Capital Gain Exemption on Sale of Property Under Section 54F – Landmark Judgements – Part 1

Explore Section 54F of the Income Tax Act, unraveling tax exemptions on the sale of long-term properties, and delve into landmark judgments for comprehensive insights.

1. Section 54F of the Income Tax Act deals with Tax Exemption from the Sale of Long Term Property (other than Residential Property).

1.1 In this article, an attempt has been made to simplify the provisions of Section 54F with the help of Illustrations and Landmark Judgments.

Also Read: Capital Gain Exemption on Sale of Property Under Sec 54F – Landmark Judgements – Part II

2. Statutory Provision:

Section 54F(1): 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, 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, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,

Section 54F(1)(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;

Section 54F(1)(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 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.

2.1 Proviso to Sec 54F (1)

Provided that nothing contained in this sub-section shall apply where
(a)	(i) The assessee 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 a 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. Salient Features of Exemption under Section 54F(1)

3.1 The exemption is available only to an ‘Individual’ or a ‘Hindu Undivided Family’. No other assessee is eligible to claim this exemption.

3.2 The Capital gain arises from the transfer of a long-term capital asset other than a residential house property is qualify for the exemption. Thus the exemption is available on long-term capital gain arising from the transfer of assets like jewellery, shares, securities, the plot of land, etc.

3.3 The investment can be made by way of purchase or construction of house property in India. No exemption shall be available if such residential property is located outside of India.

3.4 The assessee has to purchase a residential house either within 1 year before the date of the transfer or within 2 years after the date of transfer of the original asset

3.5 The assessee has to construct the house within 3 years after the date of the transfer of the original asset.

3.6 The exemption under Section 54F will be denied if the assessee owns more than one residential house on the date of transfer.  This does not include a house, which is acquired within one year before the date of transfer of the original asset.

3.7 The assessee can own two residential houses on the date of transfer. One is already owned and the other is acquired within one year before the date of transfer of the original asset under the provision of Sec 54F. If he owns more than two residential houses, income from which is chargeable under the head income from house property, no exemption is applicable.

Relevant Case Laws/ Judgements

4.1 There is nothing in section 54F to show that the house should be purchased in name of the assessee only: – The property was received by inheritance by way of partition. The legal heirs of the property are the assessee, his wife, son, and widowed daughter. The assessee sold a property for a certain consideration and invested the entire sale consideration in a land and residential house in the widowed daughter’s name and claimed exemption under section 54F on capital gain arising out of the said sale of the property. it was held that there is nothing in section 54F to show that the house should be purchased in name of the assessee only. Krishnappa Jayaramaiah v. Income Tax Officer, [2021] (Bangalore – Trib.)

4.2 Purchase of three flats in name of wife, son, and the assessee himself through a single registered deed is to be allowed under this section: The assessee had sold an immovable property owned by him and invested long-term capital gain (LTCG) on purchase of three flats in name of his wife, son and himself through a single registered deed. It was held that the benefit of deduction under section 54F for flats purchased in name of the assessee’s wife and son was also to be allowed. Mukkamala Srihari Rao v. Assistant Commissioner of Income-tax (2022) Ranchi Tribunal

4.3 Purchase of residential house in the name of wife is allowed where the entire consideration is paid by the assesse The assessee purchased a residential house in the name of his wife but paid the entire consideration himself. He has merely included his wife as the owner of the property. It was held that it would not make any difference and in fact, such a contract has to be encouraged which helps in the empowerment of women and that the government itself has floated various schemes permitting joint ownership with wife: – CIT v. Gurunam Singh [2008] (Punj. &Har.).

4.4 Benefit of exemption denied where Property acquired in joint names: There are conflicting judgments in the cases where the property was purchased in the joint name together with family members. In several cases, it has been held that where the entire consideration has been paid by the assessee himself, he is entitled to full exemption u/s 54 even if the property has been purchased in joint name with other family members. However, a contrary view was expressed by the Bombay HC in the case of Prakash v. ITO [2008]. Wherein the HC denied the benefit of exemption where the property was acquired in joint names.

4.5 It is not mandatory that the new asset purchase and has been used for residential purposes only:  The assessee purchased a new asset and obtained exemption u/s 54F but subsequently used it for coaching classes and later let out the same to a company for business purposes. It was held by the Mumbai Bench of the ITAT that once the residential house property has been purchased within the stipulated time, the assessee is entitled to exemption u/s 54F irrespective of subsequent use of the property which is irrelevant. S K Luthra v. ITO [2007] 11 SOT 646 (Mum.) 

4.5.1 Even a residential building can be used as a school or for any other commercial purpose but the relevant factor to judge is whether the construction made is for a residential house or a commercial purpose. If the building has been constructed for residential use with all amenities like a kitchen bathroom etc., which are necessary for residential accommodation then even if it is used as a school or for any other commercial purpose, it cannot lose its character as a residential building: Syed Ali Adil (supra), Andhra Pradesh High Court.

4.6 The booking of a flat in under construction property will be treated as construction and not purchase -Mustanshir I Tehsildar(supra).

4.7 The completion date of the constructed property is to be considered for deduction. If the construction is started before the date of transfer but completed within 3 years of the date of transfer, then the deduction u/s.  54F would be available to the assessee. CIT v. Subramanya Bhat [1987] (Karnataka.)

4.8 The allotment of flats or houses by Co-operative Societies and other Institutions shall be treated as construction: A flat or house allotted under the self-financing scheme of the Delhi Development Authority (DDA) or by a Co-operative Society or other Institutions, whose schemes of allotment and construction are similar to those of DDA, shall be treated as constructions by the Assessee for section 54F. Circular No. 672 dated 16.12.93 and Circular No. 471 dated 15.10.1986

4.8.1 For this purpose, the cost of the new asset is the tentative cost of construction determined by DDA and it will be immaterial that payment is allowed to be made in installments.

4.8.2. In view of the said circulars, the courts have held that investment of capital gain in the purchase of DDA Flat in the form of the first installment of the price of a flat within a prescribed period after the sale of the original property would entitle the assessee to claim the exemption in respect of capital gain even though construction of flat was not completed in the period prescribed

4.9 Non-registration of the property does not disentitle the assessee from the exemption. An assessee purchased a house property within one year from the transfer of long-term capital asset but the purchase was not registered u/s. 17 of Registration Act. It was held that the assessee is entitled to deduction u/s.  54F because he purchased the house property within the stipulated time. Balraj v. CIT [2002] (Delhi.)

4.10 The word ‘owns’ in section 54F means absolute ownership and no co-owner. Assessee owns one house. He is a co-owner of another house with his wife, derives long-term capital gain on other assets, and invests the entire proceeds in purchasing another house. The assessee will be said to be the owner of one house only and in such circumstances deduction u/s. 54F was held to be allowable. ITO v. Rasiklal N. Satra [2006] (Mum.)

4.11 The new house purchased on Credit or deferred payment is also qualified for deduction under Section 54F. It is immaterial that consideration for purchase is paid immediately or at a later date – Gopal Sharma Darbari V. ITO 2017.

4.12. HUF transfers a residential house property held in its name and capital gain is invested in purchasing another house property in the name of one of its members and not the HUF itself, the HUF can claim deduction u/s 54: PCIT v. Vaidya Panalalmanilal HUF [2018] (Guj.)

4.13. A trust having a sole beneficiary invest LTCG in a residential house is also eligible for exemption under Section 54F. – Balgopal Trust V. Asst CIT (2017)

5. Quantum of Capital Gain Exemption: The Quantum of Capital gain exemption will depend on net consideration from the sale of Capital Assets invested in the purchase/ construction of a new residential house.

5.1 The ‘Net Consideration’ means the full value of the consideration received for transferring the capital assets as reduced by some expenditure incurred completely and exclusively by connecting with such transfers.

5.2 When the assessee reinvests the entire amount from the sale of assets in order to purchase or construct a residential house, he can claim the long-term capital gain exemption limit on the total capital gains.

5.3 When only a part of the net consideration is invested in the construction or purchase of the residential property, then only the long-term capital gain’s proportionate amount is exempted.

6. Illustration:

Mr. Naresh sold a plot of land in June 2022 for Rs 16 crore and paid Rs 1 crore towards the transfer of land. The net consideration, in this case, is Rs. 15 crores. The Capital Gain that arises from such a sale is Rs 2 Crores.

6.1 Scenario 1:  Mr. Naresh purchased a residential amount for Rs 20 crores within the prescribed time.  Since the amount invested in the purchase of residential property is more than the net consideration received from the sale of land, the entire amount of Rs 2 crore Capital gain is exempted under Section 54F(1)(a).

6.2 Scenario 2 Mr. Naresh purchased a residential amount for Rs 12 crores within the prescribed time. The proportionate amount of Capital Gain will be calculated as follows:

Sl	Particulars	Amount (Rs. in Crores)	Amount (Rs. in Crores)
(a)	The Cost of new Asset (N)		12.00
(b)	Sale Consideration	16.00
(c)	Less: Expenditure incurred towards the sale of land	1.00
(d)	Net Consideration in respect of original Asset(O)		15.00
(e)	Capital Gain from sale of original Assets(O)		2.00
(f)	Exemption: (Cost of New Assets / Net Consideration) * Long-Term Capital Gain (Rs 12 Crores / Rs 15 Crores )* Rs.2 Crores= Rs.1.6 Crores
Rs. 1.6 Crores  will be exempted under Sec 54(1)(b)

7. Amendment to Section 54(F) in Finance Bill 2023 Where the cost of a new asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purposes of this subsection.

7.1 In the above Illustration, the net consideration received from the sale of a property is Rs.15 crores. Even if Mr. Naresh re-invests the total amount (or even more than the amount received) of net consideration in the purchase of a residential house, the cost of a new asset will be restricted to Rs. 10 crores for calculation of Capital Gain Exemption.

7.2 Illustration

Sl	Particulars	Amount (Rs. in Crores)
(a)	Net Consideration in respect of original Asset(O)	15.00
(b)	The Cost of new Asset (N)( Restricted w.e.f.01.04.2024)	10.00
(c)	Capital Gain from sale of original Assets(O)	02.00
Exemption:(Cost of New Assets / Net Consideration) * Long-Term Capital Gain (Rs 10 Crores / Rs 15 Crores )* Rs.2 Crores= Rs.1.33  Crores

8. The amendment will take effect from 1st April 2024 and shall accordingly, apply to the assessment year 2024-2025 and subsequent assessment years.

Disclaimer: The article is for educational purposes only.

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