Section 54F deduction not available on construction work prior to transfer of property

Ushaben Jayantilal Sodhan Vs ITO (Gujarat High Court);

Section 54F of the Act carries the title “capital gain on transfer of certain capital assets not to be charged in case of investment in residential house”. Sub­section (1) of Section 54F of the Act provides for deduction in computation of capital gain arising out of transfer of long term capital asset if the assessee, within a period of 01 year or before 02 years after the date on which the transfer took place purchased or within a period of 03 years after such date constructed one residential house. If the cost of new asset is not less than the net consideration in respect of the original asset, the whole of the capital gain would not be charged. Otherwise, the deduction would be proportionate.

 In the context of these provisions, the assessee’s case and the rival contentions have to be examined. We may recall that with respect to 03 out of the 04 flats sold by the assessee, the sale deeds were executed after the date of grant of Building Use permission. In plain terms, therefore, after the sale of these flats, no construction was carried out. Therefore, if the date of the sale deeds is considered the crucial date for transfer of the capital asset, the construction preceded the transfer. What sub­section (1) of Section 54 of the Act requires is that the assessee, after the date of transfer, purchases or within three years after such date, constructs a residential unit, only then the benefit of deduction would be granted. This provision, therefore, provides that construction of the residential unit should be done after the date of transfer but, within three years from such date. Under the circumstances, if the sale deeds are considered on the date on which the transfer of capital asset took place, the case of the assessee would not fall within the parameters of the said provision.

The assessee’s claim for deduction u/s.54F of the Act cannot succeed except in relation to the transfer of a flat in favour of Kankuben Mansingbhai Patel, which had happened before the completion of construction. In such a case, since construction can be stated to have been carried out after the transfer of the original capital asset, the claim of deduction u/s.54F of the Act cannot be denied. To this limited extent, the appeal succeeds. The Assessing Officer to re­compute the deduction accordingly. Subject to the above, the Tax Appeal stands disposed of.

FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS:

1. This Tax Appeal filed by the assessee was admitted for consideration of the following substantial question of law;

“Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the appellant would not be entitled to benefit of deduction under section 54F of the Income Tax Act, 1961 since the construction of the flats for personal use was completed before the sale of the capital asset ?”

2. The facts, being peculiar, we may notice them at the outset. The appellant­ assessee is an individual. The appeal arises out of the assessee’s Return for the A.Y. 2009-10. The assessee owned land with a bunglow on such land. The assessee demolished the bunglow to construct 08 flats on the land, some of which would be occupied by her for her own residence. The rest she intended to sell. The assessee retained 04 flats for her own use. The remaining 04 were meant for sale. The details of the names of buyers of these flats, dates of agreements to sale, dates of sale deeds and details of payments received by the assessee under the agreements to sale are as under;