Sec 54 & 54F exemptions aren’t just for Property Owners: Here’s How you and your spouse/Legal Heirs can benefit

Sec 54 & 54F exemptions aren’t just for Property Owners: Here’s How you and your spouse/Legal Heirs can benefit: Section 54 and 54F of the Income Tax Act provide crucial exemptions on capital gains from the sale of residential property when reinvested in another residential property. A recent judgment by the Hyderabad Income Tax Appellate Tribunal (ITAT) in the case of Shri Rajkumar Mandhani Vs DCIT has broadened the scope, allowing exemptions even when the new property is purchased in the name of the assessee’s spouse or legal heir. This article delves into the nuances of these provisions, analyzing the ITAT ruling and other relevant judicial precedents.

Recently the “A” Bench Of Hyderabad Income Tax Appellate Tribunal passed a judgement in the above case granting exemption to the assessee for investment in purchase or construction of a residential house in name of his spouse through the proceeds of capital gain u/s 54F.

The central point of discussion was whether the assessee is entitled to get exemption u/s 54F if he has invested in purchase or construction of a residential house in name of his spouse through the proceeds of capital gain. Another issue was whether the assessee can claim 54F deduction if he already owns one residential property in his name.

Analysis of Order passed by the Hon’ble ITAT :-

Assessee filed his return of income for the A.Y 2012-13 on 28.03.2013 admitting an income of Rs.4,36,59,390. During the assessment proceedings u/s 143(3) of the Act, the assessee filed a revised return of income on 18.03.2015 claiming exemption of Rs.47,44,308 u/s 54F. The Ld. AO & Ld. CIT(A) disallowed the said exemption mainly on two grounds that :-

1. The Assessee purchased or constructed a residential house in the name of his spouse rather than on his name.

2. The Assessee before purchasing or constructing a residential house for claiming exemption u/s 54F, already had one residential property in his name.

Aggrieved, the assessee filed an appeal before the ITAT

The assessee submitted his written submission placing reliance in the case of the case of Shri N. Ram Kumar vs. Add. CIT in ITA No.1901/Hyd/2011 dated 10.08.2012 wherein the Tribunal has held that the assessee will be entitled for deduction u/s 54F of the Act for the flats purchased in the name of assessee’s daughter. On the other hand the learned DR placed reliance upon the decision of the Hon’ble Bombay High Court in the case of Prakash vs. ITO dated 12.09.2018 reported in 312 ITR 40 (Bom.) wherein the investments made in the name of the son was not allowed as exemption u/s 54F and it has been particularly held that for qualifying the exemption, it is necessary to have investments made in the residential house in the name of the assessee only.

However, the Tribunal, drawing on various judicial decisions, emphasized that the objective of granting exemption under section 54F is to encourage residential property ownership. It noted that the term “assessee” should be interpreted liberally to include legal heirs, and strict interpretation would defeat the purpose of the exemption. In this specific case, the Tribunal highlighted that both the assessee and their wife were independent income tax assessees, and the assessee already owned a house in Kilpauk, Chennai. Therefore, the assessee’s investment in a residential house in Alagappa Nagar, Chennai, in the name of their wife, did not disqualify them from claiming exemption under section 54F of the Act even if they already own a property and receive income from it. Hence the appeal is allowed.

Judicial Pronouncements relevant for claiming sec 54 & 54F exemption & their Crux:-

1. Shri N. Ram Kumar vs. Add. CIT in ITA No.1901/Hyd/2011 dated 10.08.2012 :- The Tribunal has allowed the exemption u/s 54F for the flats purchased in name of assessee’s daughter.

2. CIT vs. Natarajan reported in 287 ITR 271 (Mad) :- Here the new residential property was bought in name of assessee’s wife and tribunal allowed the exemption in assessee favour and HC refused to interfere with the findings of ITAT.

3. Gurnam Singh reported in 327 ITR 278, the Hon’ble Punjab & Haryana High Court was considering the case of an assessee who had purchased the residential house in the name of his wife. The Hon’ble High Court considered the decision of Hon’ble Delhi High Court in the case of Raj Kumar Arora to hold that where the assessee had paid the entire sale consideration and merely has included his wife as the owner of the property, it would not make any difference and in fact such a contract has to be encouraged which helps in empowerment of women and that the government itself has floated various schemes permitting joint ownership with wife.

4. Late Gulam Ali Khan vs. CIT reported in 165 ITR 228 (A.P) :- Wherein it was held that the object of granting exemption u/s 54F of the Act, is that the house should have been purchased for residential purposes, hence allowed the exemption in favour of assessee.

5. C.N. Anantharam v. AC/T [2015] 230 Taxman 34 (Kar.) :-  An assessee purchased land in 2005. Building was constructed thereon in 2014. Building as well as land is transferred in 2015. The Court held that the assessee is entitled to claim benefit of exemption under section 54 in respect of capital gain arising on transfer of land as well as building.

6. Meher R. Surti v. ITO [2014] 61 SOT 5 (Mum.) :- Circular No, 667, dated October 18, 1993. IF an assessee chooses to purchase a house & incurs bona fide expenditure on improvement for making it habitable, it would be eligible as investment in new asset for purpose of section 54.

7. CIT v. J.R. Subramanya Bhat [1986] 28 Taxman 578 (Kar.) :- Construction of the house should be completed within 3 years from the date of transfer. Date of commencement of construction is irrelevant. Construction may be commenced even before the transfer of the house.

8. CIT v. Laxmichand Narpal Nagda [1995] 78 Taxman 219 (Bom.) :– If the whole of the consideration is paid and possession of the house is obtained, the exemption contemplated under section 54 is clearly attracted.

9. CIT v. R.L. Sood [2000] 108 Taxman 227 (Delhi) :- If the substantial amount is paid in terms of purchase agreement within the stipulated period, the exemption under section 54 is available even if the possession is handed over after the stipulated period.

10. Ishar Singh Chawla v. CIT [2010] 130 TTJ (Mum.)(UO) 108, Muneer Khan v. ITO [2010] 41 SOT 504 (Hyd.) :- Nowhere it has been mentioned in section 54 that the same funds must be utilized for the purchase of another residential house; requirement of law is that the assessee should purchase a residential house within the specified period and the source of funds is quite irrelevant.

11. Esther Christopher Mascarenhas v. ITO [2011] 9 taxmann 99 (Mum. – ITAT) :- There is no requirement for claiming exemption under section 54 that the assessee should file his return of income before the due date prescribed under section 139(1).

12. Commissioner of Income tax-XII v. Kamal Wahal, 2013 – Delhi High Court :- Section 54F does not require the new residential house to be purchased solely in the taxpayer’s name. In this case, the taxpayer bought the house in his wife’s name, who is not a stranger. Hence allowed.

13. Simran Bagga vs ACIT  (ITAT Delhi):-  The ITAT held that the deduction should not be denied solely because the new property was purchased in the name of the spouse. The bench noted that “Section 54F/54 of the Act are the beneficial provisions which should be interpreted liberally in favour of the exemption/deduction to the taxpayer and deduction should not be denied.

14. Venkata Ramana Umareddy vs Dy. CIT, – ITAT bench Hyderabad :- Here the assessee sold land and a house with land and claimed exemptions under both Section 54F and Section 54. The bench clarified that the Sections 54 and 54F are independent provisions and do not require investment in two separate houses.  Both sections allow exemption on the purchase or construction of a new residential house, and there is no prohibition against claiming exemptions under both sections if the conditions are fulfilled.

15. CIT v. Madan Lal Bassi [2004] 88 ITD 557 (Chd.) :- If by applying section 54F, there is no income in hands of a minor child to be added under section 64(1A). the benefit under section 54F cannot be denied to minor child on the ground that father of minor child had two residential houses at the time of transfer of the capital asset.

16. Hansa Bai Sanghi v. ITO [2004] 89 ITD 239 (Hyd.) :- Where an assessee purchases ground floor of a house and later, when vendor builds first floor, the assessee purchases first floor by a separate sale deed, the assessing authority is not justified in disallowing the assessee’s claim for exemption of capital gains on ground that ground floor and first floor constitute two residential houses.

17. CIT v. Sambandam Udaykumar [2012] 206 Taxman 150 (Kar.), V. A. Tharabai v. CIT [2012] 50 SOT 537 (Chennai), Usha Vaid v. ITO [2012] 25 taxmann 188 (Asr.):-  Once it is demonstrated that consideration received on transfer of a capital asset has been invested either in purchase or in construction of a residential house, even though these transactions are not complete in all respects as required under law, the same would not disentitle assessee from benefit of exemption under section 54F.

18. S. Krishna Kumar v. CIT 2012) 22 taxmann 200 (Chennai) :- If house properties are owned by assessee’s wife then the same cannot be treated as owned by the assessee for disallowing exemption under section 54F to the assessee nonetheless income from such properties are clubbed in the assessee’s hands under section 22, read with sections 27 and 64.

19. CIT v. Om Prakash Goyal [2012) 3 SOT 158 (Jaipur) :- Only requirement for claiming exemption under section 54F is construction of residential house and it does not matter that house constructed is on agricultural land or on other land.

20. N. Ram Kumar v. CTT [2012] 25 taxmann 337 (Hyd.) :- Exemption under section 54F will be admissible even where the assessee has registered residential house property in the name of his minor daughter .

21. CIT vs. Beena K. Jain (Bombay High Court): Held that for the purposes of Section 54F, the date of possession is considered the date of purchase, emphasizing the substance over the form of transactions.

22. PCIT & Ors. vs. Akshay Sobti & Ors. (Delhi High Court): Confirmed that the booking of an under-construction flat should be treated as construction, with the relevant date being the date of completion and possession.

23. Bastimal K. Jain vs. ITO (ITAT Mumbai): The ITAT held that the deduction under Section 54 should be reckoned from the date of possession by the builder, supporting the view that possession date is critical.

24. The Bombay High Court in CIT v. Mrs. Hilla J.B. Wadia [1995] 216 ITR 376 :-The Court held that capital gain exemption is admissible if the taxpayer acquired substantial domain over the house property and has paid the entire cost.

25. Hon’ble HC of Karnataka in the case of CIT v. Sambandam Udaykumar [2012] 206 Taxman 150/19 taxmann.com 17 :- That the assessee has invested money in the construction of a residential house. The exemption cannot be denied merely because the construction was not complete in all respects and it was not in fit condition to be occupied.

26. The Hon’ble SC in the case of Fibre Boards (P) Ltd. v. CIT [2015] 62 taxmann.com 135/376 ITR 596 :- Has interpreted identically worded provisions of section 54G, which grants exemption on account of investment of capital gain earned from sale proceeds of industrial undertaking in another industrial undertaking. Held that the assessee is entitled to avail exemption under the said section if it utilizes the amount of capital gain for purchase or acquisition of new plant and machinery and buildings and the said condition would be fulfilled when advances are paid for the purpose of purchase or acquisition of assets.
Further held that section 54G(2) states that amount, which is not ‘utilized’ for the said purpose is to be denied exemption. Despite much advancement in judicial thinking, the I.T. Dept. should not continue to stick to the ‘literal rule of construction.

27. The Apex Court has held in Tirath Singh v. Bachittar Singh, (AIR 1955 SC 830 ) :- That if the language of a statute in its ordinary meaning and grammatical construction leads to manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it, which modifies the meaning of the words and even the structure of the sentence.

28. Kannan Chandrasekar v. ITO [2017] 82 taxmann.com 284 (ITAT Chennai) :- “The assessee had already appropriated the capital gains for the purpose of construction of the residential unit. However, construction was not completed within the stipulated period. Liberal interpretation to be considered while granting exemption under section 54, as it is a beneficial provision.”

29. Vikas Kumar v. Dy.CIT [2017] 85 taxmann.com 25/166 ITD 481 (Hyd. – Trib) :- it was righty held that the law does not compel the assessee to perform the impossible. How can the taxpayer force building completion ?

30. Smt. Shashi Varma v. CIT [1997] 224 ITR 106 (MP HC) :- said that In the modern days, it is not easy to construct a house within time-limit and under the Government schemes, construction takes years and years. Confining to some years is impossible and unworkable under section 54 of the Act.

31. Kishore H. Galaiya v. ITO [2012] 24 taxmann.com 11/137 ITD 229 (ITAT MUM) :- the court said that if substantial investment is made in the construction of the house but the house property has not been completed, it shall amount to construction of house property for the purpose of section 54 and 54F pf Act.

32. Professor P.N. Shetty v. Office of Income-tax officer [2019] 112 taxmann.com 218/[2020] 268 Taxman 226 (Kar HC) :- It is very clear that if only a part of the amount deposited in the Capital Gains Account Scheme is utilized for the construction or purchase of a new asset within the specified time, income tax is chargeable on the unutilized amount.”

33. Jitendra V. Faria v. ITO [2017] 81 taxmann.com 16 (MUM ITAT) :-Held that if the assessee invests his share of sale proceeds arising out of sale of old capital asset, in purchase of new residential house along with stamp duty and registration charges, then he will be entitled to full exemption under section 54 of the Act (the Act), even though such property is purchased in joint names of assessee and his brother.

34. Prakash vs. ITO dated 12.09.2018 reported in 312 ITR 40 (Bom.) (Against the assessee):- Wherein the investments made in the name of the son was not allowed as exemption u/s 54F and it has been particularly held that for qualifying the exemption, it is necessary to have investments made in the residential house in the name of the assessee only.

35. M.J. Siwani v. CIT [2015] 232 Taxman 335 (SC) (Against the assessee) :- Where an assessee owns more than one residential house even jointly with another person, the benefit ofexemption under section 54F is not available

Few imp Condition & Amendment :-

Conclusion: The ITAT’s decision underscores the importance of a liberal interpretation of tax laws like Section 54 and 54F to promote residential property ownership. It clarifies that investments made in the name of spouses or legal heirs can still qualify for exemptions, provided other conditions are met. As taxpayers navigate these provisions, understanding recent judicial interpretations becomes paramount for maximizing tax benefits under these sections.