The issue that arises for consideration relates to whether the assessee in order to avail benefit of Section 54F of the Act is required to utilize the amount for the purchase of the new asset from the sale proceeds of the original capital asset only.
Under sub section (1) of Section 54F of the Act, the amount of capital gains exempt under this provision is equal to the difference between the cost of the new asset and the net consideration received from the transfer of the original asset. Where the cost of the new asset is equal to or exceeds the net consideration received, in that situation, the entire amount of capital gains is exempt under this section but if the cost of the new asset is less than the net consideration received, then the proportionate exemption is available to the assessee. The transfer has to be of long term capital asset not being a residential house and the assessee is required to purchase within a period of one year before or two years after the date on which the transfer takes place or within three years after the said date, construct a residential house. In other words, where an assessee purchases a residential house within a period of one year before or two years after the date on which transfer takes place or has constructed a residential house within three years after the said date, the capital gains shall be computed as per clauses (a) and (b) of sub section (1) of Section 54F of the Act.
Finance Act, 1987 had inserted sub section (4) of Section 54F of the Act effective from 1.4.1988. According to sub section (4) of Section 54F of the Act where the amount of net consideration is not utilized for the purchase or the construction of a new residential house, it should be deposited in an account in a specified bank under the Capital Gains Account Scheme, 1988 notified by the Central Government in the Official Gazette. This is required to be deposited by the due date for filing return of income under Section 139(1) of the Act to avail benefit under this provision.
The scope and effect of the amendments made in Sections 54, 54B, 54D and 54F by the Finance Act, 1987 have been elaborated in the departmental circular No.495 dated 22nd September 1987 reported in (1987) 168 ITR (St.) 87. The relevant portion thereof reads thus:-
“New scheme for deposits in respect of exemption from capital gains – 26.1 Under the existing provisions of sections 54, 54B, 54D and 54F, long term capital gains arising from the transfer of any immovable property used for residence, land used for agricultural purposes, compulsory acquisition of lands and buildings and other capital assets are exempt from income tax if such gains are reinvested in new assets within the time allowed for the purpose. The original assessment needs rectification whenever the tax payer fails to acquire the corresponding new asset.
26.2 With a view to dispense with such rectification of assessments, the amendments made to sections 54, 54B, 54D and 54F provide for a new scheme for deposit of amounts meant for reinvestment in the new asset. After the aforementioned amendments, where the amount of capital gains or the net consideration, as the case may be, is not appropriated or utilized by the tax payer for acquisition of the new asset before the date for furnishing the return of income, it shall be deposited by him on or before the due date of furnishing the return of income, under section 139(1) in an account with a bank or institution and utilized in accordance with a scheme framed by the Central Government in this regard. The amount already utilized together with the amounts of deposits shall be deemed to be the amount utilized for the acquisition of the new asset. If the amount deposited is not utilized fully for acquiring the new asset within the period stipulated, the capital gain relatable to the unutilised amount shall be treated as the capital gain of the previous year in which the period specified in these provisions expires. In such cases, the threshold deduction of ten thousand rupees as well as the deduction under section 53 will not be admissible. Further, the tax payer shall be entitled to withdraw such amount in accordance with this scheme. This scheme will be applicable in relation to the new section 54G also.”
The combined reading of the aforesaid provisions shows that in order to avail benefit under Section 54F of the Act, the assessee is required to either purchase a residential house within a period of one year before or two years after the date on which transfer takes place or construct a residential house within a period of three years after that date. In such cases, the capital gains shall be computed as per clause (a) and (b) of sub section (1). In case, the assessee is not able to appropriate the sale proceeds of long term capital gain, then before filing of a return under section 139(1) of the Act, he is required to deposit the same under any Capital Gain Account Scheme with a bank or institution specified by the Central Government in the official gazette. The assessee has to file proof of such deposit alongwith the return for claiming exemption under Section 54F of the Act.
The assessee has to purchase or construct a house property during the period specified under Section 54F of the Act in order to get benefit thereunder. Section 54F of the Act nowhere envisages that the sale consideration obtained by the assessee from the original capital asset is mandatorily required to be utilized for the purchase or construction of a house property. No provision has been made by the statute that in order to avail benefit of Section 54F of the Act, the assessee has to utilize the amount received by him on sale of original capital asset for the purposes of meeting the cost of the new asset. Once that is so, the assessee was entitled for benefit under section 54F of the Act.
It has been categorically recorded by the Tribunal that the assessee had made investment in between February 2008 upto August 2008 e. well within the stipulated period. The property was purchased for 3.32 crores whereas the shares which were sold had resulted in capital gain of 1.93 crores. The investment was more than the capital gain earned by him. The relevant finding reads thus:-
“In the present case, the first date of capital gain is November 8, 2008. The assessee can acquire a house within a period November 8, 1997 upto November 2010 i.e. one year prior to transfer of original capital assets and two years after the transfer of capital assets. The assessee had made investment in between February 2008 upto August 2008 i.e. well within period. Learned Assessing Officer has also not disputed about the investment made by the assessee. His grievance is that investment was made after taking loan from the employer and therefore, assessee cannot claim benefit under section 54F(1) qua the loan amount utilized for purchasing of the new house. Hon’ble Kerala High Court in the case of ITO vs. KC Gopalan (supra) has held that in section 54, there is no condition that assessee should utilize the sales consideration itself for the purpose of acquisition of new property. Similar are the other orders of the ITAT relied upon by the assessee. On perusal of section 54F(1) and sub section (4), it reveals that these sections do to put any restriction that only capital gain would be utilized for purchase of the new house. The law permits utilization of capital gain within the specified time, the assessee may use such funds for other purposes and may find resources from other source for investment in time. The section provides investment in a house prior to one year of the transfer of long term capital assets. It will make it clear that if the transfer has not taken place then from where the funds would come for making the investment. The investment must be from some other sources and when assessee would receive sales consideration on transfer of a long term capital assets, he will claim set off of the capital gains against the investment already made for the purpose of exemption under section 54F. Learned DR has relied upon an order of the ITAT reported in 27 SOT 61. In that case, the ITAT has held that if investment was made out of loan amount then exemption under section 54F(1) will not be available. In the opinion of the ITAT, the assessee has to demonstrate source of funds,if investment was made by the assessee from his own source and not from loan taken from the bank then exemption would be available. In our opinion, the section does not put any such restriction. Hon’ble Kerala High court has explained the position. Similarly, in a series of other orders, at the end of ITAT, it has been held that there is no condition that assessee should utilize the sales consideration only for the purpose of acquisition of new property. In view of the above discussion, we are of the view that learned revenue authorities have erred in holding that assessee is not entitled for exemption under section 54F(1) of the Income Tax Act, 1961 for a sum of 121,32,636/-. The investment of the assessee is more than the capital gain earned by him. Therefore, we allow the appeal of the assessee and delete the addition of 121,32,636/- in the total income of the assessee under the head “long term capital gain”.
Adverting to the judicial pronouncements, in K. C. Gopalan ‘s case (supra), while considering identical issue, it was observed by the Kerala High Court as under:-
“xxxxxxx The assessee has to construct or purchase a house property for his own residence in order to get the benefit of section 54. The wording of the section itself would make it clear that the law does not insist that the sale consideration obtained by the assessee itself should be utilised for the purchase of house property. The main part of section 54 provides that the assessee has to purchase a house property for the purpose of his own residence within a period of one year before or after the date on which the transfer of his property took place or he should have constructed a house property within a period of two years after the date of transfer. Clauses (i) and (ii) of section 54 would also make it clear that no provision is made by the statute that the assessee should utilise the amount which he obtained by way of sale consideration for the purpose of meeting the cost of the new asset.
6. A reading of sections 53 and 54 of the Act would make it clear that a special provision is made in respect of capital gains arising out of transfer of particular type of capital asset, namely, house property which was being used by the assessee or a parent of his for the purpose of their residence. Entitlement of the exemption under section 54 relates to the cost of the acquisition of a new asset in the nature of a house property for the purpose of his own residence within the specified period.”
Further, following the judgment of the Kerala High Court in C. Gopalan ‘s case (supra), the Gauhati High Court in CIT vs. Rajesh Kumar Jalan, (2006) 157 Taxman 398 (Gau.) held as under:-
“11…..We are of the view that the assessee had already appropriated the entire capital gain for purchase of the new asset within the stipulated time. In this regard, we find support from the decision of the Kerala High Court in the case of K.C. Gopalan wherein it was held that the assessee is entitled to exemption under Section 54 even though for the construction of the new house, the amount that was received by way of sale of his old property as such was not utilised. It was held by the Kerala High Court that no provision is made by the statute that the assessee should utilise the amount which he obtained by way of sale consideration for the purpose of meeting the cost of the new asset. It was held that Section 54 only provides that the assessee has to purchase a house property for the purpose of his own residence within a period of one year before or after the date on which the transfer of his property took place or he should have constructed a house property within a period of two years after the date of transfer. It was further held that entitlement of exemption under Section 54 relates to the cost of acquisition of a new estate in the nature of a house property for the purpose of his own residence within the specified period.
In CIT , Bangalore vs. Anandraj, (2015) 56 com 176 (Karnataka), the relevant conclusion recorded by Karnataka High Court read thus:-
“6. It is not in dispute that the assessee sold the agricultural land and the consideration received is in the nature of a long term capital gain. Even before the sale of the property, he had borrowed housing loan and started construction on the site belonging to him. After the sale, the amount spent towards construction of the house is more than the consideration received by the sale of agricultural land and therefore, he is entitled to the benefit of section 54F of the Act.”
In the present case, the investment made by the assessee being within the stipulated time and more than the capital gain earned by him, the addition of 1,21,32,636/- was rightly deleted by the Tribunal under the head long term capital gain.