2025 (7) TMI 951 - AT - Income Tax

Exemption u/s 54F - Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house - whether the investment made by the assessee towards the purchase of the plot (on which construction of the new residential house is stated to have been carried out) i.e purchased 1 year before the first transaction of sale of the capital asset carried out on 17.06.2021 will form part of his investment eligible for exemption u/s 54F of the Act? HELD THAT - The essence of Section 54F is that where the assessee has invested the net sale consideration within the stipulated time period then even if the construction was not fully habitable he will be entitled for the exemption under the said statutory provision. We are unable to subscribe to the summary acceptance of the assessee s claim of having invested in the construction of the new residential house within the prescribed period by the CIT(A). We thus in terms of our aforesaid observations are of the firm conviction that the matter is required to be restored to the file of the A.O. for the limited purpose of verifying the assessee s claim of having invested up to the date of furnishing the return of income under Section 139 of the Act (including investment made towards the purchase of the residential plot on which the new residential house is stated to have been constructed i.e SY. No.17/8 situated at Dattagalti Village Kasaba Hobli Mysore Taluk vide registered purchase deed No.7877 dated 12.12.2019) based on which he has raised a claim for exemption under Section 54F of Rs. 4, 24, 08, 090/-. In case the claim of the assessee of having invested in the construction of a new residential house during the subject year before us i.e. A.Y. 2022-23 is in the course of the set-aside proceedings not found to be in order which thus renders him exigible for the consequential tax liability on the Long Term Capital Gains (LTCG) or any part thereof during the subject year i.e AY 2022-23 then as a fall out thereof the offering of the LTCG on the subject property for tax on the subsequent transfer of the new residential house during the lock-in period i.e AY 2024-25 to the said extent will be rendered as redundant and otiose. If that be so then the A.O. shall make appropriate adjustments in the hands of the assessee for the subject year i.e AY 2022-23 considering the tax realized by the revenue on the subject LTCG in AY 2024-25 failing which the same would tantamount to double taxation in the hands of the assessee which is de hors Article 265 of the Constitution of India. Our aforesaid view is fortified by the judgment of Bachulal Kapoor 1965 (12) TMI 24 - SUPREME COURT had observed in the context of the facts involved in the case before them that if the assessment proceedings initiated under Section 34 of the Income Tax Act 1922 in the hands of the individual members of the HUF culminated in the assessment of HUF then the appropriate adjustment is to be made by the ITO in respect of the tax realized by the Revenue in respect of the part of the income of the family that was assessed in the hands of the individuals of the said family. It was observed that by doing so it would not result to the reopening of the final order of assessment but in reality to arrive at the correct figure of tax payable by the HUF. We thus in terms of our aforesaid observations direct the AO that in case if the assessee s claim for exemption u/s 54F or any part thereof is not found by the AO to be in order then considering the fact that the entire amount of said LTCG (as claimed by the assessee based on the return of income placed on our record) has been offered by him as his income under Section 54F(3) in AY 2024-25 i.e the year in which the subject new residential house was transferred during the lock- in period he shall carry out appropriate adjustments in respect of the tax realized by the revenue on the said amount of LTCG or any part thereof as per the extant law.

Summary

The primary legal questions considered in this appeal pertain to the interpretation and applicability of Section 54F of the Income Tax Act, 1961, specifically:

(i) Whether the investment made by the assessee in the purchase of a residential plot prior to the one-year period before the first capital asset transfer transaction qualifies as eligible investment for exemption under Section 54F;

(ii) Whether the assessee is entitled to claim exemption under Section 54F for the investment made towards the construction of a new residential house, based on the documentary evidence submitted;

(iii) The relevance and interpretation of the time limits prescribed under Section 54F for purchase and construction of a new residential house;

(iv) The applicability of the provisions relating to deposit of unutilized capital gains under Section 54F(4) and its impact on the exemption claim;

(v) The effect of transfer of the new residential house within the lock-in period under Section 54F(3) on the taxability of capital gains;

(vi) The procedural correctness of the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT(A)) in accepting or rejecting the exemption claim.

Issue-wise Detailed Analysis:

1. Eligibility of Investment in Residential Plot Purchased Prior to One-Year Window:

Legal Framework and Precedents: Section 54F(1) prescribes three distinct modes for exemption from capital gains tax arising from transfer of any long-term capital asset (other than a residential house): purchase of a residential house within one year before the date of transfer; purchase within two years after; or construction within three years after the date of transfer. The provision explicitly provides opening and closing time limits for purchase but only an outer limit for construction. The CBDT Circular No. 667/1993 clarifies that the cost of land is an integral part of the cost of a residential house for exemption purposes.

The Allahabad High Court in Commissioner of Income Tax vs. H.K. Kapoor and Karnataka High Court in CIT vs. J.R. Subramanya Bhat held that commencement of construction prior to transfer of original asset does not disentitle exemption under the analogous Section 54.

Court's Interpretation and Reasoning: The Court observed that Section 54F(1) distinctly provides opening and closing time limits for purchase of a new residential house but does not prescribe any opening time limit for purchase of plot or commencement of construction. The three modes of exemption are mutually exclusive and independent. The Court rejected the AO's view that purchase of the plot prior to one year before the date of transfer disqualifies the exemption claim. It held that the legislature intended only to prescribe an outer limit for construction (three years) but no anterior limit for purchase or start of construction.

Application of Law to Facts: The assessee had purchased the residential plot on 12.12.2019, which was approximately one and a half years prior to the first capital asset transfer on 17.06.2021. The Court held that this purchase was not barred by Section 54F, as no anterior time limit exists for purchase of plot. The purchase was within a reasonable time prior to transfer, and the exemption claim for the cost of the plot was valid.

Treatment of Competing Arguments: The AO's contention that the plot purchase had to be within one year before the transfer was rejected as contrary to the plain language of the statute and judicial precedents. The Revenue's reliance on the CBDT Circular was distinguished as the Circular supports inclusion of plot cost but does not impose an anterior time limit.

Conclusion: The investment in the residential plot purchased prior to the one-year window before transfer qualifies for exemption under Section 54F.

2. Entitlement to Exemption for Construction Expenses Claimed by Assessee:

Legal Framework and Precedents: Section 54F(1) allows exemption if the assessee constructs a residential house within three years from the date of transfer. Section 54F(4) mandates deposit of unutilized capital gains in a specified account if not utilized before filing return. Judicial precedents, including the Karnataka High Court in CIT vs. B.S. Shantha Kumari and Madhya Pradesh High Court in Smt. Shashi Varma vs. CIT, emphasize liberal construction of this beneficial provision.

Court's Interpretation and Reasoning: The Court held that exemption cannot be denied merely because construction was not fully completed within three years, provided the investment was made within the stipulated period. The Court emphasized the beneficial nature of Section 54F and the legislative intent to encourage residential construction.

Key Evidence and Findings: The AO had disallowed the claim for construction expenses citing lack of conclusive documentary evidence such as approval plans, contracts, bills, and bank statements. The CIT(A) accepted the assessee's documentary submissions but did so on general observations without detailed scrutiny.

Application of Law to Facts: The Court found the AO's rejection of the claim on documentary grounds justified, as the CIT(A) did not specifically analyze or refer to the evidence substantiating the construction expenses. The matter was remanded to the AO for verification of the documentary evidence and investment made up to the date of filing the return.

Treatment of Competing Arguments: The assessee's representative argued that sufficient documentary evidence was submitted and the AO erred in rejecting the claim. The Revenue contended that the evidence was insufficient and the construction was not completed within time. The Court balanced these views by ordering a fresh verification.

Conclusion: The exemption claim for construction expenses is subject to verification of documentary evidence by the AO. The matter is remanded for this limited purpose.

3. Interpretation of Time Limits under Section 54F:

Legal Framework: Section 54F(1) specifies three modes with distinct time limits: purchase within one year before or two years after transfer; construction within three years after transfer. Section 54F(4) requires deposit of unutilized capital gains before filing return.

Court's Interpretation: The Court emphasized that the statute does not impose any anterior time limit for purchase of plot or commencement of construction. The outer limit for completion of construction is three years. The Court rejected the AO's inference that construction cannot start before transfer or that sale proceeds must be exclusively used for construction.

Application to Facts: The assessee's purchase of plot prior to one year before transfer and construction within three years satisfied the statutory requirements.

Precedents: The Court relied on judicial pronouncements from Allahabad and Karnataka High Courts interpreting similar provisions under Section 54, affirming that commencement of construction prior to transfer does not disqualify exemption.

Conclusion: The statutory scheme permits purchase or construction starting before transfer, provided completion and investment occur within prescribed outer limits.

4. Deposit of Unutilized Capital Gains under Section 54F(4):

Legal Framework: Section 54F(4) mandates deposit of unutilized net consideration in a specified scheme before filing return if investment is not fully utilized. Failure to utilize leads to charge of exempted capital gains as income after three years.

Findings: The AO observed the assessee did not comply with Section 54F(4) by failing to deposit unutilized capital gains in the specified account. The assessee claimed utilization by construction and purchase.

Court's Reasoning: The Court did not specifically adjudicate on this issue but implicitly required AO to verify utilization during remand proceedings.

Conclusion: Compliance with Section 54F(4) conditions remains a factual issue for AO to verify in remand.

5. Transfer of New Residential House within Lock-in Period under Section 54F(3):

Legal Framework: Section 54F(3) provides that if the new asset is transferred within three years of purchase or construction, the exempted capital gain becomes taxable in the year of transfer.

Facts and Findings: The assessee transferred the new residential house within the lock-in period during AY 2024-25 and declared LTCG accordingly. The AO and Revenue argued this affects the exemption claim for AY 2022-23.

Court's Reasoning: The Court directed the AO to make appropriate adjustments to avoid double taxation, recognizing that if exemption is disallowed for AY 2022-23, the subsequent tax on transfer in AY 2024-25 would be redundant. The Court cited the Supreme Court's decision in ITO vs. Bachulal Kapoor emphasizing correct tax computation to avoid double taxation.

Conclusion: AO must adjust assessments to prevent double taxation in light of transfer within lock-in period.

6. Procedural and Evidentiary Aspects:

Findings: The AO rejected exemption claims based on non-compliance with documentary requirements and statutory provisions. The CIT(A) reversed these findings on general grounds but without detailed analysis of evidence. The Tribunal found the CIT(A)'s acceptance of evidence to be summary and remanded the matter for detailed verification.

Conclusion: The matter is remanded to AO for verification of documentary evidence supporting investment in purchase and construction and for compliance with statutory provisions, with opportunity to assessee to produce fresh evidence.

Significant Holdings:

"The legislature has given three disjunctive and mutually exclusive modes in which the exemption can be claimed... The use of word 'or' at the relevant places leaves nothing to doubt that there are three distinct non-overlapping modes providing for exemption."

"The reference to the cost of purchase or construction of residential house includes the cost of plot also and accordingly, the cost of land is liable to be considered for the purpose of granting exemption along with the amount spent on purchase or construction of superstructure thereon."

"There is no reference whatsoever to the opening time limit from which the process of purchasing or constructing a new residential house has to begin... It is wholly impermissible to read the date of transfer of the original asset as the starting period under this mode."

"The requirement... is that the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house."

"It is far-fetched to argue that utilization of only the sale consideration from the transfer of original asset is to be utilized for purchase or construction of a new residential house so as to qualify for the exemption."

"The exemption under Section 54F cannot be denied merely because the construction of the house was not complete in all respects within three years... the essence... is that where the assessee has invested the net sale consideration within the stipulated time period, then even if the construction was not fully habitable, he will be entitled for the exemption."

"The capital gains arising from the sale of the old property to the extent it was invested in the construction of the new residential property was exempt under Section 54 of the Act."

"If the claim of the assessee of having invested in the construction of a new residential house during the subject year is not found to be in order, then considering the fact that the entire amount of said LTCG has been offered as income under Section 54F(3) in AY 2024-25, the AO shall make appropriate adjustments to avoid double taxation."

Final Determinations:

(i) The investment in the residential plot purchased prior to the one-year window before transfer is eligible for exemption under Section 54F;

(ii) The exemption claim for construction expenses is subject to verification of documentary evidence by the AO on remand;

(iii) The statutory time limits under Section 54F prescribe only outer limits for purchase and construction, with no anterior limits for construction commencement or plot purchase;

(iv) The assessee's failure to comply with Section 54F(4) deposit requirements is a factual issue to be examined on remand;

(v) Transfer of the new residential house within the lock-in period triggers taxability of exempted capital gains in that year, and appropriate adjustments must be made to avoid double taxation;

(vi) The appeal of the Revenue is partly allowed for statistical purposes, with remand directions to the AO for verification and adjustment as per law.