as per Rule 46A of the Income Tax Rules. The AO filed remand report during the appellate proceedings before the Ld. CIT(A). The relevant paragraphs of the order of the Ld. CIT(A) is reproduced here as under :
“5.2.4. Further, due to submission of additional evidences, the AO was given an opportunity to examine this evidence as per Rule 46A.
The AO submitted remand report on 26.06.2024 wherein following findings, have been given-
On perusal of sale deed of ancestral agriculture land 24/12/2020 (mentioned by the assessee as 23/12/2020), it is noticed that the appellant being share holder in the ancestral property, was made consenting party to the agreement and received Rs.30,00,000/-. Out of the total sales consideration Rs. 1,60,00,000/- through UTR No. SYNBR 52020122355520075 dated 23/12/2020. Further, on perusal of purchase deed of new flat dated 17/12/2020 and home loan statement bearing account no. 60380243599, it is observed that the assessee has purchased the residential flat for the agreement value of Rs.65,34,723/- on 17/12/2020, for which the assessee has availed the home loan amounting to Rs. 30,00,000/- from Bank of Maharashtra. On verification of bank statement 60025235461 it is seen that the assessee has utilized the Rs. 3,79,000/- out of her share of sale consideration of Rs. 30,00,000/- for purchase of new flat, however, utilization of remaining 26,21,000/- could not be substantiated with documentary evidences.
In the instant case, as per material available on records, the assessee has invested Rs. 30,00,000/- in the residential house property within one year before transfer of agriculture land. The assessee before CIT(A) submitted that the assessee do not own more than one residential property at the time of purchase of new residential property, however, no supporting documents for the same was provided by the assessee.
I have carefully considered the submission of the appellant and findings in remand report. From above, it is noticed that Rs.4.00lakh was only utilized for purchase of property balance amount was not utilized for purchase of the property. Therefore, if amount of capital gain is not utilized of the purpose of section 54F of the Act then deduction would not be allowed to the appellant. Further, copy of the remand report was also send to appellant on 14/11/2025 for submission of comments on the same, however, no comments have been offered by the appellant.
The appellant has been asked to submitted justification; however, the appellant has not submitted any clarification, therefore, exemption u/s 54 is restricted to the Rs.4.00lakh only as there is nothing on record which can prove that payment other than Rs.4.00 lakh was made by the appellant out of capital gain as agreement to purchase shows that payment had to be made in installments, however, nothing has been submitted by the appellant.”
3.3 Thus, it is observed that the assessee had claimed deduction u/s 54F of the Act. The assessee’s father had sold ancestral land. The assessee was a consenting party and received Rs.30,00,000/-. The assessee purchased a new flat vide Purchase Deed dated 17.12.2020. These facts have not been disputed by the Ld. DR. The only ground on which the Ld. CIT(A) restricted assessee’s claim of deduction u/s 54F of the Act to Rs.4,00,000/- was that the assessee has also taken loan and purchased the flat from loan amount. In this context, section 54F is reproduced here as under :
“Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.
54F. (1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, 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”.
3.4 Thus, to avail deduction u/s 54F of the Act, the assessee had to purchase new asset within a period of one year before or two years after date of transfer of original asset.
4. In this case, admittedly, the assessee had purchased a new asset in the form of a flat on 17.12.2020 and the original asset was sold on 24.12.2020. Thus, the flat was purchased within a period of one year before the date of sale of original asset. There is no such condition in the section that the amount received by the assessee from sale of original asset shall only be invested in the purchase of new asset. Therefore, the Ld. CIT(A) has erred in not allowing fully the deduction u/s 54F of the Act. In this background, we direct the AO to allow assessee deduction u/s 54F of the Act of entire amount of investment in the new asset. Since, admittedly, the investment in the new asset is more than capital gain, there shall not be any addition under the head capital gain after allowing deduction u/s 54F of the Act. Accordingly, ground No. 1 raised by the assessee is allowed.
Ground No. 2 :
5. Ground No. 2 is regarding the addition of Rs.4,00,000/- on account of cash deposits. The relevant paragraph of the order of the Ld. CIT(A) is reproduced here as under :
“5.3.4. Due to submission of additional evidences, the AO was given an opportunity to examine these evidence as per Rule 46A. The AO submitted remand report on 26.06.2024 wherein following findings, have been given-
It is further submitted that no documentary evidence has been submitted by the appellant in respect of Addition of Rs. 4,00,000/- u/s 69A r.w.s 115BBE despite allowing reasonable opportunity of being heard
5.3.5.In view of findings, in remand report, it is evident that the appellant failed to explain source of cash deposits with supporting document/evidences, even after sufficient opportunities. Copy of the remand report was also send to appellant on 14/11/2025 for submission of comments on the same, however, no comments have been offered by the appellant.
5.3.6. Besides, the appellant failed to prove that asset sold was long term asset. In support of claim, bills and source of acquisition have not been submitted. Even, sale bills have not been submitted during the appellate proceedings.
5.3.7. Moreover, contradictory submission has been made by the appellant. One hand, she mentioned that it is gold loan, on other hand she mentioned that cash deposit was out sale of gold. In view of such facts, reply of the appellant is not tenable.
5.3.8. In view of facts narrated above, it is clear that source of cash deposit in Bank of Maharashtra has not been explained. Therefore, the AO rightly made addition u/s 69A of the Act. Since, the appellant has not discharged her onus, therefore, addition of Rs.4.00lakh is hereby confirmed. Accordingly, ground no.4 is dismissed.”
5.1 Thus, it is observed that the Ld. CIT(A) has specifically mentioned that the assessee failed to file any evidence to substantiate cash deposits. The Ld. CIT(A) has also mentioned that the assessee has changed its stand on the issue of cash deposits. No document has been filed before us to explain the source of cash deposits and to rebut the findings of the Ld. CIT(A). In these facts and circumstances of the case, we uphold the addition of Rs.4,00,000/-. Accordingly, ground No. 2 raised by the assessee is dismissed.
6. Ground No. 3 is general in nature, no ground was added altered or amended. Hence, ground No. 3 is dismissed.
7. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 08th October, 2026
