Section 54, 54F – Landmark Decisions & Circulars
Sec 54 – Profit on Sale of Property used for Residence
In case of an assessee being an Individual or a HUF, the capital gains arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property", and the assessee has within a period of one year before or two year after the date on which the transfer took place purchased a residential house, or constructs a residential house within a period of three years after the date of transfer by investing capital gain, then such capital gain will be exempt.
This section deals with giving exemption when long term capital gains arises on transfer of residential house is invested in purchase or construction of another residential house-
1.) If amount of capital gains is greater than the cost of house purchased or constructed, the difference will be taxable in the year of transfer.
If the new property is transferred within three years, value of this property shall be considered to be NIL.
2.) If the cost of new asset is equal or more than the capital gains, no capital gain tax shall be chargeable.
If the new asset is transferred within three years, the cost shall be reduced by the amount of capital gain.
Mr. Shah transferred his house and earned capital gain of Rs. 2,00,000/- and purchased a new house for Rs. 2,50,000/-. If this property is transferred within three years value of this property shall be taken at Rs. 50,000/- and out of sale consideration Rs. 50,000/- shall be deducted and the difference shall be charged as short term capital gain.
3.) If the amount of capital gains is not utilized for purchase of the new asset, within one year before the date of transfer of original asset took place, or which is not utilized by him for the purchase or construction of new asset before the date of furnishing of return the same is required to be deposited in the bank or institution as may be specified by the Central Government and the proof of deposit is required to be attached with the return of Income.
Cost of Property shall be considered to be, amount spent for purchase or construction of the property plus amount deposited in Bank.
As per Section 54 amount of Capital Gains is required to be invested for purchase or construction of the property.
Section 54F – Capital Gains invested in Residential House:
If long term capital asset, other than residential house is transferred and the assessee makes investment of a residential house, within the stipulated period, the capital gain shall be exempted.
1.) The exemption is available to Individual and HUF.
2.) Investment in residential house should be of net consideration.
3.) If a house is purchased before one year or after two years of transfer or if house is constructed, it should be constructed within three years from the date of transfer of original asset.
4.) Cost of new asset is more than amount of net consideration and if the cost of new asset is less than amount of net consideration, than proportionate exemption shall be available.
5.) This exemption is available, if the assessee is not in possession of any residential house on the date of sale of other asset (amendment in this condition from A.Y. 2001-2002)
From A Y 2001-2002, the assessee shall be entitled to exemption even if the assessee owns one residential house other than the new asset.
6.) New asset purchased or constructed should not be transferred for three years.
7.) If amount of net consideration is not utilized for purchase or construction of new house, it should be deposited in the scheme notified by central government before the due date of filing the return u/s 139(1) and proof of such payment should be enclosed with the return of income.
8.) Amount spent for new asset as well as amount deposited in bank shall be considered as cost of acquisition of new asset
9.) After acquiring a new residential house it is possible assessee may become owner of two residential house now proviso provide that there after you cannot purchase any new residential house nor you can construct with in a period of three years otherwise the exemption will be withdrawn.
Section 54 vs. Section 54F
1.) Both sections are applicable to individual and HUF.
2.) Applicable only when long term capital asset is sold.
3.) Sec 54 applies to a long term capital asset being buildings or lands appurtenant thereto and being residential house.
4.) The exemption is available if the assessee purchases or constructs a residential house within a specified period.
5.) Under section 54 only ‘Capital Gains’ should be invested in residential house while under section 54F ‘net consideration’ should be invested.
6.) Section 54 is applicable, even if, assessee holds more than one house property, while section 54F is applicable only if the assessee has one residential house at the date of transfer of old asset.
7.) If capital gain or net consideration is not appropriated or utilized before the due date of filing the return of income under section 139(1) then the same shall be deposited under ‘Capital Gains Accounts Scheme, 1988’.
1. Beneficial owner is owner for Sec. 54.
Mrs. Amy F. Cama v CIT 237 ITR 82 (Bom)
Representative Assessee – Trustee – Assessment of Trustee – Effect of Section 161 – Trustee entitled to benefits available to beneficiary – Trustee can claim exemption under section 54 – Income Tax Act, 1961, S.54, 161
Capital Gains – Exemption – Sale of House used as residence and purchase of another house for purpose of residence – Exemption under section 54 can be claimed – Income Tax Act, 1961, S. 54, 161.
2. Agreement for purchase of a house with builder or society amounts to construction.
CIT v Smt. Bharati C Kothari 244 ITR 352 (Cal)
Capital Gains – Exemption – Sale of residential house and construction of another within three years – Sale of flat by assessee on 30-04-1981 – Agreement for purchase of a new flat on 29-04-1982 – Amount paid in Installments – Entire purchase price paid within three years from date of Sale of flat – Sale proceeds invested in flat under construction – Whether assessee herself constructs house or gets it constructed by a contractor or third party was not material – Assessee was entitled to exemption from capital gains tax – Income Tax Act, 1961, S. 54.
3. Sec. 54 has to be liberally interpreted.
Bajaj Tempo Ltd. v CIT 196 ITR 188 (SC)
The Hon’ble Supreme Court in the cases of Bajaj Tempo Ltd. (1992) 196 ITR 188 has held that if there are two interpretations possible, the interpretation, which is harmonious with the object of the statute to effectuate the legislative intention and in consonance with the justice, a purposive approach should be adopted. So the provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee.
4. House of the firm used by partners :
CIT v M. K. Chandrakanth (2002) 258 ITR 14 (Mad)
Where a firms property is used for residence of partners and thereafter distributed to the partners upon dissolution of the firm and the partners sells the same, exemption can be claimed by the partner under section 54. For this purpose, period for which this property was held by the firm shall also be taken into account for determining the question whether the house property in exemption was a long term capital asset or not.
5. Whether when assessee constructs or purchases a residential house out of borrowed funds is he eligible for deduction u/s. 54/54F of the Income Tax Act, 1961?
It is submitted that section 54F(1) should be read along with its sub-section (4) and not in isolation. If both the sections are read together, only one inference can be drawn that the sale proceeds of the capital asset must be utilized/appropriated by the assessee towards the new assets within a specified period, and if not appropriated before date of furnishing of return of income under section 139, it shall be deposited by him before furnishing such returns in an account of any such bank or institution as may be specified and utilized in accordance with any scheme which the central government may by notification in the official gazette framed in this behalf. If the sale proceeds is appropriated for any other purpose, except to purchase the property and new assets are acquired out of the borrowings, the assessee would not be entitled for deduction under Section 54F of the Act. In the case of Milan Sharad Ruparel v ACIT (Mum.) 27 SOT 61 sale proceeds of the capital assets received by the assessee were utilized and appropriated for different purpose and the assessee had no personal funds to acquire a residential house which was purchased from the loan borrowed from Bank. In such circumstances, since the sale proceeds or the capital gain accrued to the assessee had not been wholly appropriated towards the purchase of the residential house within a specified period, the assessee is not entitled to claim exemption of whole capital gain under section 54F.
The objects of introduction of these sections are that assessee should make investments in a residential house, on sale of its old residential house. It is not necessary that the same fund should be available with the assessee for its investment in a residential house. Neither the law nor does any circular require the identity of amount received on sale and utilization for purpose of section 54F and other relevant provisions. This view is fortified by judgment of the Kerala High Court in the case of K.C. Gopalan 107 Taxmann 591 (Kerala) in which there Lordship have held that in order to get benefit of section 54, there is no condition, that assessee should utilize the sale consideration itself for the purpose of acquisition of new property.
It is submitted that exemption u/s. 54/54F of the I.T. Act should be liberally interpreted. The Supreme Court of India in the case of Bajaj Tempo has clearly held that the exemption u/s. 54/54F of the Act should be liberally construed and if there are two view possible, the one which is favourable to the assessee should be adopted. It is submitted that when investment in the new house is made within the prescribed time limit, the basic objective of granting the exemption is satisfied & there is no need to track down the source.
6. CIT v T.N. Aravinda Reddy (1979) 120 ITR 46 (SC)
Where a property is owned by more than one person and the other co-owner or co-owners release his or their respective share or interest in the property in favour of one of the co-owners, it can be said that the property has been purchased by the releasee. Such release also fulfills the condition of section 54 as to purchase so far as releasee-assessee is concerned.
7. CIT v Narasimhan (PV) (1990) 181 ITR 101 (Mad)
The assessee sold his residential property and invested the capital gain within the stipulated time in the construction of a new floor on another house owned by him by demolishing the existing floor, it was held that he was entitled to exemption under section 54.
8. K.C. Kaushik v P.B. Rane, ITO (1990) 185 ITR 499 (Bom)
Where the assessee purchased more than one house, than he can claim relief in respect of only one house provided he satisfies the conditions of section 54.
However, in the following three tribunal judgments, the exemption was given for more than one house/flats-
(1) Where the assessee had purchased two adjacent residential units having a different municipal number but used as one single residential house. [Anand Basappa (Dr.) v ITO (2004) 91 ITD 53 (Bang-Trib)].
(2) Where the assesee had purchased four flats in the same building though on different floors and since all the flats were required because of large size of the family, which maintained a common kitchen and a common ration card. [Vyas (K.G.) v 7th ITO (1986) 16 ITD 195 (Bom)].
(3) Where an assessee purchased two adjoining flats converting into a single residence, exemption under section 54 shall be allowed. [ACIT v Mrs. Leela P. Nanda (2006) 286 ITR (AT) 113 (Mumbai)].
However, in a recent case it has been held that the expression ‘a’ residential house should be understood in a sense that building should be of residential nature and ‘a’ should not be understood to indicate a singular number. The combined reading of section 54(1) and 54F of the Income-tax Act discloses that, a non-residential building can be sold, the capital gain of which can be invested in a residential building to seek exemption of capital gain tax. However, the proviso to section 54F of the Income-tax Act, lays down that if the assessee has already one residential building, he is not entitled to exemption of capital gains tax, when he invests the capital gain in purchase of additional residential building. [CIT v D. Ananda Basappa (2009) 309 ITR 329 (Karn)]. However, in case of section 54F, the law specifically prohibits the purchase or construction of more than one residential house.
9. Sashi Varma v CIT (1997) 224 ITR 106 (MP)
Allotment of a flat by DDA under the self-financing scheme shall be treated as construction of the house [Circular No. 471, dated 15-10-1986]. Similarly, allotment of a flat or house by a cooperative house, of which the assesee is the member, is also treated as construction of the house [Circular No. 672, dated 16-12-1993]. Further, in the cases, the assessee shall be entitled to claim exemption in respect of capital gains even though the construction is not completed within the statutory time limit.
Delhi High Court applied the same analogy where the assessee made substantial payment within the prescribed time and thus acquired substantial domain over the property, although the builder failed to hand over the possession within the stipulated period. [CIT v R.L. Sood (2000) 245 ITR 727 (Del)].
10. Ramanathan (CV) v CIT (1980) 155 ITR 191 (Mad)
In case of assessee’s death during the stipulated period, benefit of exemption under section 54(1) is available to legal representative if the required condition are satisfied by the legal representative.
11. CIT v Smt. Sunita Aggarwal (2006) 284 ITR 20 (Del)
Where for the purpose of claiming exemption under section 54, the assessee purchased property from two different persons, by virtue of four different sale instances in the shape of four different parcels which constituted one single residential unit or house, it was held that the execution of four different sale deeds in respect of four different portions of the property does not materially affect the nature of transaction or nature of the property acquired, the investment so made in the purchase of the same was eligible for deduction under section 54.
12. CIT v V. Natarajan (2006) 154 Taxman 399 (Mad)
Where an assessee who owned a house property, sold the same and purchased another property in the name of his wife, exemption under section 54 shall be allowable.
Further, where the assessee sold agricultural land and out of sale proceeds, purchased another agricultural land in his name and in the name of his only son, exemption under section 54B was allowable.
13. T.N. Vasavan v CIT (1992) 197 ITR 163 (Ker)
An assessee gifted some land to his wife. He thereafter constructed a building on the said land. The Government acquired the land and building and paid compensation for land to wife and for building to the assessee (husband). It was held that capital gain on land was assessable in the husband by virtue of section 64 but he was not entitled to exemption under section 54 in respect of capital gain on the acquisition of the land of the wife as the capital gain to the wife did not arise on transfer of a residential house.
14. Mrs. Prema P. shah, Sanjiv P. Shah v ITO (2006) 282 ITR (AT) 211 (Mumbai)
Where non-resident Indian sold property in India and purchased residential property in U.K. and claimed deduction under section 54, it was held that it was not necessary that residential property showed be purchased in India itself.
However, exemption under section 54F was not allowed where asset other than residential house property was transferred and the assessee acquired a residential house outside India.
15. Shakuntala Devi v DDIT 2009-TIOL_221 ITAT-BANG
Where an assessee after selling the flat has entered into a memorandum of understanding with the buyer of the property and transfers a substantial part of the total consideration and consequently claims exemption under section 54, the Bangalore Tribunal held that for claiming exemption under section 54, transfers of property, possession or ownership has nothing to do with the case as long as the sum of capital gains stands transferred to the seller for the purchase of a new flat as this fulfills the condition of section 54.
Similarly, the assessee shall be allowed exemption under section 54 even if the house property is not completed within the statutory time limit. [Sashi Varma v CIT (1997) 224 ITR 106 (MP)]. Delhi High Court applied the same analogy where the assessee made substantial payment within the prescribed time and thus acquired substantial domain over the property, although the builder failed to hand over the possession within the stipulated period. [CIT v R.L. Sood (2000) 245 ITR 727 (Del)].
16. Circular No. 667, dated 18-10-1993
The cost of the land is an integral part of the cost of the residential house, whether purchased or constructed.