ITAT Pune Upholds Section 54F Exemption on House Bought from Spouse

ITO Vs Kalawati Vijaykumar Agarwal (ITAT Pune)

The Revenue appealed against the order dated 11.07.2023 passed by the CIT(A)/NFAC for Assessment Year 2021-22, whereby the assessee was allowed deduction of ₹3,03,74,563 under Section 54F of the Income-tax Act, 1961.

The assessee had filed her return declaring total income of ₹23,06,480 and claimed deduction under Section 54F after selling her one-third share in a property at Uruli, Devachi, Haveli, Pune for ₹3,75,00,000, out of a total sale consideration of ₹11,25,00,000 received jointly with two others. She invested ₹3,50,00,000 in purchasing a residential property from her husband, Shri Vijaykumar Satyanarayan Agarwal, and claimed exemption under Section 54F.

During assessment, the Assessing Officer noted that the assessee, as a member of Vijaykumar Satyanarayana Agarwal HUF, had earlier consented to the assignment of the same property by the HUF to her husband through a deed of assignment dated 28.07.2011. Viewing the subsequent purchase of the property by the assessee from her husband as a circular transaction, the Assessing Officer rejected the claim under Section 54F. The Assessing Officer also observed that the deed of assignment dated 28.07.2011 had not been produced and considered the claim insufficiently substantiated.

The CIT(A) allowed the deduction. It held that Section 54F requires purchase or construction of a new residential property within the prescribed period and specifies other conditions relating to ownership of residential houses, but does not prescribe any restriction based on the relationship between the buyer and the seller. It further held that purchase of a property from a spouse is not prohibited under Section 54F. The CIT(A) also observed that the earlier assignment between the HUF and the assessee’s husband and the later purchase by the assessee were separate transactions, that consent of HUF members was required for transfer of HUF property, and that such consent had no bearing on the assessee’s claim in the relevant assessment year. Referring to Section 47(i), the CIT(A) held that the assignment between the HUF and the husband was not pursuant to partition and therefore constituted a transfer. It also observed that the Act contains no provision excluding transfers between husband and wife for adequate consideration and noted that the assessee had paid ₹3,50,00,000 through banking channels. Accordingly, the CIT(A) directed the Assessing Officer to allow the deduction under Section 54F.

Before the Tribunal, the Revenue reiterated that the assignment deed dated 28.07.2011 had not been produced before the Assessing Officer or the CIT(A), contending that, without evidence that the husband owned the property in his individual capacity, the claim under Section 54F could not be accepted. The assessee produced a paper book, including the deed of assignment as additional evidence, and supported the order of the CIT(A).

The Tribunal examined Section 47(i) and agreed with the CIT(A) that the assignment of the property between the HUF and the assessee’s husband was not connected with partition and therefore constituted a transfer. It also agreed that Section 47 contains no provision relating to transfers of capital assets between husband and wife for adequate consideration. The Tribunal noted that the assessee had purchased the property for ₹3,50,00,000, paid the consideration through banking channels, and concurred with the detailed reasoning of the CIT(A). Finding no infirmity in the appellate order, the Tribunal upheld the allowance of deduction under Section 54F and dismissed the Revenue’s appeal.

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal filed by the Revenue is directed against the order dated 11.07.2023 of the CIT(A) / NFAC relating to assessment year 2021-22.

2. Facts of the case in brief, are that the assessee is an individual and filed his return of income on 27.12.2022      declaring total income at Rs.23,06,480/-. The case was selected for scrutiny under ‘CASS’ for the following reasons:

“Large deduction / exemption claimed u/s 54, 54B, 54EC, 54EE, 54F, 54G, 54GA, 54GB etc. (Non-business ITR)”

3. On perusal of the IT return, the Assessing Officer noted that the assessee has declared Long term capital gain of Rs.18,87,563/- by claiming the deduction u/s 54F of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’), details of

4. He, therefore, asked the assessee to substantiate her case. From the details furnished by the assessee, the Assessing Officer noted that the assessee has sold the property situated at Uruli, Devachi, Haveli, Pune along with two others for a consideration of Rs.11,25,00,000/-. In this transaction, the assessee has received Rs.3,75,00,000/- (being 1/3^rd share of sale consideration). The assessee has purchased one immovable property bearing Plot No.18, admeasuring 334.73 sq. mtrs., carved out of survey No.687/1 along with building standing thereon for consideration of Rs.3,50,00,000/- and claimed the deduction u/s 54F of the Act.

The Assessing Officer noted from paragraph ‘u’ of the deed of assignment executed on 01.11.2021 that the assessee being a member of the Vijaykumar Satyanarayana Agarwal HUF had given her consent to assign the same immovable property to Vijaykumar Satyanarayan Agarwal from Vijaykumar Satyanarayana Agarwal HUF, which reads as under:

“u. thereafter, Vijaykumar Satyanarayana Agarwal HUF assigned its rights vide Deed of Assignment dated 28.07.2011 in favor of Vijaykumar Satyanarayan Agarwal, Assignor herein, with the consents of Mrs. Kalawathi Vijaykumar Agarwal, Manoj Vijay Kumar Agarwal, Mrs. Manisha Mukesh Agarwal, Mrs. Rupali Dheeraj Agarwal, and Mrs. Deepa Sagar Agarwal.”

5. Since the assessee being a member of Vijaykumar Satyanarayan Agarwal HUF had given consent to assign the said property in favour of Mr. Vijaykumar Satyanarayan Agarwal vide deed of assignment dated 28.07.2011 and later on the assessee purchased / got assigned a piece of the same property, the Assessing Officer was of the opinion that it is a circular pattern and the assessee is not eligible for claiming the deduction u/s 54F. Therefore, he confronted the assessee to explain the same. Rejecting the various explanations given by the assessee, the Assessing Officer rejected the claim of deduction u/s 54F of the Act.

6. In appeal, the CIT(A) / NFAC allowed the claim of the assessee by observing as under:

“5. Decision: Background facts leading up to the appeal, submissions of the appellant and AO’s order are carefully considered.

5.1 The appellant Smt. Kalawati Agarwal had claimed deduction of Rs.3,03,74,563/- u/s.54F of the Act towards investment in residential house property purchased from her husband Shri Vijaykumar Satyanarayan Agarwal. Shri Vijaykumar Satyanarayan Agarwal acquired the said property from his HUF Vijaykumar Satyanarayan Agarwal HUF in which the appellant is also a member. All the members of the HUF including the appellant gave consent for the transfer of the property between Shri Vijaykumar Satyanarayan Agarwal and Vijaykumar Satyanarayan Agarwal HUF. The AO disallowed the deduction claimed by the appellant u/s 54F of the Act holding the purchase as a circular transaction. Thus, the sole issue to be decided in the Instant case is the appellant u/s.54F of the Act.

5.2 In order to claim exemption u/s 54F of the Act, new property should be either purchased or constructed. Purchase should take place either one year prior to the transfer or within two years from the date of transfer of the capital asset. In case of construction, construction should take place within three years from the date of transfer of the capital asset. Further, deduction u/s 54F of the Act is not allowable in case the assessee either owns more than one residential house or purchases/constructs any residential house other than the new asset. Apart from the above no other conditions or restrictions have been prescribed for allowing or disallowing the claim of exemption u/s 54F of the Act. Thus, the relationship between the buyer and seller of the property is immaterial for allowing the exemption claimed by the assessee. Further, there is no explicit restriction in section 54F of the Act regarding the investment in the property purchased from spouse. That being the case, there cannot be any reason to deny the appellant’s claim of exemption u/s.54F of the Act since the appellant had satisfied all the conditions prescribed therein. Therefore, the AO was not justified in disallowing the appellant’s claim of exemption u/s.54F of the Act merely because the property was purchased from her husband.

5.3 The transactions between Shri Vijaykumar Satyanarayan Agarwal and Vijaykumar Satyanarayan Agarwal HUF and Shri Vijaykumar Satyanarayan Agarwal and the appellant are independent and are to be taxed separately in the respective assessment years though all are pertaining to the same property since capital gain arises in the respective hands at the time of sale. Further, legally, members of the HUF have to give consent for the sale of HUF’s property. The said consent has to be given even when the property is sold to third parties. Thus, the consent given by the appellant being a member of Vijaykumar Satyanarayan Agarwal HUF at the time of sale of the impugned property to Shri Vijaykumar Satyanarayan Agarwal is in a different context and has nothing to do with the claim of exemption by the appellant in the impugned assessment year.

5.4 As per section 47(i) of the I.T. Act, any distribution of capital assets on the total or partial partition of a Hindu Undivided Family shall not be regarded as a transfer. In the instant case, assignment of the property on 28.07.2011 between Shri Vijaykumar Satyanarayan Agarwal and Vijaykumar Satyanarayan Agarwal HUF was not in connection with the partition, hence the same is a transfer and accordingly the impugned property acquired by Shri Vijaykumar Satyanarayan Agarwal is an independent one. Further, provisions of section 47 has not provided for any clauses relating to the transfer of capital asset between husband and wife and vice versa for an adequate consideration, Hence, the sale of property between husband and wife is to be treated as a transfer for the purpose of capital gains. In the instant case of the appellant, the impugned property was purchased by the appellant for Rs.3,50,00,000/- which is at arm’s length price and the appellant had actually paid the consideration through banking channel. Thus, the AO is not justified in holding the investment made by the appellant as a circular transaction

5.5 In view of the above, I am of the considered view that the appellant is rightly entitled for deduction of Rs.3,03,74,563 claimed u/s 54F of the Act. Thus, the AO is hereby directed to allow the exemption claim of the appellant and grant relief accordingly.

6. In the result, appeal is allowed.”

7. Aggrieved with such order of CIT(A) / NFAC, the Revenue is in appeal before the Tribunal by raising the following grounds:

i. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in holding that the assessee is entitled to claim deduction amounting to Rs.3,03,74,563/- u/s 54F of the Income Tax Act, 1961

ii. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that there was transfer of capital asset held by the HUF in favour of Shri Vijaykumar Satyanarayan Agarwal, husband of the assessee upon assignment of rights held by the assessee when there is no discussion in the order of the CIT(A) on the documentary evidence regarding assignment of such rights and when no consideration was admittedly received by the assessee against assignment of such rights.

iii. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that in the absence of valid transfer of rights of the assessee in the capital asset in favour of Shri Vijaykumar Satyanarayan Agarwal, husband of the assessee, the claim of transfer of the capital asset remained unproved and therefore, the assessee still held her rights over the property and therefore, the assessee could not have purchased the same property from her husband of which she is also one of the owners.

iv. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that all the conditions specified in Sec 54F of the Act fulfilled vis-à-vis the transactions without appreciating that the circular transactions involving the same asset have been carried in order to circumvent the conditions laid down in proviso to Sec.54F of the Act.”

8. The Ld. DR strongly challenged the order of the CIT(A) / NFAC in allowing the claim of deduction u/s 54F of the Act. The Ld. DR referred to the written submission filed by him on this issue which reads as under:

“1.1 The assessee Mrs. Kalawati Vijay Kumar Agarwal along with 2 others sold a plot of land for 11.25 crores and the assessee got ? 3.75 crores as her share against which she claimed deduction u/s 54F of ? 3.03 crores basis the investment made in a residential house said to be purchased from her husband Mr Vijay Kumar Agarwal. It was submitted by the assessee that Shri Vijay Kumar Agarwal (Individual) had been assigned the impugned property by Vijay Kumar Agarwal (HUF) by deed of assignment dated 28/07/2011 and that the assessee as coparcener of the said HUF had consented to the same. However, no such deed dated 28/07/2011 was ever produced before the AO. In the absence of the said deed dated 28/07/2011, the AO held that the genuineness of transaction between the said HUF [Le Vijay Kumar Agarwal (HUF)] cannot be verified. Further, that, it could neither be ascertained by the AO as to whether the assessee had any right in the said property or not and what was the purpose for the assessee giving her consent for assigning the property vested in the HUF to its Karta i.e. Shri Vijay Kumar Agarwal (Individual). As multiple opportunities were given to the assessee by the AO to furnish the requisite details ie the said deed of assignment dated 28/07/2011 and the assessee having failed to do so, the AO held that the assessee failed to substantiate that the claim of deduction u/s 54F was not a camouflaged investment. Accordingly, the claim of deduction u/s 54F amounting to 3.03 crores was disallowed by the AO. The assessee being aggrieved appeal to the CIT (A).

1.2 The CIT (A) vide his order dated 11/07/2023 held that the relationship between the buyer and seller of the property is immaterial for allowing the exemption claim by the assessee and that there was no explicit restriction section 54F of the Income-tax Act, 1961 regarding the investment in the property purchased from spouse. That, accordingly, there could not be any reason to deny the Appellant’s claim for exemption u/s 54F. In view of the aforesaid logic, the CIT (A) allowed the appeal of the assessee and deleted the addition made pertaining to disallowance of claim u/s 54F amounting to ?3.03 crores.

2. Say of the Department:

2.1 The investment made by the assessee in a residential house claimed to be belonging to her husband would require that there should be evidence on record that the assessee’s husband owned the said residential housing question. Ownership of the said residential house was claimed to have been obtained by the assessee’s husband by virtue of an assignment deed dated 28/07/2011 This deed was never brought on record. The CIT (A) did not appreciate that the very basis for the claim u/s 54F was the assignment deed dated 28/07/2011 which vested the ownership of the residential property in the husband of the assessee and that in the absence of such assignment deed dated 28/07/2011 before the AO as well as the CIT (A), it was incorrect on the part of the CIT (A) to allow the claim of deduction u/s 54F. The CIT (A) instead the view that for a claim u/s 54F, the relationship between the purchaser and the seller was not relevant and that there was no restriction on purchase of the said residential property from the spouse. It is agreed that the relationship between the purchase and the seller is not relevant and that there is no restriction on purchase of the said residential property from the spouse, however, the CIT (A) lost sight of the fact that there was no evidence on record that the spouse was the owner of the said residential property in which the purported investment was made for making a claim u/s 54F. As the transaction was between the assessee and her husband, the mere payment of ₹ 3.50 crores could not have been held to be an investment in the residential property for claim u/s 54F unless it was proved by cogent evidence that the property owned by the husband’s HUF had come to be assigned to the husband in his individual capacity. This was supposed to have been done by deed of assignment dated 28/07/2011 but which was never brought on record. As the money i.e. 3.50 crores and paid by the assessee to her husband would remain merely within the household, the AO was correct in holding that it was merely a circular transaction and that the claim u/s 54F was not made out.

3. In view of the above, it is submitted that the assessment order dated 26/12/2022 of the AO be upheld and the grounds of appeal of the Department Appellant be allowed. It is prayed accordingly.”

9. The Ld. Counsel for the assessee on the other hand filed a voluminous paper book and drew the attention of the Bench specifically to the following documents which are filed in the paper book:

10. Referring to the same, he submitted that only item No.4 is the additional evidence which was not filed before the lower authorities. He submitted that the CIT(A) / NFAC after considering the various decisions has taken a view in favour of the assessee and therefore, the same should be upheld and the grounds raised by the Revenue be dismissed.

11. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) / NFAC and the paper book filed by both the sides. We find the assessee claimed deduction u/s 54F of the Act towards investment in the residential property purchased from her husband Shri Vijaykumar Satyanarayan Agarwal. Shri Vijaykumar Satyanarayan Agarwal had acquired the said property from his HUF Vijaykumar Satyanarayan Agarwal in which the assessee is also a member. All the members of HUF including the assessee gave consent for transfer of the property between Shri Vijaykumar Satyanarayan Agarwal and Vijaykumar Satyanarayan Agarwal, HUF. We find the Assessing Officer disallowed the deduction claimed by the assessee on the ground that the purchase of the property by the assessee is a circular transaction and therefore, the assessee is not entitled to the claim of deduction u/s 54F of the Act. We find the CIT(A) / NFAC allowed the claim of deduction u/s 54F of the Act, the reasons of which are reproduced in the preceding paragraphs.

12. We find the provisions of section 47(i) of the Act read as under:

45. “ Nothing contained in section 45 shall apply to the following transfers :—

(i) any distribution of capital assets on the total or partial partition of a Hindu undivided family”

13. From the above, it is clear that any distribution of capital assets on the total or partial partition of HUF shall not be regarded as transfer. The CIT(A) / NFAC in our opinion has rightly held that the assignment of the property on 28.07.2011 between Vijaykumar Satyanarayan Agarwal and Vijaykumar Satyanarayan Agarwal, HUF was not in connection with the partition and therefore, the same is a transfer and therefore, the property acquired by Shri Vijaykumar Satyanarayan Agarwal is an independent one. We also agree with the findings of the CIT(A) / NFAC that the provisions of section 47 of the Act have not provided for any clauses relating to the transfer of capital asset between the wife and husband and vice-versa for adequate consideration. It is also an undisputed fact that the assessee has purchased the property for a consideration of Rs.3,50,00,000/- and the amount has been paid through banking channel. In this view of the matter and in view of the detailed discussion by the CIT(A) / NFAC on this issue, we do not find any infirmity in the order of the CIT(A) / NFAC allowing the claim of deduction u/s 54F of the I.T. Act, 1961. Accordingly, the same is upheld and the grounds raised by the Revenue are dismissed.

14. In the result, the appeal filed by the Revenue is dismissed.

Order pronounced in the open Court on 13^th September, 2024.