Sainaba Hamza Koya Vs ITO (Kerala High Court)
The Court held that Section 54F exemption is allowable even if construction of a new house is funded through borrowed money, provided the capital gains are later appropriated for repayment. Excess funds in Capital Gains Account must be released after retaining tax dues.
Conclusion: Purchasing or constructing the residential building, by utilising the funds borrowed by assessee and later appropriating the funds from the transfer of property to those transactions, were also permissible under Section 54F. Since the liability of assessee already determined, and it was also evident that such tax liability along with the interest and other charges were lesser than the amount lying in the Capital Gain SB Account of assessee, assessee should have been permitted to withdraw the excess amount, if any, in the deposit, after retaining the amounts payable by assessee towards the Revenue, by way of tax and other incidental liabilities.
Held: Assessee sold portions of a gifted property in 2020, depositing the sale proceeds (₹39,60,000 and ₹43,64,000) into a Capital Gains SB Account under the Capital Gains Account Scheme, 1988, intending to claim exemption under Section 54F by constructing a new residential property. Construction was funded through borrowed money, and assessee sought to utilize the account funds to repay the debt. However, Department denied the request to close the account and release funds citing incomplete construction, use of borrowed funds, non-filing of returns for the relevant assessment years, and non-compliance with Section 54F conditions. According to assessee, purchasing or constructing the residential building, by utilising the funds borrowed by assessee and later appropriating the funds from the transfer of property to those transactions, was also permissible under Section 54F. It was held that one of the essential requirements for claiming the benefit under section 54F was that, the amount acquired by assessee from the transfer of the property must have been utilised within a period of one year before or within two years after the date on which the transfer took place, for purchasing one residential building, or the said amounts must have been utilised for constructing a residential building within three years from the date of the said transfer. In the case of construction, the period fixed was after three years from the date of transfer of property, and adjustment of the amount spent prior to the transfer of property was not contemplated. However, the permission granted to appropriate the funds spent by assessee within one year before the transfer of property, in the case of the purchase of the residential building, clearly conveyed the scheme envisaged in section 54F, where such adjustment was permitted. In view of the above, the bench disposed of the petition directing the 1st respondent to grant permission to assesee to release the balance amount, if any, in the Capital Gain SB Account maintained by assessee with the 2nd respondent-Bank, after retaining the amounts equivalent to the liability of assessee.
