DCIT Vs Mahendrakumar Varjangbhai Jilaria (ITAT Surat)
Open Plots Are Not Residential Houses; House Constructed on Agricultural Land Can Qualify Under Section 54F
Background of the Case
The assessee sold a plot of land at Vesu, Surat, on 3 December 2016 for consideration of ₹16,19,80,000. Against the resulting long-term capital gains, he claimed a deduction of ₹4,94,38,949 under section 54F for investment in a new residential house.
The Assessing Officer rejected the deduction on two principal grounds. First, he considered that the assessee owned more than one residential house on the date of transfer. Secondly, he held that the new asset purchased was agricultural land rather than a residential house.
The CIT(A) examined the property documents and evidence of construction and allowed the deduction. The Revenue challenged that relief before the Tribunal.
Residential Plots Mistaken for Residential Houses
The Assessing Officer noticed that the assessee had sold two other properties—Plot Nos. 42 and 43 at Vrundavan Society, Adajan, Surat—on 20 March 2017. Since these properties were held when the Vesu land was sold, he treated them as additional residential houses and invoked the ownership restriction under section 54F.
The CIT(A), however, examined the registered sale deeds and found that the properties were described as “Khulla Plot Wali Millkat”, meaning open plot properties.
The photographs forming part of the registered deeds also showed open plots. Further, the property history recorded in the documents did not indicate that construction had ever been carried out on them.
The CIT(A) therefore concluded that the Assessing Officer had wrongly equated plots intended for residential purposes with existing residential houses. The assessee did not own more than one residential house on the relevant transfer date.
Deduction Was for Construction, Not Merely Purchase of Land
The second objection concerned the land purchased at Saroli, Surat. The Assessing Officer relied on its description as agricultural land and concluded that the requirement of acquiring a residential house had not been satisfied.
The CIT(A) found that this approach overlooked the actual claim. The assessee had purchased land for construction of a residential house, rather than claiming exemption solely for acquisition of vacant land.
For the construction, the assessee deposited ₹25 lakh in the Capital Gains Account Scheme with Bank of Baroda within the due date. He had also submitted a construction agreement and ledger account during the assessment proceedings.
The CIT(A) found that the deposited amount was subsequently utilised for construction of the new residential house within the prescribed period. Photographs of the completed house were also furnished during the appellate proceedings.
Accordingly, the CIT(A) held that the land’s agricultural classification did not, by itself, defeat the deduction where a qualifying residential house had actually been constructed on it.
Revenue’s Objections Before the Tribunal
The Revenue disputed the findings concerning the existing properties and relied on certain registered-document descriptions which, according to it, indicated residential construction.
It also argued that the Saroli land had been purchased on 12 October 2015, more than one year before the transfer of the original asset. Further objections concerned the relatively small constructed area compared with the total land area, absence of specified regulatory approvals, and another bungalow construction reflected in the balance sheet.
The Revenue additionally alleged a violation of Rule 46A, contending that fresh evidence had been admitted without giving the Assessing Officer an opportunity to examine it.
The assessee supported the CIT(A)’s order.
Tribunal’s Decision
The Tribunal upheld the factual findings of the CIT(A). It found that the Adajan properties were open plots without residential houses, and that the Assessing Officer’s conclusion regarding ownership of multiple houses was incorrect.
Regarding the new investment, the Tribunal noted that the assessee had purchased open land on which a residential house was constructed. The record established utilisation of the Capital Gains Account Scheme deposit for construction within the specified time.
The Tribunal concluded that the assessee had demonstrated compliance with the conditions of section 54F. It therefore upheld the deduction of ₹4,94,38,949 and dismissed the Revenue’s appeal.
Author’s Comments
A residential plot does not become a residential house merely because it is meant for residential use. The distinction is crucial when applying the restriction on ownership of more than one residential house under section 54F. Here, the registered deeds, their photographs and the recorded property history supported the assessee’s position.
The second significant aspect is the need to examine the completed investment as a whole. Looking only at the land purchase document overlooked the construction agreement, CGAS deposit and subsequent utilisation. The claim concerned a house constructed on the land, and the Tribunal assessed it on that basis.
The decision also supports the proposition that agricultural classification alone is not an automatic bar under section 54F where the evidence establishes timely construction of a residential house. It should not, however, be understood as dispensing with applicable land-use or construction requirements.
A qualification is necessary regarding the Revenue’s other objections. Although the order records arguments on the land purchase date, proportion of construction, another bungalow and Rule 46A, the Tribunal does not separately analyse each contention. The clearest principles emerge from its express findings on vacant plots and timely residential construction, rather than treating every argument recorded in the order as independently settled law.
FULL TEXT OF THE ORIGINAL ORDER OF ITAT SURAT
The appeal filed by the Revenue is against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [in short “CIT(A)”] dated 12.09.2023 for the Assessment Year (in short “AY”) 2017-18.
2. The Revenue has raised the following grounds of appeal:
“) On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in directing the AO to allow deduction u/s 54F of the I.T. Act, 1961 for Rs.4,94,38,949/- without appreciating findings of the AO and the facts and circumstances established on records shows that assessee had not fulfilled the condition laid down as per provision of the I.T. Act, 1961 and exemption claimed u/s 54F of the I.T. Act.
ii) On the facts and circumstances of the case and in law, the ld. CIT(A) has violated the principles of natural justice while admitting the additional evidences and not providing opportunity of being heard to the Assessing Officer as per the provisions of section 250(2) of the Income tax Act, 1961 and Rule 46A(3) of the income tax Rules, 1962.
iii) On the facts and in the circumstances of the case and in law, the Id CIT(A) erred in by directing the AO to allow deduction u/s 54F of the I.T. Act ignoring the fact that on the date of transfer of original asset the assessee was in possession of more than one residential property and therefore, the assessee is not entitled for the benefit of deduction claimed u/s.54F of the Act.
iv) It is therefore prayed that the order of the Ld. CIT(A) may kindly be set aside and that of the Assessing Officer be restored.
v) The appellant craves leave to add, alter, amend and/or withdraw any grounds of appeal either before or during the course of hearing of the appeal.”
3. The Assessee had filed his return of income for A.Y. 2017-18 on 23.03.2018 declaring total income of Rs. 11,23,20,190/- including LTCG of Rs.11,04,35,185/- and case was selected for scrutiny under CASS. Accordingly, statutory notices 143(2) & 142(1) of the Income Tax Act, 1961 (in short “the Act”) were issued on 08.08.2018 and 23.09.2019 respectively. During the year under consideration, the assessee, an individual earned partner’s remuneration and share in profit from various partnership firms along with interest income, dividend income and long-term capital gain on sale of property as also agriculture income. The assessee filed his return of income for the year under consideration on 26-03-2018 declaring total income of Rs.11,23,20,190/- which includes the long-term capital gain of Rs.11,04,35,185/- in respect of sale of land sold a plot of land at Vesu, Suratafter claiming deduction of Rs.4,94,38,949/- u/s. 54F of the Income Tax Act, 1961 (in short “the Act”) in respect of investment in construction of new residential house against the sale of that land. The case of the assessee was selected for scrutiny and notices u/s.143(2) and 142(1) of the Act was issued. In the order passed u/s 143(3) of the Act, the Assessing Officer (in short “the AO”) has held that the claim of deduction u/s 54 of the Act is not tenable since the appellant was owning more than one house property at the time of transfer of the original asset i.e., the land at Vesu, Surat. The AO held that on going through the details filed by the assessee that he had sold 2 more residential properties at Plot No. 42 & 43, R.S. No. 279/1, Adajan, Surat on 20.03.2017 whereas the original asset was sold on 03.12.2016. The AO also held that the asset purchased by the assessee for claim of deduction u/s. 54F is an agricultural land and therefore violets the condition that the new property purchased should be a house property. Hence, the AO disallowed the claim of deduction u/s. 54F amounting to Rs.4,94,38,949/-.
4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) allowed the appeal of the assessee.
5. The Ld. Departmental Representative (in short “Ld. DR”) submitted that the assessee filed the return of income (ROI) on 26.03.2018, declaring a total income of Rs. 11,23,20,190/-. The case was selected for complete scrutiny. During the relevant financial year, the assessee sold a property valued at Rs.16,19,80,000/- and claimed a deduction under section 54F amounting to Rs.4,94,38,949/-. While examining the details submitted by the assessee, the AO observed that the assessee had also sold two additional properties located at Adajan. Based on this, the AO concluded that the assessee was in possession of more than one residential property on the date of transfer of the original asset, thereby violating one of the conditions under section 54F, which stipulates that the assessee must not own more than one residential house (other than the new asset) on the date of transfer. Furthermore, the AO noted in paragraph 4.5 of the assessment order that the new asset purchased was agricultural land. Since section 54F allows a deduction only if the investment is made in a residential house, the AO held that this condition was also not fulfilled. Consequently, the AO denied the deduction under section 54F. The assessee filed an appeal before the CIT(A) challenging the AO’s order. In the appellate proceedings, the assessee submitted that the two properties referred to by the AO were merely plots of land and not residential houses. To support this claim, the assessee furnished the registered sale deeds of the properties. Regarding the second objection, the assessee also submitted the purchase deed of the new asset, which indicated that it was a plot of land located at Saroli, not agricultural land as claimed by the AO. After examining the submissions and evidentiary documents, the CIT(A) found both grounds for disallowance untenable and accordingly allowed the assessee’s appeal. Aggrieved by the decision of the CIT(A), the department has preferred an appeal before the Income Tax Appellate Tribunal (ITAT). Upon a careful examination of the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] allowing the assessee’s claim under Section 54F of the Income Tax Act, 1961, it is respectfully submitted that the said order suffers from both legal and factual infirmities. To assess the matter in its proper perspective, it is essential to first consider the relevant statutory provisions. Section 54F of the Income Tax Act, 1961 provides an exemption from long-term capital gains tax to individuals and Hindu Undivided Families (HUFs) who sell a long-term capital asset, other than a residential house, and reinvest the net sale consideration in purchasing or constructing a single residential house property in India within a specified time. This provision is intended to encourage reinvestment in residential property and promote housing. Section 54F of the Income Tax Act provides a beneficial exemption to individuals and Hindu Undivided Families (HUFs) in respect of long-term capital gains arising from the transfer of a capital asset other than a residential house, provided the net sale consideration is reinvested in a residential house situated in India within the prescribed time limits. However, the exemption is strictly conditional and requires full compliance with all statutory requirements, including those relating to ownership, reinvestment period, and the nature of the new asset acquired. Any failure to meet these conditions can lead to the denial or withdrawal of the exemption. In light of the above legal framework and upon a detailed examination of the facts of the case-including the assessment order, appellate order of the CIT(A), and the Statement of Facts filed by the Department-it is evident that the order passed by the CIT(A) is erroneous, both in law and on facts. The CIT(A) has failed to consider material evidence and statutory requirements while allowing the assessee’s claim under Section 54F. One of the key conditions for availing exemption under Section 54F of the Income Tax Act is that, on the date of transfer of the original asset, the assessee should not own more than one residential house (other than the new asset acquired). However, the facts of the present case reveal that the assessee was the owner of multiple residential properties at the relevant time, namely:
- R.S. No. 402/1, Moje Vesu, Surat (the original asset transferred);
- Plot No. 42, R.S. No. 279/1, Adajan;
- Plot No. 43, R.S. No. 279/1, Adajan.
Significantly, Plot No. 42 is registered in the name of the assessee as a constructed residential unit, having a built-up area of 52.26 sq. metres. The registered sale deed explicitly describes the property as “property with construction (residence)”, a phrase repeated in both Index II documents dated 18.04.2008 (purchase) and 21.03.2017 (sale). The Gujarati term “Bandhkam -Rehthan” (meaning “Construction – Residence”) and “Bandhkamvali Milkať” (meaning “Property with Construction”) further confirm the residential nature of the asset. These records were acknowledged by the Assessing Officer (AO), but were disregarded by the CIT(A), who accepted the assessee’s characterization of the property as non-residential without adequate reasoning or examination. During the appellate proceedings, the assessee submitted additional evidence, including photographs and other supporting materials, to claim that the new property purchased was residential in nature. However, these documents were admitted without affording the AO an opportunity to verify or rebut the evidence, in violation of Rule 46A of the Income Tax Rules. No reasons were recorded for the admission of these materials, nor was any notice given to the AO for cross-verification. This is a clear violation of the principles of natural justice. Moreover, the photographs submitted by the assessee do not contain any identifying details such as plot numbers, municipal markings, or verifiable references, and therefore cannot conclusively establish the residential nature of the construction. Section 54F mandates that a residential property must be purchased within one year before or two years after the date of transfer of the original asset. In this case, the transfer took place on 03.12.2016, meaning any purchase made prior to 03.12.2015 falls outside the eligibility window. However, the assessee purchased the new property on 12.10.2015-nearly two months prior to the permissible cut-off date. Furthermore, examination of the purchase deed reveals that payments for the land began as early as 14.10.2014, which is over two years before the sale of the original asset. Thus, the conditions for reinvestment within the stipulated time frame are clearly not satisfied. In addition, the registered deed (Page 86 of the assessee’s paperbook) categorically states in Gujarati that the purchased land is “Kheti ni Jamin” or agricultural land. This further undermines the claim that a “residential house” was acquired. Even if the assessee’s claim of construction is considered, the nature and legality of the construction are questionable. On a parcel of agricultural land measuring 12,039 sq. metres (approx. 3 acres), the assessee claims to have constructed a residential house covering only 173.34 sq. metres (1.43% of the land). No documentary evidence-such as a Non-Agricultural (NA) conversion certificate, municipal approval, or occupancy certificate-was submitted to substantiate that residential construction was legally permissible or actually carried out. The total construction cost of Rs. 25,00,000 on land valued at Rs.4.51 crore further raises doubts about the genuineness and scale of the construction. Such a disproportionate ratio suggests the possibility of a temporary or makeshift structure erected solely to claim tax benefits under Section 54F. Another critical condition of Section 54F is that the assessee must not construct another residential house within three years of the date of transfer, apart from the one used to claim exemption. However, the assessee’s balance sheet as on 31.03.2017 (Page 35 of the paperbook) reflects an asset titled “Construction of Bungalow” valued at Rs. 66,53,902. This asset is distinct from the property claimed under Section 54F. Whether this represents ongoing construction or a completed structure, it constitutes a clear violation of the conditions prescribed under Section 54F. Either way, the assessee becomes ineligible for exemption due to ownership or construction of more than one residential house within the prescribed timeframe. The overall circumstances suggest that the assessee attempted to artificially structure the transaction to obtain tax benefits not legally due. The original asset yielded long-term capital gains of Rs. 16.19 crore, and it appears that post-facto efforts were made to portray an agricultural land purchase as an acquisition of a residential house. The alleged construction was on a small portion of the land, lacked regulatory approvals, and was neither verifiable nor substantial in nature. These facts point to a deliberate and strategic misrepresentation of facts to circumvent tax liability by exploiting the beneficial provisions of Section 54F. The CIT(A)’s order reflects a one-sided acceptance of the assessee’s submissions without proper judicial scrutiny. The failure to evaluate registered documents, refusal to consider departmental evidence (including the Statement of Facts), and the improper admission of unauthenticated evidence have cumulatively led to an erroneous conclusion. It is a well-established principle that tax exemptions and deductions must be construed strictly, and the onus lies entirely on the assessee to prove eligibility. The CIT(A), however, disregarded this legal position and relied on unverified and self-serving evidence submitted by the assessee. The order, therefore, suffers from both procedural irregularity and substantive misapplication of law, warranting its reversal. The Ld. DR further submitted that the order passed by the CIT(A) suffers from serious legal infirmities and material factual oversights. The CIT(A) has erred in law and on facts by accepting the assessee’s claim under Section 54F of the Income Tax Act, 1961, without ensuring strict compliance with the mandatory conditions laid down under the provision. The appellate order fails to appreciate key facts brought on record by the Assessing Officer, including (i) the assessee’s ownership of more than one residential house on the date of transfer, (ii) the purchase of the alleged new asset outside the prescribed timeline, (ii) the classification of the new asset as agricultural land lacking NA conversion or municipal sanction for residential use, and (iv) the improper admission and reliance on unverified additional evidence in violation of Rule 46A. Moreover, the CIT(A) did not offer the AO any opportunity to examine or counter the fresh evidence, thereby breaching the principles of natural justice. Additionally, the assessee’s subsequent construction of another bungalow further violates the condition of not owning or constructing more than one residential property within the prescribed timeframes, thereby rendering the exemption inadmissible. It is a well-settled principle that tax exemption provisions must be interpreted strictly, and the burden to prove eligibility lies squarely upon the assessee. In the present case, the assessee has failed to discharge this burden with credible evidence and has, instead, made inconsistent and unsupported assertions. The sequence of events and manner in which the exemption is claimed indicates a deliberate and structured attempt to misuse the beneficial provisions of Section 54F to avoid legitimate tax liability. In light of the foregoing, it is most respectfully submitted that the appellate order lacks legal sustainability, is factually untenable, and ought to be set aside in its entirety. The denial of exemption by the Assessing Officer is well-reasoned, consistent with the statutory framework, and merits restoration. The Ld. DR submitted that the Department’s appeal before the ITAT is, therefore, fully justified and prayed that this written submission be taken on record and that the Hon’ble Tribunal may be pleased to allow the appeal of the Department and uphold the assessment order passed under Section 143(3) of the Act, thereby denying the assessee’s claim for exemption under Section 54F.
6. The Ld. Authorised Representative (in short “Ld. AR”) for the assessee relied upon the order of the CIT(A).
7. We have heard both the parties and perused all the relevant material available on record. The CIT(A) in para 5.4 & 5.5 has categorically given the finding that the assessee was not in possession of more than one residential house at the time of sale of the original asset. In fact, the AO has wrongly recorded the finding which can be set out from the perusal of the evidences submitted by the assessee before both the authorities. The CIT(A) held as under:
“5.4 I have gone through the registered sale deed of the properties located at Plot No. 42 & 43, R.S. No. 279/1, Vrundavan Society, Adajan, Surat and on going through page 9 of the said registered sale deeds, it is seen that the properties have been mentioned as ‘Khulla Plot Wali Millkat meaning ‘Open Plot Properties’. Even the photographs affixed on page 15 of the registered sale deeds show that the properties sold are open plots and not residential houses. Moreover, even the history of the properties sold as mentioned on page 9 to 12 of the registered sale deeds, do not mention any construction being ever made on the said plots. Accordingly. I fully agree with the appellant that the properties sold by him are open plots and not residential houses and that the AO has wrongly considered the said open plots for residential purpose as residential houses and accordingly, the AO has wrongly held that the appellant was in possession of more than one residential house at the time of sale of the original asset. Hence, I hold that the appellant was not in possession of more than one residential house at the time of sale of the original asset and accordingly, the deduction u/s. 54F cannot be denied to the appellant on this ground.
5.5 Now the second ground of the AO in disallowing the deduction u/s. 54F of the Act is that the asset purchased by the appellant for claim of deduction u/s. 54F is an agricultural land as is clearly mentioned on page 3 of the purchase document and therefore, the pre-condition that the new property purchased should be a residential house is also not satisfied in the case of the appellant. I have gone through the copy of the purchase deed and on going through the same, it is seen that it is an open land at Saroli, Surat which has been purchased by the appellant and that for construction of residential house on the said land, the appellant had deposited Rs. 25,00,000/- in the capital gain account with the Bank of Baroda within the due date. During the course of assessment proceedings, the appellant even submitted before the AO, a copy of the agreement for construction of new residential house on the said land along with the copy of ledger account. The appellant had even utilised the amount deposited in the capital gain account scheme for construction of new residential house within the specified time. However, in the assessment order, in para 4.5 the AO has only mentioned about the land being purchased by the appellant and there is no finding as regards the deposit of the amount of Rs. 25,00,000/- in the capital gain account scheme by the appellant as also its utilisation within the specified period of time for which the construction agreement stands submitted. Thus, it is amply evident that the AO has failed to consider the fact that in the subsequent year, the appellant has duly constructed residential house on the said land as purchased by him and that the deduction has not been claimed only in respect of purchase of land. The fact that the land purchased is an agricultural land or non-agricultural land is not material since the appellant being an agriculturist, he can construct his residential house on his agricultural land for which there is no restriction u/s. 54F of the Act. During the appellate proceedings, the appellant had also furnished photographs of new residential house constructed on the said land. In view of the above facts, I am of the opinion that the Ld AO has considered only the land purchase document and has failed to consider the amount of Rs. 25,00,000/- deposited by the appellant in the capital gain account scheme as also the utilisation thereof in the subsequent year towards construction of new residential house for which the copy of construction contract and ledger account were also before the AO and are forming part of the assessment folder. Hence, in the event of the appellant constructing new residential house within the specified period of time, on the land purchased by him, by utilising the amount deposited in the capital gain account scheme, I hold that the Ld AO has wrongly held that the deduction u/s. 54F of the Act has been claimed by the appellant only in respect of purchase of land and not in respect of house property since from the details available on record, it is proved that the appellant had purchased land on which construction of new residential house has been duly done by him within the specified time which is duly allowable u/s. 54F of the Act. Accordingly, this ground of the AO of making the disallowance u/s. 54F is also erroneous and incorrect on facts and merits of the case. Thus, I hold that the appellant has rightly claimed deduction u/s. 54F of the Act in respect of new residential house constructed by him on the land purchased. Grounds of the appellant are allowed.”
8. Thus, the properties sold by the assessee are open plots and there was no residential houses on those properties. Therefore, the finding of the AO is incorrect that assessee was in possession of more than one residential premises/house. In fact, assessee was not in possession of more than one residential house at the time of sale of the original assets. Therefore, deduction u/s. 54F cannot be disallowed to assessee on this basis. The AO further observed that the assets purchased by the assessee is agricultural land, but the purchase deed clearly mentioned that the assessee purchased open land upon which the assessee was constructing residential house. The record shows that the assessee has utilized the amount deposited in capital gain account for construction of new house within specified time. Thus, the AO cannot deny deduction u/s. 54F on this ground as well. The assessee has demonstrated the conditions fulfilled as prescribed u/sec. 54F of the Act while claiming deduction. Therefore, the CIT(A) has rightly allowed the deduction to the assessee u/sec. 54F of the Act. There is no need to interfere with the findings of the CIT(A). Hence, the appeal of the Revenue is dismissed.
9. In result, appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 09.10.2026
