Sec- 54F - Claim of deduction u/s. 54F is available only when the assessee completes construction of new residential property within three years

Anu Agarwal

vs.

Income-tax Officer

Hon'ble I.T.A.T. Chandigarh has held that, when an assessee sells a property but had failed to construct new residential house within the specified period on plot purchased by her/him out of the sale proceeds of that property, the assessee was not entitled to deduction claimed under section 54F of the I.T. Act, 1961.

Facts of the case:

The assessee had sold a property during the year which was purchased. After reducing the indexed cost capital gain from the sale of said property was worked out. The assessee invested in the purchase of plot on which residential house was to be constructed. On the basis of this investment proportionate deduction u/s 54F was claimed. However, the house could not be constructed. 

During assessment proceedings the A.O. observed that as per provisions of section 54F the assessee was required either to purchase within a period of one year before or two years after the date on which the transfer took place or complete the construction of residential house within a period of three years. The assessee purchased the plot the assessee was also required to complete the construction of a new house within a specified period and where no construction had taken place, the deduction u/s 54F could not be allowed. Accordingly he disallowed deduction u/s 54F.

SUBMISSION OF APPELLANT BEFORE C.I.T (A):

1. Only proportionate deduction out of the total capital gain was claimed and tax was paid on balance of the capital gain. Since the assessee could not complete the construction, therefore, the addition can be made only after the period of three years expired and period of three years expired in AY 2011-2012.
2. It was further submitted that it was a matter of common sense that whether the property has been constructed or not, would be known only in the year when the time is to expire. 
3. Reliance was also placed on the decision of Hon'ble Allahabad High Court in case of Ranjit Narang v. CIT [2009] 317 ITR 332.

CIT(A) observed that the assessee has not started the work of construction on the said plot, therefore, the claim of deduction u/s 54F was not acceptable. 

Observation of sec-54F:

On plain reading of Section 54F of the Income Tax ACT, 1961, it clearly shows that, the deduction under this section is allowable only in case where the assessee within a period of one year before or two years after the date on which the transfer took place purchases, or has within a period of three years after that date constructed the residential house. Therefore, if the assessee has not purchased or constructed the house within the specified period the deduction is not available. Hon'ble I.T.A.T. has held that, there was no evidence to prove that assessee wanted to start construction and if the tax was allowed to be postponed merely on the basis of purchase of plot then no assessee would pay correct taxes during the year and postpone the payment of taxes by merely purchasing the plot. Hence,  the same could be intention of the provisions of section 54F. Therefore, upheld the order of the CIT(A).

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