Capital Gain Deduction u/s 54 and 54F simultaneously for a Single Residential House Property

Explore the possibility of claiming deductions under Sections 54 and 54F of the Income Tax Act simultaneously for a single residential house property. Learn about the recent case law involving M/s. Sudhakar Traders, which sheds light on the importance of Proper Officer’s authorization in issuing notices under Section 61 read with Rule 99 of the CGST Act. Stay informed about the conditions and implications of claiming these exemptions concurrently.

Article explains deductions on capital gains from the sale of a long-term capital asset under Sections 54 and 54F of the Income Tax Act, 1961 simultaneously for a Single Residential House Property. Section 54 enables individuals to claim deductions when selling a residential house and purchasing or constructing another residential house within a specified timeframe. The deduction is available on the long-term capital gains from the sale of the original house if the amount equal to the capital gain is invested in the new property. Section 54F offers a similar deduction for the sale of any long-term capital asset, except a residential house, where the net sale consideration must be invested in a residential house property. Whether both deductions can be claimed simultaneously depends on the specific circumstances, and a recent case law clarifies the possibility of claiming exemptions under both sections.

Section 54 and Section 54F of the Income Tax Act, 1961 provides for deductions against capital gain arising on transfer of a long-term capital asset, subject to certain conditions.

Section 54 allows an individual to claim a deduction if he sells a residential house and purchase/ construct another residential house within a specified time frame. The deduction is available on the long-term capital gains arising from the sale of the original house provided amount equal to capital gain arising on sale of such original house is invested in purchasing or constructing a new residential house property.

Section 54F provides a similar deduction but is applicable when an individual sells any long-term capital asset other than a residential house and uses the sale proceeds to purchase or construct a residential house property within the specified time frame. In this case, the Net Sale Consideration, instead of just the capital gains, needs to be invested in the new house to claim the deduction.

But the question arises as to whether Assessee can claim deduction u/s 54 and 54F simultaneously?

As for whether deductions under Sections 54 and 54F can be claimed together, it depends on the specific facts and circumstances of each case. The language of the Income Tax Act does not explicitly state that both deductions cannot be claimed simultaneously.

Also, as per the judgement passed by ITAT Hyderabad in the case of Venkata Ramana Umareddy V/S Dy. CIT Cir-3 (3), Hyderabad (2013), it was held that Assessee has transferred as plot of land to a developer and on such transfer, he has earned long term capital gain. Also, in the same FY he has transferred his residential house and earned long term capital gain. And Assessee had claimed entire amount of capital gain for deduction u/s 54 and 54F towards the investment in a new residential house property.

However, AO is of the opinion that Assessee needs to invest in two separate house properties and disallowed such deduction on the aforesaid basis and made addition to the income of the Assessee.

Assessee being aggrieved by the addition to income filed an appeal before the CIT(A) contended that Section 54 and 54F are independent provisions and are not mutually exclusive. And both the sections require investment in new residential house property but neither of them restricts the assessee from claiming exemption against investment in the single residential house property subject to the fact that the criteria are met. However, CIT(A) has rejected the contentions on the grounds that the purpose of both the sections is to give fillip to the Housing Sector, evidently, different sources for investment in a residential house have been envisaged there under and investment cannot be clubbed together for getting a bigger advantage of exemption on account of bigger investments.

Thereafter, Assessee filed appeal before ITAT Hyderabad wherein he contended that Section 54 and 54F deal with sale of different assets and call for investment in a residential house property and both the sections are independent. Therefore, the Department’s contention that the he should have invested in two different houses is not a correct interpretation and also proves that no double deduction is claimed as the entire capital gain arising out of sale of residential house is invested in the part of the new residential house and the Net Sale Consideration received from sale of plot of land is invested in another part of the new residential house property.

After hearing the appeal, ITAT comes to an opinion that reading of section 54 and 54F makes it clear that they are independent of each other and operate in respect of long term capital gain arising out of transfer of distinct and separate long term capital assets. However, both the sections allow exemption only on purchase or construction of a new residential house and only reasoning on which the lower authorities have rejected assessee’s claim of exemption is that the assessee cannot claim exemption under both the sections towards investment in a single residential house property. According to the lower authorities for claiming exemption u/s 54 and 54F the assessee has to invest in two houses. Such an interpretation of the provision is totally misconceived and misplaced. The restriction imposed under the proviso to Section 54F (1) clearly debars exemption if the assessee purchases or constructs more than one residential house. And reiterate that sec. 54 and 54F apply under different situations. While sec. 54 applies to long term capital gain arising out of transfer of long term capital asset being a residential house and Section 54F applies to long term capital gain arising out of transfer of any long term capital asset other than a residential house. However, the condition for availing exemption under both the sections is to purchase or construct of a new residential house within the stipulated time period. Further it must be noted that price of new residential house property is much more than the total long term capital gain and Net Sales Consideration as required by the respective sections. Also, there is no specific bar either u/s 54 or 54F or any other provision of the Act prohibiting allowance of exemption under both the sections in case the conditions of the provisions are fulfilled. And, since long term capital gain arises from sale of two distinct and separate assets i.e., residential house and plot of land and the assessee has invested the entire capital gain in purchase of a new residential house, he is entitled to claim exemption u/s 54 and 54F simultaneously.

So, from the aforementioned case law we can conclude that an assessee can claim deduction u/s 54 and 54F simultaneously subject to that the same has been acquired in fulfilment of the conditions stipulated under the said sections.

For better understanding of the aforementioned case law, we can consider following example:

Suppose during the FY 2023-24, Mr. X sold a land situated in Jaipur to Mr. M for Rs. 1.7 crores on 2^nd April, 2023 which was purchased during FY 2002-03 for Rs. 45 Lakhs. Also, on 31^th May, 2023 he sold a residential house situated in Ajmer to Mr. R for Rs. 78 Lakhs which was purchased during the year 2005-06 for Rs. 12 Lakhs. On his wife’s birthday on 3^rd June, 2023, he purchased a sea facing 3 BHK Flat in Juhu, Mumbai for Rs. 5.30 Crores.

In the above example, following will be the capital gain arising on transfer of plot of land and residential house:

Capital Gain on Transfer of Plot of Land situated in Jaipur:

Capital Gain on Transfer of Residential House situated in Ajmer:

Mr. X is eligible to claim exemption u/s 54 and 54F since he has purchased new residential house property within the time stipulated in the respective sections.

Amount of Exemption u/s 54 and 54F available with Mr. X will be:

For Section 54F: Since, the Net Sales Consideration received by selling Plot of Land in Jaipur is fully invested in purchasing new residential house property, Mr. X is eligible to claim exemption of Rs. 25,85,714

For Section 54: Mr. X has invested Rs. 5.30 Crores in new residential property and to avail the benefit of Section 54F, he has invested Rs. 1.70 Crore from the Net Proceeds of transfer of plot of land situated in Jaipur. Apart from that he has made additional investment of Rs. 3.60 Crores. Therefore, he can claim exemption of Rs. 42,30,769 u/s 54.

Therefore, Total exemption available with Mr. X for FY 2023-24 is Rs. 68,16,483.