Section 54 & 54F: Similarities, Differences & Other Issues

To own a house in life time is a cherished dream of every person in India, but this dream is not fulfilled in case of many persons mainly due to paucity of funds. Some are lucky enough who get ancestral property and some are able to make their own out of their hard earned earnings. The Government of India has provided certain exemptions on purchase or construction of house property which are enshrined in Income Tax Act 1961 in Sections 54 & 54F. As we all are aware that both Section 54 & Section 54F  deal in investment in house property on sale of residential house or any asset other capital asset. There are certain similarities and differences between both these sections which are narrated below for easy understanding and shall be useful for everyone who is interested in this topic.

SIMILARITIES:

1. Exemption from capital gain is claimed by making investment in purchase or construction of residential house property.

2. Exemption is available if investment in house property is made before one year from the date of transfer and two years after the date of transfer of residential house or any other capital asset in case new residential house is purchased or three years from the date of transfer in case new residential house is constructed.

3. Exemption is withdrawn in case new house property is transferred within three years of its purchase or construction as the case may be and the amount claimed as exempt is taxable in the year in which new residential house property is sold.

4. Cases of allotment of flat under self financing scheme of DDA or similar schemes of cooperative societies are treated as construction for this purpose. CBDT Circular No. 672 dated December 16, 1993

5. Exemption is available to Individual and HUF.

6. The new house property which is purchased or constructed with in time limit must of situated in India (From Assessment Year 2015-16)

7. Date of commencement of construction is not relevant in both the sections. Construction may commence even before transfer of house property/capital asset. CIT v. J.R. Subhramaya Bhat (1986) 165 ITR 571 (Kar.)

8. Exemption is claimed in case net consideration/capital gain is invested as per the mandate of section 54/54F before due date of filing of Income Tax under section 139(1) for the year in which transfer of property took place.

9. Exemption can be claimed by depositing the amount in capital gain account scheme for the remaining period of 2 or 3 years as the case may be before the due date of filing of income tax return under section 139(1).

10. In both the sections it is prescribed that in three years from date of transfer of residential house or capital asset if amount is not invested in purchase or construction of residential house then the amount of capital gain which was claimed as exempt will become taxable in the year in which period of three year expires.

11. In both the sections it is no where prescribed that same money has to be used for making investment in house property. Ishwar Singh Chawla v. CIT (2010) 130 TTJ Mum 108, Muneer Khan v. ITO (2010) 41 SOT 505 (Hyd.)

12. There is no requirement of filing of income tax return only for claiming exemption under section 54 and 54F. However return may be filed for other purposes like claiming refund and overall income is taxable.

13. If whole of the consideration is paid and possession of the house is obtained, the exemption contemplated in Section 54 & 54F is clearly attracted. CIT v. Laxmichand Narpal Nagda (1995) 211 ITR 804 (Bombay). If substantial amount is paid in terms of purchase agreement within the stipulated period, the exemption under section 54 is available, even if possession is handed over after the stipulated period. CIT v. R.L. Sood 245 ITR 727 (Delhi).

14. Even a minor can claim the benefit of section 54F when income is taxable in the hands of minor child even if his father has two house properties in his name. CIT v. Madan Lal Bassi (2004) 88 ITD 557 (Chandigarh).

DIFFERENCES:

1. In Section 54 exemption is available in case residential house is sold and in Section 54F exemption is available in case any capital asset other than residential house is transferred.

2. In Section 54 exemption is available in case only long term capital gain is invested in purchase or construction of one residential house property. In Section 54F net sales consideration has to be invested in purchase or construction of residential house property. With effect from Assessment Year 2020-21, a taxpayer has an option to make investment in two residential house properties in India to claim section 54 exemption. This option can be exercised by the taxpayer only once in his lifetime provided the amount of long-term capital gain does not exceed Rs. 2 crores

3. In Section 54 there is no limit on number of residential houses you own on the date of transfer of residential house property whose capital gain tax is required to be claimed as exemption and in Section 54F exemption is not available in case the transferor hold more than one residential house property on the date of transfer.

4. In Section 54 after claiming exemption an assessee can buy any other house property and in Section 54F if an assessee purchases any other house property within 2 years or constructs within 3 years of transfer of capital asset other than the new house the exemption so claimed is withdrawn.

OTHER ISSUES :

In case investment is made in the name of any other family member then exemption is available or not available is explained with the help of judicial pronouncements as under :

According to section 54F an individual or HUF can claim exemption of any long term capital asset other than a residential house on investing net sale consideration in a residential house within two years in case of purchase and within three years in case of construction. The assessee must not have more than one residential house other than the new one. In a case an assessee has invested the entire sale consideration in a residential house within two years of sale of plot or any other asset and has fulfilled all other conditions of section 54F, but since the new house was purchased in the name of wife the assessing officer has denied the benefit of section 54F saying that the investment in new house should be in the name of the assessee himself. Now the question is that whether the Assessing Officer is correct in his contention? In this regard it can be said that section 54F does not throw any light on it. It only laid down the time limit within which the new house is to be purchased or constructed along with other conditions in order to claim exemption u/s 54F. A reference is to be made to judicial pronouncements in this regard. In case of Commissioner of Income Tax Vs Kamal Wahal the honorable Delhi High Court ruled in assessee’s favour (351 ITR 4). The honorable Court relied upon its own judgment in the case of CIT v. Ravinder Kumar Arora (342 ITR 38) in which it was laid down that where the entire purchase consideration was paid only by the assessee and not a single penny was contributed by any other person, preferring a purposive construction against a literal construction, more so when even applying the literal construction, there is nothing in section 54F to show that the house should be purchased in the name of the assessee only. Section 54F in terms does not require that the new residential property shall be purchased in the name of the assessee; it merely says that the assessee should have purchased/constructed ‘a residential house’ The Court also laid down that there is a predominant judicial view that there is nothing in section 54F to show that the new house must have been purchased in the name of assessee himself. Moreover in this case the assessee has not made investment in the name of a stranger; rather he has purchased the same in the name of his wife. There is also no dispute that the entire investment has come out of the sale proceeds and that there was no contribution from the assessee’s wife. Therefore the substantial question of law was answered in assessee’s favor. In the case of CIT Vs Ravinder Kumar Arora relied upon by the honorable Delhi Court in the aforesaid case, while examining the issue whether exemption u/s 54F is available to an assessee who has purchased a new house in joint name with his wife, the honorable Delhi High Court laid down that: “Plain reading of section 54F indicates that in order to get benefit of this section, the assessee should, inter alia, ‘purchase’ a house. As per the revenue, this house has to be purchased in the name of the assessee only and benefit is not given if it is purchased by the assessee jointly with his wife. It was the assessee who independently invested in the purchase of new residential house though in his own name but along with the name of his wife also and that it was the assessee who paid stamp duty and corporation tax at the time of the registration of the sale deed of the house so purchased and has also paid commission and legal expenses in connection with the purchase of the house. The Tribunal further records that whole of the purchase consideration has been paid by the assessee and not even a single penny has been contributed by the wife in the purchase of the house. The Tribunal also noted the argument that the property was purchased by the assessee in the joint name with his wife for ‘shagun’ purpose and because of the fact that the assessee was physically handicapped. The Tribunal further concludes that as a matter of fact, the assessee was the real owner of the residential house in question. On the aforesaid facts, the conditions stipulated in section 54F stand fulfilled. It would be treated as the property purchased by the assessee in his name and merely because he has included the name of his wife and the property was purchased in the joint names would not make any difference. If the view of the Assessing Officer (AO) or the contention of the revenue is accepted, it would be a derogatory step. Moreover, section 54F mandates that the house should be purchased by the assessee and it does not stipulate that the house should be purchased in the name of the assessee only. Here is a case where the house was purchased by the assessee and that too in his name and wife’s name was also included additionally. Such inclusion of the name of the wife for the above-stated peculiar factual reason should not stand in the way of the deduction legitimately accruing to the assessee. Objective of section 54F and the like provision such as section 54 is to provide impetus to the house construction and so long as the purpose of house construction is achieved, such hyper-technicality should not impede the way of deduction which the Legislature has allowed. Purposive construction is to be preferred as against the literal construction, more so when even literal construction also does not say that the house should be purchased in the name of the assessee only. Section 54F is the beneficial provision which should be interpreted liberally in favour of the exemption/deduction to the tax-payer and deduction should not be denied on hyper-technical ground. “ Another significant ruling in favor of assessee can be found in the case of Director of Income Tax, International Taxation, Bangalore Vs Mrs. Jennifer Bhide (349 ITR 80) by Karnataka High Court. In this case the honorable High Court examined whether investment made in joint name with her husband would entitle the assessee to claim exemption u/s 54 and 54EC, the High Court ruled in favor of assessee stating that “Once the sale consideration is utilized for the purpose mentioned under sections 54 and 54EC, the assessee is entitled to the benefit of those provision. As the entire consideration has flown from the assessee and no consideration has flown from her husband, merely because either in the sale deed or in the bond her husband’s name is also mentioned, in law he would not have any right. In that view of the matter, the assessee cannot be denied the benefit of deduction of the aforesaid amount. The Tribunal, on proper appreciation of the material on record, has rightly allowed the appeal and set aside the order passed by the assessing authority as well as the Appellate Commissioner.” Another favorable judgment is available in the case of V. Natrajan case (2006) 287 ITR 271 (Madras). The decision of Delhi ITAT in case of Ramphal Hooda Vs. ITO in ITA No. 8478/Del/2019 dated 2.3.2020 is also in favour of assessee.

However not all judgments are in favor of the assessee. In the case of Prakash v. ITO, Ward 1(5), (312 ITR 40) the honorable Mumbai High Court ruled in favor of revenue. The issue in that case was whether for qualifying exemption u/s 54F investment has to be in the name of assessee himself, the Court observed that no benefit is available to any other person u/s 54F whose provisions are to be interpreted strictly. The assessee purchased new house in the name of his adopted son therefore no benefit accrues to him u/s 54F. Therefore the above ruling though relates to house purchased in the name of adopted son and not in the name of wife either jointly or singly, is significant. In an another judgment of ITAT, Hyderabad in the case of Girish Dharod Vs ACIT, Hyderabad, the honorable ITAT clearly observed that in many cases the Courts have adopted a liberal construction to extend the benefit of section 54 and 54F to cases where investments have been made in the name of wife while statutory provision as such does not include assessee’s wife or assessee’s minor children. But the same cannot be stretched beyond a reasonable point so as to cover other blood relations. The honorable Punjab & Haryana High Court is also against the assessee in the case of CIT Vs. Dinesh Verma ITA No. 381 of 2014 (o & M) dated 6.7.2015

From what we have seen above, it can be said that while there are a few judgments in favour of assessee even if investment is made in the name of wife or any other relative, one cannot conclude that the issue is finally settled in favor of assessee There is no ruling of Supreme Court in this regard; therefore it is advised to make investment in name of assessee only in order to buy peace and to avoid any lengthy litigation. Since the litigation is very difficult and time consuming hence it is advised to exercise abundant caution in these matters.