Dhanasekaran Palani Vs ITO (ITAT Chennai)
Summary: ITAT Chennai partly allowed the appeal of Dhanasekaran Palani and held that the assessee was entitled to deduction under Section 54 of the Income-tax Act, 1961 in respect of the eligible cost of construction of a new residential house, notwithstanding that the underlying plot had been purchased earlier and stood in the name of his wife. The assessee and his brother had jointly inherited a residential property at Royapettah, Chennai, which was sold on 10.12.2014 for Rs.1,45,81,500. The assessee’s 50% share of the consideration was Rs.72,90,750 and, after deducting indexed cost of acquisition of Rs.6,42,867, he computed long-term capital gain of Rs.66,47,883 and claimed the entire amount as deduction under Section 54.
A vacant plot at Padappai had, however, been purchased for Rs.12,37,500 and registered in the name of the assessee’s wife on 19.07.2013, approximately 17 months before the transfer of the original residential house. The AO denied the entire deduction of Rs.66,47,883, principally because the plot had been purchased more than one year before the transfer and was registered in the wife’s name, and the CIT(A) confirmed the disallowance. Before the Tribunal, the assessee contended that a residential house was subsequently constructed on the plot, with the ground and first floors completed in October 2016 and the second floor in March 2017, all within three years of the transfer dated 10.12.2014. Relying upon CIT v. J.R. Subramanya Bhat and CIT v. H.K. Kapoor, the Tribunal held that for purposes of Section 54 the date of commencement of construction is not material; what is relevant is whether construction of the new residential house is completed within the statutory period. Since construction was completed within three years, the construction component qualified for deduction.
The Tribunal separately considered the land component. Although C. Aryama Sundaram v. CIT and CBDT Circular No. 667 dated 18.10.1993 recognise that land may form an integral component of the cost of a residential house, the Tribunal distinguished the present facts because the plot had been acquired about 17 months before the transfer and was registered in the wife’s name. It therefore excluded the entire land cost of Rs.12,37,500. At the same time, it rejected the Revenue’s approach of denying the whole Section 54 claim merely because of the earlier acquisition and ownership of the land.
The registered Civil Engineer’s valuation report placed the total value at Rs.75,41,700; after deducting the land value of Rs.12,37,500, the eligible construction component worked out to Rs.63,04,200. The Tribunal accordingly directed the Jurisdictional Assessing Officer to allow Section 54 deduction of Rs.63,04,200, subject to the construction expenditure being otherwise supported by the material already on record. The balance Rs.3,43,683 out of the assessee’s claim of Rs.66,47,883 was held taxable as long-term capital gain. The Tribunal expressly confined its ruling to the peculiar facts and declined to express any wider opinion on whether land purchased in a spouse’s name could, in other circumstances, qualify as eligible Section 54 investment.
Cases Discussed
- 1. CIT Vs C. Aryama Sundaram (Supreme Court) [2023] 148 taxmann.com 364 / 292 Taxman 71 (SC) — The Revenue’s SLP against the Madras High Court decision was dismissed. The precedent was referred to in support of the proposition concerning the components forming part of the cost of a new residential house.
- 2. C. Aryama Sundaram Vs CIT (Madras High Court) [2018] 97 taxmann.com 74 / 258 Taxman 10 (Mad.) — Held that the cost of a new residential house necessarily includes the cost of land, construction material, labour and other costs relatable to acquisition/construction. The Tribunal distinguished the land component on the peculiar facts before it.
- 3. CIT Vs H.K. Kapoor (Allahabad High Court) [1998] 234 ITR 753 (All.) — Followed for the proposition that exemption under Section 54 cannot be refused merely because construction of the new residential house commenced before sale of the original house, where construction is completed within the prescribed period.
- 4. CIT Vs J.R. Subramanya Bhat (Karnataka High Court) [1987] 165 ITR 571 (Kar.) — Followed for the principle that the date of commencement of construction is immaterial for Section 54; the relevant requirement is completion of construction within the statutory period.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal has been preferred by the assessee against the order passed by the Learned Commissioner of Income Tax, Appeal (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “the Ld. CIT(A)”], dated 19.02.2026, arising from the assessment order dated 14.03.2023 for the Assessment Year (AY) 2015-16 passed by the Assessing Officer, Assessment Unit, Income Tax Department [hereinafter referred to as “the AO”], u/s. 147 r.w.s. 144B of the Income-tax Act, 1961 (hereinafter referred to as “the Act”).
2. The brief facts of the case emanating from the records are that the assessee is an individual had not filed his return of income for the A.Y. 2015-16. As per the information available with the department, during the F.Y. 2014-15 the assessee has sold an immovable property for Rs.1,45,81,500/- and hence the case was reopened for by issuing notice u/s.148 of the Act dated 31.03.2018. In response to the notice u/s.148 of the Act, the assessee filed his Return of Income on 07.09.2022, for the Assessment Year 2015-16, by declaring an income of Rs.3,47,220/-. In the said return the assessee had declared a sale consideration of Rs.72,90,750/- and claimed an indexed cost of acquisition of Rs.6,42,867/- and balance amount of Rs.66,47,883/- is claimed as deduction u/s.54 of the Act. The Assessment is completed and Order u/s.143(3) r.w.s.147 of the Act dt. 14.03.2023 by disallowing an amount of Rs.66,47,883/- claimed as deduction u/s.54 of the Act.
3. The assessee being aggrieved by the order of the AO preferred an appeal before the Ld.CIT (A), who in turn dismissed the appeal of the assessee by confirming the order of the AO. The assessee aggrieved by the order of the ld.CIT(A) is in appeal before us.
4. The ld.AR submitted that the assessee and his brother Mr.D.Kannan jointly sold the inherited residential property to Mr.V.Venkateshwaran (PAN: AACPV5440K) and the property situated at No.133, Venkatachala Mudali street, Royapettah, Chennai – 600014 on 10.12.2014 for a sale consideration of Rs. 1,45,81,500/- with 50% as assessee’s share. The assessee claimed deduction u/s.54 of the Act towards investment in new residential house property built on the existing site held in the name of the assessee’s spouse Mrs.P.Shankari. The assessee purchased a plot situated at 160, Shankari Street, Vishnunagar, Padappai, Chennai 601 301 measuring 1,650 Sqft (or) 0.69 grounds, in the year 2013 for Rs.12,37,500/- in the name of his spouse with by the amount received as an advance by way of cash from the buyer for the proposed to sale of residential property amounting to Rs.10,00,000/- on 29.06.2013 and registered on 19.07.2013.
5. The AO observed the date of acquisition of the property on 19.07.2013 to claim deduction u/s.54 of the Act, against the house property sold on 10.12.2014 vide sale deed No. 3650/2014 and the plot was purchased by Mrs. P. SHANKARI i.e. assessee’s wife on 19.07.2013 vide sale deed no.6475/2013. The time difference between the date of purchase of the plot by assessee’s wife and the date of sale of house by the assessee is more than 1 year. Therefore, the cost of plot purchased by assessee’s wife is not eligible for the purpose of the claiming deduction u/s.54 of the Act. Accordingly, the AO disallowed the deduction claimed u/s 54 of Rs.66,47,883/- on the basis of the valuation report and added the same under the head “Long Term Capital Gain”
6. Further, the ld.AR submitted that as on the date of Valuation of Report (3rd June 2022), the ownership of Residential Property vested with Mr.D.Palani by way of settlement deed from his spouse on 26.05.2022. Considering the Valuation of Report and Registered Deed of the residential property the AO’s observation is incorrect for rejecting the valuation Report.
7. The ld.AR argued that the assessee is eligible to claim the deduction on cost of vacant land purchased prior one year and five month from the date of sale of the residential property on the following Madras High Court Decision in case of C, Aryama Sundaram vs The Commissioner of Income Tax – 3 vide TCA No. 520 of 2017.
8. The ld.AR submitted that The Act does not explicitly define ‘cost of the new residential house’ to include land. However, the Central Board of Direct Taxes (CBDT) through Circular No. 667, dated 18.10.1993, clarified that the cost of the land is an integral part of the cost of the residential house, whether purchased or built. Accordingly, if the capital gain is appropriated towards the purchase of a plot and also towards the construction of a residential house thereon, the aggregate cost should be considered for determining the quantum of deduction u/s.54 of the Act. This is provided that the acquisition of the plot and also the construction thereon, are completed within the period specified in these sections.
9. The ld.AR relied on the judicial pronouncements supported the above view by Hon’ble Madras High Court in C.Aryama Sundaram v. CIT [2018] 97 taxmann.com 74/258 Taxman 10 (Mad.) by holding that the cost of the new residential house would necessarily include the cost of the land, the cost of materials used in the construction, the cost of labour, and any other cost relatable to the acquisition and/or construction of the residential house. This decision was upheld by the Supreme Court, which dismissed the Special Leave Petition filed by the revenue in CIT v. C. Aryama Sundaram [2023] 148 taxmann.com 364/292 Taxman 71 (SC).
10. The ld.AR stated that though the plot was purchased on 19.07.2013, which is more than one year before the transfer date, the overall activity is the construction of a residential house. The commentaries and judicial views generally support that the date of commencement of construction is not material, as long as the construction is completed within the prescribed three-year period after the transfer of the original asset. For instance, in CIT v. J. R. Subramanya Bhat [1986] 28 Taxman 578 (Karn.) and CIT v. H. K. Kapoor [1998] 234 ITR 753 (All.), it was held that the date of commencement of construction is not material, and exemption could not be refused simply because construction began before the sale of the old house. The crucial aspect is the completion of construction within the three-year window.
11. In the present case, the construction was completed on 31.12.2016, which is well within the three-year period ending on 10.12.2017. Therefore, the entire investment, encompassing both the cost of the vacant plot and the subsequent construction cost, would be eligible for exemption u/s.54 of the Act.
12. Further the ld.AR relied on the case law of CIT v. J.R. Subramanya Bhat [1986] 28 Taxman 578 (Kar.) and CIT v. H.K. Kapoor [1998] 234 ITR 753 (All.), it was held that the date of commencement of construction of the new building is immaterial. An assessee can commence construction of the new residential house even before the sale of the old house and still be entitled to claim the exemption u/s.54 of the Act, provided the construction is completed within three years after the sale of the old residential house.
13. The appellant has completed the construction of Ground Floor-1200 Sq.ft., 1st Floor 1500 Sq.ft., during the year October 2016. Second floor construction completed on March 2017. The Assessee has constructed the residential property in the village by using the contract labor and the material purchased from hardware shop i.e., cement, Steel, Pipes, Sand, Bricks, Electrical Items and others. The said place there are no builders available to construct the residential property. The assessee has obtained from the local authority plan, and paid their local taxes to the Village Panchayat under the control of Government of Tamil Nadu. Further, the assessee has obtained the cost of construction from the civil registered engineer for construction of residential property for Rs.69,60,000/- (Paper book Page No.22). The ld.AR drew our attention to the total valuation given by the valuer is Rs.75,41,700/- (Total valuation of land 12,37,500/- + building 69,60,000/- deducted 8% cost saving due to own supervision and direct purchases on Rs.81,97,500/-). Therefore, the ld.AR prayed for setting aside the order of the ld.CIT(A) and allow the appeal of the assessee.
14. Per contra, the ld.DR supported the orders of the authorities and submitted that the assessee has built the house on the site, which belongs to his wife, which was bought earlier to the sale of the House property, which is in question for capital gains. Therefore, ld.DR prayed for dismissing the appeal of the assessee.
15. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below, the paper book filed by the assessee and the judicial precedents relied upon by both sides. The issue for our consideration is whether the assessee is entitled to deduction u/s.54 of the Act in respect of the investment made in the new residential house constructed on the plot standing in the name of his wife and, if so, the quantum of deduction allowable.
16. The undisputed facts emerging from the record are that the assessee along with his brother, Mr.D.Kannan, jointly owned an inherited residential property situated at No.133, Venkatachala Mudali Street, Royapettah, Chennai–600014. The said property was sold to Mr.V.Venkateshwaran on 10.12.2014 for a total sale consideration of Rs.1,45,81,500/-. The assessee’s 50% share in the sale consideration amounted to Rs.72,90,750/-. After reducing the indexed cost of acquisition of Rs.6,42,867/-, the assessee computed the long-term capital gain at Rs.66,47,883/- and claimed the entire amount as deduction u/s.54 of the Act.
17. It is also an admitted fact that a vacant plot situated at No.160, Shankari Street, Vishnunagar, Padappai, Chennai–601301, measuring about 1,650 sq. ft., was purchased for Rs.12,37,500/- and registered on 19.07.2013 in the name of the assessee’s wife, Mrs.P. Shankari. The original residential property giving rise to the capital gain was subsequently transferred on 10.12.2014. Thus, the vacant plot had been acquired approximately 17 months prior to the date of transfer of the original residential house.
18. The AO denied the entire deduction of Rs.66,47,883/- claimed u/s.54 mainly on the ground that the plot was purchased more than one year prior to the transfer of the original residential property and, further, that the plot was purchased and registered in the name of the assessee’s wife. The ld.CIT(A) confirmed the action of the AO.
19. Before us, the ld.AR contended that the assessee subsequently constructed a residential house on the said plot and that the construction was completed within three years from the date of transfer of the original residential property. It was submitted that the ground floor measuring approximately 1,200 sq. ft. and the first floor measuring approximately 1,500 sq. ft. were completed during October 2016 and the second floor was completed during March 2017. Therefore, according to the ld.AR, the statutory requirement prescribed u/s.54 of the Act in respect of construction of the new residential house stood satisfied.
20. The ld.AR further drew our attention to the valuation report prepared by the registered Civil Engineer and placed in the paper book. As per the valuation report, the valuer has arrived at the value of the property at Rs.75,41,700/-, after taking into account the value of the land of Rs.12,37,500/-, the value/cost attributable to the building/construction and the adjustment towards cost saving on account of own supervision and direct purchase of construction materials. The ld.AR accordingly contended that the investment made in the residential house was sufficient to support the deduction claimed u/s.54 of the Act.
21. We have carefully considered the rival contentions. Section 54 provides, inter alia, that where the capital gain arises from transfer of a long-term capital asset being a residential house and the assessee has, within the period prescribed therein, purchased or constructed another residential house, the capital gain shall be dealt with in accordance with the provisions of the said section. In the case of construction, the statute provides a period of three years after the date of transfer of the original asset for construction of the new residential house.
22. In the present case, there is no dispute that the original residential property was transferred on 10.12.2014. The material placed before us indicates that the construction of the new residential house was completed during the period relevant for determining eligibility u/s.54 of the Act. The ground and first floors were stated to have been completed during October 2016 and the second floor during March 2017. Therefore, the construction was completed well within three years from 10.12.2014.
23. In this regard, the ld.AR has rightly placed reliance on the judgment of the Hon’ble Karnataka High Court in CIT v. J.R. Subramanya Bhat [1987] 165 ITR 571 (Kar.), wherein it was held that for the purposes of section 54, the date of commencement of construction is not material and what is relevant is whether the construction of the new residential house is completed within the period prescribed under the provision. A similar view has been taken by the Hon’ble Allahabad High Court in CIT v. H.K. Kapoor [1998] 234 ITR 753 (All.).
24. Therefore, merely because the construction might have commenced prior to the transfer of the original residential property would not, by itself, disentitle the assessee from claiming deduction u/s.54 of the Act, provided the construction of the new residential house was completed within the statutory period. On the facts before us, we are satisfied that the construction of the residential house was completed within three years from the date of transfer of the original property.
25. However, the claim relating to the cost of land requires separate consideration. The vacant plot was admittedly purchased and registered on 19.07.2013 in the name of the assessee’s wife, Mrs. P. Shankari. The original residential house was transferred only on 10.12.2014. Therefore, the acquisition of the land preceded the transfer of the original residential house by approximately 17 months.
26. The ld.AR has relied upon CBDT Circular No.667 dated 18.10.1993 and the judgment of the Hon’ble jurisdictional Madras High Court in C.Aryama Sundaram v. CIT [2018] 97 taxmann.com 74/258 Taxman 10 (Mad.) to contend that the cost of land constitutes an integral part of the cost of the new residential house. We have carefully considered the said contention. There can be no quarrel with the general proposition that, in an appropriate case, the cost of land may constitute an integral component of the cost of a residential house. However, the CBDT Circular itself proceeds on the premise that the acquisition of the plot and construction thereon should satisfy the conditions and the period prescribed under the relevant provision.
27. In the case before us, the factual position is materially different insofar as the land component is concerned. The plot was not only acquired approximately 17 months prior to the transfer of the original residential house, but was also purchased and registered in the name of the assessee’s wife. Therefore, having regard to the peculiar facts of the present case, we are not inclined to include the cost of land of Rs.12,37,500/- while determining the quantum of deduction allowable to the assessee u/s.54 of the Act.
28. At the same time, we are unable to accept the action of the lower authorities in denying the entire deduction, including the expenditure attributable to construction of the residential house. The land component and construction component are capable of being separately identified on the basis of the valuation report placed on record. Once the assessee has constructed a residential house within the statutory period and the amount attributable to such construction is separately ascertainable, the entire claim cannot be rejected merely because the underlying plot was acquired earlier and stood in the name of the assessee’s wife.
29. The valuation report placed before us assumes significance in this regard. As pointed out by the ld.AR, the final valuation of the property has been determined at Rs.75,41,700/-. Out of the said amount, the value/cost attributable to the land is Rs.12,37,500/-. Since, for the reasons discussed hereinabove, we are not allowing the land component for the purposes of section 54, the same has to be excluded from the total valuation for determining the eligible investment.
30. Accordingly, the eligible amount attributable to construction of the residential house is worked out as under:
Total value as per valuation report: Rs.75,41,700/-
Less: Cost/value of land: Rs.12,37,500/-
Eligible cost attributable to construction: Rs.63,04,200/-
31. Thus, on the basis of the valuation report relied upon by the assessee himself, after completely excluding the land component, the amount which can be considered towards eligible construction of the residential house works out to Rs.63,04,200/-.
32. It is pertinent to note that the assessee has claimed deduction u/s.54 of the Act amounting to Rs.66,47,883/-. However, after exclusion of the land component, the eligible construction cost works out only to Rs.63,04,200/-. The deduction u/s.54 of the Act, therefore, cannot exceed Rs.63,04,200/- on the facts and material placed before us.
33. We also find merit in the assessee’s contention that construction of the residential house was undertaken by engaging local contract labour and by directly procuring construction materials such as cement, steel, pipes, sand, bricks, electrical items and other materials from local suppliers. The assessee has further stated that the construction was undertaken pursuant to the plan obtained from the local authority and applicable taxes were paid to the Village Panchayat. These facts, read along with the valuation report of the registered Civil Engineer, support the assessee’s case that substantial expenditure was incurred towards construction of the residential house.
34. The subsequent settlement of the property by the assessee’s wife in favour of the assessee on 26.05.2022, in our view, does not determine the quantum of deduction allowable for the assessment year under consideration. The entitlement has to be examined with reference to the investment made in construction of the new residential house and compliance with the conditions prescribed u/s.54 of the Act during the relevant statutory period. We have, therefore, confined our adjudication to the construction component established on the basis of the material placed before us.
35. In view of the foregoing discussion, we hold that the AO was not justified in denying the entire deduction of Rs.66,47,883/- u/s.54 of the Act. At the same time, we are not inclined to accept the assessee’s claim insofar as it seeks inclusion of the cost of the vacant land of Rs.12,37,500/- purchased and registered in the name of his wife approximately 17 months prior to the transfer of the original residential house.
36. We accordingly direct the Jurisdictional Assessing Officer (JAO) to exclude the land cost of Rs.12,37,500/- from the total valuation of Rs.75,41,700/- and allow deduction u/s.54 of the Act in respect of the balance amount of Rs.63,04,200/-, being the amount attributable to the eligible construction of the new residential house, subject to the construction expenditure being otherwise supported by the material already available on record.
37. Consequently, as against the deduction of Rs.66,47,883/- claimed by the assessee u/s.54 of the Act, deduction to the extent of Rs.63,04,200/- is allowed. The balance amount of Rs.3,43,683/- (Rs.66,47,883 – Rs.63,04,200) shall not be eligible for deduction u/s.54 of the Act and shall consequently form part of the taxable long-term capital gain, subject to the computation in accordance with law.
38. Before parting, we clarify that our decision is rendered having regard to the peculiar facts of the present case and the valuation report placed on record. We have allowed only the construction component and have excluded the entire land component. Therefore, it is not necessary for us to express any wider opinion on whether land purchased in the name of a spouse could, in different factual circumstances, constitute eligible investment u/s.54 of the Act.
39. In the result, the order of the ld.CIT(A) on this issue is modified and the JAO is directed to allow deduction u/s.54 of the Act to the extent of Rs.63,04,200/-, being the eligible cost attributable to construction of the residential house after exclusion of the land cost of Rs.12,37,500/-.
39. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 17th September, 2026 at Chennai.
