Capital Gains Exemption Upheld Where Multiple Properties Were Only Business Assets; Section 54F Relief Restored as Incomplete Properties Failed Residential Test; No Section 54F Bar Where Extra Properties Were Under Construction and Unsold; Business Inventory Cannot Be Counted as Residential House for Section 54F; ITAT Ahmedabad order on Disallowance of Deduction under Section 54F – Meaning of “Ownership of Residential House” on the Date of Transfer; Upholds Allowability Where Additional Properties Were Under Construction and Held as Business Assets
DCIT Vs Aditya Harshvadan Mangaldas (ITAT Ahmedabad); ITA No. 299/Ahd/2025; 11/12/2025; 2022-23
Key Issue:-
The controversy before the Ahmedabad Bench of the Income Tax Appellate Tribunal revolved around the denial of deduction under section 54F of the Income-tax Act, 1961 on the allegation that the assessee owned more than one residential house, other than the new asset, on the date of transfer of the original capital asset, thereby attracting the disabling proviso to section 54F(1).
Statutory Framework –
Section 54F:-Section 54F of the Income-tax Act, 1961 provides exemption from long-term capital gains arising from transfer of any long-term capital asset, not being a residential house, where the net consideration is invested by an individual or a Hindu Undivided Family in the purchase or construction of a residential house in India within the stipulated time period.
The section permits purchase of a residential house either one year before or two years after the date of transfer of the original asset, or construction within three years from such date. The exemption is proportionate to the amount of net consideration invested in the new residential house.
However, the proviso to section 54F(1) restricts the availability of the exemption and provides that no deduction shall be allowed if the assessee:
(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii) purchases any other residential house (other than the new asset) within one year after the date of transfer; or
(iii) constructs any other residential house (other than the new asset) within three years after the date of transfer.
Thus, the statutory embargo operates strictly with reference to ownership of residential houses as on the date of transfer of the original capital asset. The interpretation of the expressions “owns” and “residential house” has therefore assumed critical importance in judicial determinations under section 54F.
Brief Facts:
The assessee filed his return of income for AY 2022-23 declaring total income of ₹3.85 crore. During the year, the assessee sold an artwork/painting on 16 October 2021 for a consideration of ₹17.74 crore, resulting in long-term capital gains. Against this gain, the assessee claimed deduction under section 54F by investing ₹22.50 crore in the purchase of a residential house on 31 March 2022.
The case was selected for scrutiny under CASS, limited to examination of the deduction claimed under section 54F. The Assessing Officer disallowed the claim on the premise that the assessee was owner of one residential house and had constructed two additional residential villas within one year from the date of transfer of the original asset, thereby violating the proviso to section 54F(1). The assessment was completed under section 143(3) by denying the deduction and enhancing the assessed income to ₹21.60 crore.
Findings of the First Appellate Authority
In appeal, the NFAC-CIT(A) undertook a detailed factual examination. It was noted that the assessee had purchased land in September 2019 and developed three villas, namely Villa Nos. 12, 13 and 14. Villa No. 12 was completed in January 2020 and was sold on 18 August 2021, prior to the sale of the artwork, and the resultant gains were offered as short-term capital gains.
Villa Nos. 13 and 14, on the other hand, were under construction on the date of transfer of the artwork and were intended, from inception, to be developed and sold as part of a commercial venture. Substantial documentary evidence, including receipt of sale advances prior to the transfer of the artwork, deduction of TDS by buyers, disclosure in Schedule AL, and offering of profits as business income in subsequent years, was placed on record.
On these facts, the CIT(A) concluded that the assessee owned only one residential house on the date of transfer of the original asset and that the villas under construction, treated and taxed as business assets, could not be regarded as residential houses for the purposes of the proviso to section 54F. The disallowance was accordingly deleted.
Arguments before the Tribunal
Before the Tribunal, the Revenue contended that the mere existence of two villas under construction within the prohibited period was sufficient to attract the mischief of the proviso to section 54F, irrespective of their stage of completion or business character.
The assessee, per contra, submitted that ownership for the purposes of section 54F must be real, effective and capable of residential use as on the date of transfer. Since Villa Nos. 13 and 14 were incomplete, incapable of occupation and demonstrably held as business assets, the assessee could not be said to own more than one residential house on the relevant date.
ITAT Analysis and Decision:
The Tribunal upheld the order of the CIT(A) and dismissed the Revenue’s appeal. It was categorically observed that, as admitted by the Assessing Officer himself, Villa Nos. 13 and 14 were under construction on the date of sale of the artwork and were not in a condition fit for residential occupation. Consequently, the assessee could not be regarded as the owner of more than one residential house on the date of transfer of the original asset.
The Tribunal further attached significance to the consistent treatment of Villa Nos. 13 and 14 as business assets, the receipt of advances prior to the sale of the artwork, and the offering of profits from their sale under the head “Profits and Gains of Business or Profession”. These facts clearly established the commercial intent and nature of the assets.
In view of these findings, the Tribunal held that the assessee was not hit by the proviso to section 54F and that the deduction had been rightly claimed by investing the capital gains in a new residential house within the prescribed time.
Ratio Decidendi
For the purposes of section 54F, ownership of a “residential house” must be examined with reference to actual ownership, capability for residential use and the true nature of the property as on the date of transfer of the original capital asset. Properties under construction, particularly when held and taxed as business assets and incapable of occupation, cannot be treated as residential houses merely on the basis of future potential or subsequent completion.
ITAT Conclusion:
The decision of the Ahmedabad ITAT reinforces the settled principle that the restrictive proviso to section 54F cannot be applied mechanically. The condition relating to ownership of more than one residential house must be interpreted pragmatically, having regard to the factual ownership and character of the property on the date of transfer. The ruling provides important clarity in cases involving real estate development activities and simultaneous claims under section 54F.
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