Section 54/54F of the Income Tax Act, 1961 is a benevolent Section - Few Regular Queries 'answered'

The exemption u/s. 54F of the Income Tax Act, 1961

...a benevolent section

is for the assesses who gets long term gains on any asset other than house property and who uses all the sales consideration within a specified period for purchase or constructing a residential house. 

The specified period in case of house purchase is one year before or two years after the date of transfer of asset on which gains were made. However, for construction, section 54 provides, time limit of three years.

(1) What would be the plight of the assessee if the construction gets delayed for no fault at his end? ( i.e. beyond stipulated period of 3 years)

While the plain reading and strict application of the provision u/s. 54F compels one to think that, an exemption is not allowed in case of delay beyond 3 years.

NOW, the Higher judicial authorities have rescued taxpayers by giving relief in those cases where they have found that most of the sales consideration have been spent for construction of house but still some portions could not be completed for several reasons.

The appellate authorities have taken the view that section 54F being relief provision, should be viewed in a bit of relaxed manner.

However, one needs to satisfy that either full amount or most of the amount of sales consideration was already used.

ü      CIT vs. Sardarmal Kothari [2008] 302 ITR 286 (Mad.)

ü      Satish Chandra Gupta v. Assessing Officer [1995] 54 ITD 508

ü      (CIT vs. Hilla J.B. Wadia [1995] 216 ITR 376 (Bom)

Ref.: Contradictory view had been taken against Circular No. 667 dated 18^th October 1993 while giving relief to the assessees.

(2) Whether it is mandatory for an assessee to be an ‘owner’ of the land in order to get the benefit u/s. 54/ 54F of the I.T. Act, 1961?

For the purpose of attracting the provisions of section 54 of the Income-tax Act, it is not necessary that the assessee should become the owner of the property.

(a) Balraj v. Commissioner of Income-Tax [2002] 254 ITR 22 (Del)

(b) Commissioner of Income-tax v. Ajitsingh Khajanchi [2008] 297 ITR 95 (MP) 25.04.07

(3) Whether an assessee (Indian Origin or Non-Resident Indian) will get the exemption u/s. 54F of the Income Tax Act, 1961 on the ground that, the investment was made by the assessee in purchasing a residential house outside India?

A bare reading of the provisions of sec-54 and 54F make it clear that, there are no express conditions that require the capital gains or the net consideration is to be re-invested in a residential house located in India. 

Therefore, a resident assessee is entitled to exemption u/s. 54F on purchase of residential premises anywhere in the world. In the absence of any specific or implied prohibition, such an investment anywhere in the world by a non-resident cannot be denied. Once the Income-Tax Act, 1961 assumes the power to tax the income of a non-resident, then the logical consequences of such power is to confer upon such a person all the benefits that flow from the provisions of the Act unless specifically prohibited.

Hence, where in the cases two views are possible, the benefit of doubt should be given to the assessee. Sections 54 and 54F, being a beneficial provision, the Court has to adopt the interpretation that favors the assessee, IMPORTANTLY where these provisions are incentive provisions.

 (a) Prema P. Shah vs. ITO, 100ITD 60 (Mum.) 

 (b)    ITO vs. Dr. Girish M. Shah, ITA No. 3582/M/2009

(4) Whether assessee will get exemption u/s. 54/ 54F of the I.T. Act, 1961 when only 10% of the land is being used for construction of residential property and rest are left vacant?

The plain reading of section 54 & 54F that, exemption is allowable in respect of amount invested in the construction of a residential house. 

When a land is purchased and building is being constructed thereon, it is not necessary that such construction should be on the entire plot of land, meaning thereby a part of the land that is appurtenant to the building and on which construction is made, there would be no denial of exemption on the said investment.

Thus, the cost of vacant land appurtenant to and forming part of the residential unit was to be considered for claim of exemption under section 54F even if no construction has been done on the appurtenant land.

(a) Addl. CIT Range - I, Dehradun v/s. Narendra Mohan Uniyal 34 SOT 152

(b) CIT vs. Zaibunissa Begum 151 ITR 320

To sum it up, the cost of vacant land appurtenant to and forming part of the residential unit is to be considered for the claim of exemption under section 54F even if no construction has been done on the appurtenant land.