When there is a long-term capital gain from the sale of any capital asset, investing in a residential house within a specified period can provide exemption under Section 54/54F of the Income Tax Act, 1961. However, taxpayers often face challenges in claiming these exemptions due to objections raised by tax authorities. In this article, we will discuss four critical aspects of Section 54/54F exemptions based on landmark judgments.
(I) Small Residential House on Large Land: Is Size a Constraint?
The assessee (Mr. Girish) has sold commercial property and constructed a very small residential house consisting of two room, a kitchen and bathroom with and land size was very big. The cost of construction is very small when compared to the price of land.
The Assessee has claimed exemption U/s 54F however the Commissioner (Appeals) has restricted the deduction to constructed portion only and observed that a very small residential house constructed as compared to the land size and the exemptions benefits cannot be extended to the land appurtenant is also not tenable in law.
Mr. Girish submitted a valuation report, which revealed that the assessee had constructed a residential building with electricity and water connections, used as a residential unit, with estimated life of 65 years .
The Delhi Tribunal, in the case of Girish Mohan v. ACIT (2023) ruled that the size of the constructed house in proportion to the size of land is immaterial for clamming exemption under section 54F. In the present case the construction proportion is very small in proportion to the land size of 1.26 hectare has nothing to do with granting exemption benefit to the cost of land appurtenant to the house.
(II) Appurtenant Land without Construction: Eligible for Exemption?
A interesting ruling pronounced in the matter Addl. Commissioner of Income Tax Vs. Shri Narendra Mohan Uniyal by ITAT Delhi Bench, H, as below:
The assessee, Shri Narendra Mohan sold a piece of land for Rs. 1.20 crores, which resulted in capital gains of Rs. 31.04 lakhs. After the sale of the plot, he purchased a piece of land for Rs. 30 lakhs and within six months thereafter again purchased another continuous plot of land for which payment totalling Rs. 30 lakhs was made in instalments.
Mr. Narendra Mohan claimed exemption under section 54F of net consideration which he invested in the purchase of the first plot on which the residential house was under consideration and in respect of his continuous plot which according to him was nothing but land appurtenant to the building constructed on the first plot.
The Assessing Officer held that exemption under section 54F is provided only if the investment is in respect of a residential house and not for an empty plot. He, therefore, held that the consideration invested in the purchase of the second plot was not entitled to exemption under section 54F and restricted the exemption to the extent of the amount invested in the purchase of the first plot.
In the matter ITAT pronounced that the cost of vacant land appurtenant to and forming part of the residential unit is to be considered for claim of exemption u/s 54F even if no construction has been done on the appurtenant land.
The other relevant point came out by the judgement that When the land is purchased and the building is constructed thereon, such construction doesn’t need to be on the entire plot of land. There is no denial of exemption for a part of the land which is appurtenant to the building and on which no construction is made.
(III) Commercial/Residential Use of Property: Is it Relevant?
Many times, it is interpreted by the department officer that the legislature wanted that the exemption under section 54F, should only be allowed to an assessee who intended to use the new residential house for residence purpose, however such interpretation is legally incorrect in as much no such requirement is mentioned in section 54F. The marginal notes of section 54F and provisions of section 54F nowhere suggest that investment should be in such residential house where assessee intends to reside. This issue has been examined by the various benches of the ITAT, in the following decisions:
Mahavir Parsad Gupta v. Jt. CIT (ITAT Delhi) :- The assessee ( Mahavir Parsad Gupta) sold shares and he invested the amount of Long Term Capital Gain in the new residential house property and claimed exemption U/s 54F of the Income Tax Act 1961.
The CIT (A) observed that the new property in has been let out by the assessee for commercial purposes. The CIT(A) noted that in the super structure constructed by the assessee, there was no provision for any kitchen facility and, therefore, it could not qualify to be a residential house. The exemption under section 54F was denied.
The assessee’s contention was, the plot of land was meant for residential purposes. The letting out by the assessee of the super structure for commercial purposes was not the intention and was merely incidental, done with a purpose of earning some rentals. It was argued that the conditions specified in Section 54F merely require an assessee to invest in a residential house and there was no stipulation that the same be also used as a residential house. It was submitted that the letting out for commercial purposes was only a temporary phenomenon and does not distract from the fact that the property remained a residential property.
The ITAT Delhi Bench ruling clearly states that, The use of the property is not the relevant criterion to consider the eligibility of Section 54F benefit. A bare reading of the provisions of Section 54F reflect that what is required is investment in a new residential house. Therefore, the question that arises in the instant case is as to whether the new property constructed by the assessed is a residential house or not. Mere non-residential use would not render a property ineligible for Section 54F benefit, if it otherwise is a residential house.
IV) Residential House on Agricultural Land: Section 54 Exemption
Mr. Kanwal Mohan Singh Sehgal, sold residential house and computed long term capital gain of Rs. 1,94,89,939/- out of which he claimed deduction of Rs. 1,70,00,000/- under section 54 of the Income Tax Act, 1961 (the “Act”) and declared taxable capital gain of Rs. 24,89,939/-.
The officer found that Mr. Kanwal Mohan purchased agricultural land measuring 87120 sq ft. It is further observed that land in question is being used as Farm House and that the residential house is constructed in 1350 sq ft., guest house in 900 sq ft., staff quarters and toilets 500 sq. ft., swimming pool 400 sq. ft. and shed for parking & pets 1800 sq. ft. Based on the report and the land is still agricultural in revenue records.
The ITAT Delhi C in the matter DCIT v. Kanwal Mohan Singh Sehgal – pronounce that:
- Farm house is also residential house.
- Assessee has built small house compared to size of land, but section 54 does not put any rider that deduction in respect of investment in acquisition of land appurtenant to the building will not quality for exemption.
- It is not in dispute that the assessee has purchased agricultural land and constructed in the said land residential house, guest house, staff quarters, swimming pool & shed for parking etc. The assessee has made investment in the residential house and land appurtenant thereto and that the Act does not limit the size of appurtenant land.
Conclusion:
Section 54/54F exemptions can be complex, and taxpayers often face challenges in claiming them. However, by understanding the nuances of the law and relevant case laws, taxpayers can ensure they claim the exemptions they are eligible for. It is always advisable to consult with a tax professional or chartered accountant to ensure compliance with the relevant tax laws and regulations.
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Disclaimer: This article is prepared for understanding and study purposes only. Taxpayers should consult their CA or tax consultant before taking any decision, and the author will not be responsible for any loss due to decisions taken based on this article.
About Author: Author is Practicing Chartered Accountant and founder of D Rahul & Associates, Navi Mumbai. You can reach Author at ca.rahuldwivedi@gmail.com or 9004485377.
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