CA Gaurav Pahuja
In this article, the author has made an attempt to throw light on the rudiments for claiming the exemption u/s 54F of the I.T. Act, 1961 vis – a -vis analyzing the various relevant provisions of the Act and few latest & significant judgments given by various authorities.
Section 54F of I.T. Act, 1961 aims to provide for the 100% exemption to an individual or HUF from the chargeability of Long Term Capital Gain (LTCG) that arises from the transfer of a capital asset other than a residential house (residential house being already covered u/s 54) where the assessee invests the entire amount of net consideration in a residential house within the prescribed time limit subject to the fulfillment of other conditions mentioned in the said section and also for a proportionate exemption where entire amount of net consideration is not invested but only a portion of it is utilized for the acquisition/ construction of a residential house.
However, the section uses the key words “Purchase” or “Construction” of the residential house and provides for the prescribed time limit of one year before the date of transfer or two years after the date of transfer of a long term capital asset for purchase purpose and three years after the date of transfer for construction purpose respectively. As the “Purchase” or “Construction” of the residential house is the very essence for claiming exemption u/s 54F, it becomes significant to interpret the meaning of the same.
Brief facts of the case of Pankaj Wadhwani v. Commissioner of Income-tax-I, Indore  18 taxmann.com 33 decided by the Indore Bench of ITAT are mentioned below:
The assessee declared income of Rs. 1,43,990/- in ITR filed on 31.10.2006 for AY 2006-07 mentioning LTCG as NIL on the sale of agricultural land for Rs. 5,40,000/- after claiming exemption u/s 54F by depositing Rs. 2,61,429/- with the coloniser/builder. As per the Assessing Officer, the long term capital gain should have been Rs. 65,449/-, due to which, he issued notice u/s 148 on 4.1.2008 to the assessee. The assessee, in response to the notice, filed return on 22.2.2008 declaring total income at Rs. 2,03,100/-, including the long term capital gain at Rs. 59,118/- Consequently penalty proceedings u/s 271(1)(c) were initiated. However the AO allowed the exemption u/s 54F which was later on revoked by the CIT by passing an order u/s 263 on the ground that the exemption u/s 54F was erroneously granted by the AO and the same was prejudicial to the interests of the revenue. The assessee, therefore, filed an appeal before the ITAT.
CASES REFERRED TO
1. CIT V. Pradeep Kumar  153 Taxman 138 (Mad.)- in this case the two joint owners of the property sold the same and exemption u/s 54F for 50% of capital gain was claimed by both of them. The assessing officer in an enquiry came to know that no new construction was carried out by the assessee and thus exemption was not allowable. Consequently assessment was made u/s 148, on appeal by the assessee, CIT(A) also affirmed the order of the AO. However on further appeal by the assessee, ITAT allowed the exemption to the assessee. Hon’ble High Court of Madras concluded that as there was no concrete material on record to show that the construction as contemplated by Sec 54F was carried out by the assessee, the order of the ITAT was held to be blatantly erroneous. Hence this case was not decided in favour of the assessee and thus could not help the assessee to support his case.
2. Usha Gupta v. CIT  296 ITR 287 (Raj.)- in this case the High Court of Rajasthan held that where the assessee had claimed deduction under section 54F without annexing any documents in support of his claim, no exemption under section 54F can be allowed, as allowing the same will amount to accepting whatsoever is declared by the assessee in his ITR which is not supported by any material. Therefore, this case was again decided in favour of the revenue and cannot be the rescue path for the assessee.
The Hon’ble Bench observed even the assessee had deposited the part of the consideration for purchase of the plot, till the date of hearing of the case (when the period of 3 years have already expired) yet no construction has started, therefore held that the benefit of the exemption provided u/s 54F is not available to the assessee. Further it is mentioned that as neither the ownership nor the possession of the plot is transferred to the assessee by the coloniser/builder till date, the question of starting construction does not arise. Further, invoking the provisions of Sec. 263 by CIT was held to be justified stating that allowing unproved deduction/exemption not only renders the order of Assessing Officer erroneous but also prejudices the interest of Revenue.
COMPREHENSIVE ANALYSIS OF THE CASE
The facts and conclusion of the case bring the following issues to be considered before any justified and acceptable conclusion can be drawn:
a) What is meant by “Purchase” and “Construction” for the purpose of Sec. 54F?
b) Whether the order of the CIT u/s 263 was rightly passed in view of the facts and circumstances of the case?
c) Whether the possession and ownership of the property/ plot should only be given importance ignoring the intention of the assessee to carry on the construction once the possession of property/ plot is handed over to him?
Reply a) The term “Purchase” in general signifies the fact of acquisition of something. However, “acquisition” can be said to complete when the acquirer becomes the owner of that something by way of obtaining its ownership. In this regard, the provision of the Transfer of Property Act is very much relevant according to which a purchase is complete when the ownership of a property is transferred to the buyer from the seller. On the other hand, the term “Construction” signifies building, erection or the creation of a structure. It is worth mentioning that such construction must be real one & not symbolic and must result in some value addition. Further, a simple reading of Section 54F makes it clear that purchase or construction of the residential house within the prescribed time is necessary for claiming the exemption under the said section. In addition, in the absence of anything contrary provided by Sec. 54F, the term “Purchase” and “Construction” are to be interpreted in the normal sense only.
Reply b) Section 263 provides the power to the Commissioner to call for and examine the record of any proceeding under this Act, and to revise any order passed by the Assessing Officer which is erroneous in so far as it is prejudicial to the interests of the revenue after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary for this purpose. Further, such order may provide for enhancement or modification of the assessment, or even cancelling the assessment and consequently directing a fresh assessment. Thus, the condition of “erroneous” as well as “prejudicial to the interest of revenue” are required to be satisfied for attracting the provisions of Sec. 263. Further, this fact has been affirmed in the case of Pankaj Wadhwani v. Commissioner of Income-tax-I, Indore  18 taxmann.com 33. However, it is but obvious that both the said conditions are to be checked first before invoking the provision of Sec. 263. In other words, when a commissioner is about to apply the provisions of the said section, he has to first ensure that both the essential conditions are present in a particular case, further he can check the same keeping in view the circumstances present at that time only and without predicting anything about future. Similarly, when we talk about the present case, the CIT was supposed to check the satisfaction of the two basic conditions before applying Sec. 263 and the same should have been done keeping in view the circumstances as existed at that time i.e. whether at that time the time limit of 3 years as allowed by Sec 54F had been expired and that the construction has not been completed by the assessee, the exemption could have been said to be allowed erroneously by the A.O., and the provisions of Sec. 263 would have been invoked correctly. But as it is mentioned in the case that the period of 3 years was still remaining at that time when the CIT passed revisional order, the CIT was not supposed to predict the future and guess that the construction shall not be completed by the assessee within prescribed time limit of 3 years and thus, he cannot be said to be justified in applying the provisions of Sec. 263 at that time itself. Although in the Para No. 5 of the judgment, it is mentioned that the stipulated period of 3 years had elapsed when the revisional jurisdiction by the Ld. CIT was invoked because the assessee filed the original return on 31.10.2006 and the revisional order is dated 17.3.2011, it is significant to note that the date of initiating proceedings by CIT should be considered instead of the date of order. Furthermore, the situation can change tremendously in case the CIT and other authorities are given the power to predict on their own and act accordingly.
Reply c) No doubt, the basic intention of the section is the actual purchase or real construction of the residential house within the prescribed time limit for allowing the exemption. But at the same time, the intention of the assessee should be examined to decide the genuineness of the claim of exemption. This thumb rule is very much desired and is applied also in many provisions of the I.T. Act, 1961 as well as many other laws. Hence, if the assessee has invested a sum of money for the purchase of a plot for the purpose of construction thereon once he obtains the possession thereof (as happened in the given case), he should be granted the exemption for the same and it must not be questioned or disallowed by a higher authority until the expiry of the time limit sanctioned by Sec. 54F. This is due to the requirement of Sec. 54F which demands the actual purchase or real construction of the residential house within the prescribed time limit. Thus, if the actual purchase or construction is not completed within that time limit, the exemption granted can be rightly disallowed. Therefore, the possession and ownership of the property/ plot should not be given sole importance but the intention of the assessee to carry on the construction once the possession of property/ plot is handed over to him should also be considered with equal weight-age.
In view of the above discussion, the CIT was not justified in invoking the provisions of Sec. 263 considering the fact that the time limit of 3 years had not elapsed at the time when such proceedings were initiated by him. However, even if allow ability of exemption was unreasonable and doubtful in view of the revenue, the matter should have been taken up by way of appeal instead of opting for Sec. 263. In addition, the intention of assessee in the acquisition and construction of the residential house should be considered although not altogether ignoring the requirement of actual acquisition and real construction within the prescribed time limit but some mechanism of relief must be provided by the Act to provide relief where the assessee is having a bonafide intention to carry out the construction once the possession of the plot/property is handed over to him by the builder etc. as the assessee is not having any default for not obtaining the possession.