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-
Looking at the above we find that if an assessee has purchased a residential house before one year from the date of the transfer of the original capital asset and within two years after the date of transfer the original capital asset the assessee is entitiled for the exemption u/s 54F . Here we find the word purchase of the residential unit not construction . Interpreting by the courts and the tribunals we find that if the construction activities started of the new house before the transfer of the original asset than deduction u/s 54F is allowed to the assessee . We look below how the court has interpreted widely this provision .
Important judgements on section 54F
Exemption under section 54F allowable despite start of construction of new house before the date of sale of the original asset
Exemption under section 54F was allowable to assessee on purchase of a house property despite the fact that construction activities of the new house has started before the date of sale of the original asset as Section 54F was a beneficial provision and was applicable to an assessee when the old capital asset was replaced by a new capital asset in form of a residential house.
Assessee derived a long-term capital gain on sale of shares and had claimed deduction under Section 54F stating that it had purchased a residential apartment. Admittedly, at the time of booking of the flat the construction did not commence. ITO was of the view that claim of the assessee that above transaction was a purchase of a new asset was incorrect and according to him the transaction of acquiring property as per the apartment buyers agreement was a transaction of construction of property and therefore he disallowed the claim. The issue arose for consideration was whether assessee was entitled to deduction under Section 54F despite the fact construction of the house property commenced before the date of the sale of the original asset.
Following the decision in case of
CIT v. Bharti Mishra (2014) 265 CTR 374:222 Taxman 2 (Del)
CIT v. Kuldeep Singh (2014) 270 CTR 561 (Del)
wherein it was held that Section 54 F is a beneficial provision and is applicable to an assessee when the old capital asset is replaced by a new capital asset in form of a residential house. Once an assessee falls within the ambit of a beneficial provision, the said provision should be liberally interpreted. It was held assessee had purchased a house property i.e a new asset and was entitled to exemption under section 54F despite the fact that construction activities of the purchase of the new house has started before the date of sale of the original asset which resulted into capital gain chargeable to tax in the hands of the assessee.
[Kapil Kumar Agarwal v. DCIT – Date of Judgement: 30.04.2019 (ITAT Delhi) (AY 2011-12)
ITAT allows date of possession of new house instead of date of sale agreement/ registration
The contention of the assessee is that since final consideration was paid and the possession of flat was received within a period of one year prior to the date of transfer of capital asset, the same should be considered as the date of purchase. Whereas, the stand of Department is that the date of execution of agreement for purchase of flat should be considered as the date of purchase.
The Id A.R. has drawn our attention to Clause (12) of the deed of agreement between the assessee and the builder for purchase of flat. The said clause is reproduced herein below:
“Clause No.12 of the deed of agreement between the assessee and the builder” .
Nothing contained in this Agreement shall be constructed so as to confer upon the Purchaser any right whatsoever into or over the said property or the said new building or any part thereof including the said premises on execution of this agreement. It is agreed by and between the parties that conferment of title in respect of the said premises shall take place in favour of the Purchasers only on the Purchaser’s making full payment of consideration to the Developers and complying with the terms and conditions of this Agreement and on the Purchaser being admitted as a member of the said society as herein provided.”
The aforesaid clause makes it unambiguously evident that the assessee has no right whatsoever in the property on mere execution of agreement. The assessee shall be conferred title of property only on making full payment of consideration to the builder. In the instant case, full consideration has been paid by the assessee for purchase of residential flat within a period of one year before the date of transfer of capital asset. Thereafter, actual possession of the flat was delivered to assess on 17.09.2010 i.e., within a period of one year prior to the date of transfer of capital asset. It is an un-rebutted fact that at the time of execution of agreement, the residential property was not in existence. Therefore, taking into consideration facts of the case, the date of possession of flat is the date of actual purchase for the purpose of claiming exemption under section 54F of the Act. –
[Ayushi Patni v. DCIT – Date of Judgement : 17.01.2019 (ITAT Pune) (AY 2012-13)
In the result from the above text we find two important points for claiming deduction u/s 54F of the Act .
(a) If construction to the residential house is started and that is within one year before the date of transfer of the capital asset , then that part of the construction and booking amount paid by the customer to the builder is entitled for exemption u/s 54 F of the Act , 1961 . It means it is not that assessee is entitled to the exemption only on the purchase of the residential house which is already built up. But if residential house is booked and construction started after booking of the residential unit , assessee is entitled for the exemption u/s 54F . This is wider interpretation of the law .
(b) Date of possession of the house is the date of purchase of the residential unit . Date of making an agreement is not the date of purchase of the residential unit . Agreement for the purchase is made earlier and possession of the residential unit is given when assessee has made the full and final payment . If that payment is with in one year from before the date of transfer of the original asset than assessee is entitled for exemption u/s 54F . Date of agreement may fall beyond one year before the date of transfer of the original asset . The date of possession of the flat is the date of actual purchase for the purpose of claiming exemption u/s 54F of the Act .