2015 (4) TMI 620 - HC - Income Tax

Taxpayer eligible for Section 54F exemption when sale proceeds used to build house on owned plot despite account non-deposit

The Commissioner of Income-Tax and The Deputy/Asst. Commissioner of Income-Tax Bangalore Versus K. Ramachandra Rao

HC held that the assessee was entitled to exemption under Section 54F where sale proceeds were applied to construct a residential house on a site already ... Entitlement to benefit conferred under Section 54F - sale consideration is utilized for construction of a residential house on a site which is owned by him within one year from the date of transfer - amount not deposited in a capital gains account scheme before the due date prescribed under Section 139(1) - Held that:- Eligible for the benefit under Section 54F(1) the assessee should not be owning more than one residential house other than the new asset acquired or he should not purchase any residential house other than the new asset within a period of one year after the date of transfer of residential asset or constructs any residential house other than the new asset within a period of three years after the date of transfer of the residential asset. In the entire scheme there is no prohibition for the assessee putting up construction out of sale construction received by such transfer of a site which is owned by him as is clear from the language used. It is open for the assessee to put up a residential construction or to purchase a residential house. It is not the requirement of law that he should purchase a residential site and then putup construction. Therefore, in the instant case admittedly the assessee has purchased a vacant site pri-31.3.2001. He sold the original asset on 27.8.2003 on which date he was already owning a site. In fact even before sale of the original asset he had started construction on such site by availing loan from the Bank. In terms of Section 54F(1) all investments made in the construction of the residential house of the said site within a period of one year prior to 27.8.2003 would be eligible for exemption under Section 54F(1). Similarly all investments in the said construction after 27.8.2003 within a period of three years therefrom is also eligible for exemption. Therefore, the argument that such investment in putting up a residential construction cannot be made on a site owned by him to be eligible for exemption is without any substance. Both the Appellate Authorities have rightly extended the benefit to the assessee and there is no error committed by them which calls for interference. - Decided in favour of assessee. Assessee invests the entire sale consideration construction of a residential house within three years from the date of transfer - whether assessee can be denied exemption under Section 54F on the ground that he did not deposit the said amount in capital gains account scheme before the due date prescribed under Section 139(1) - Held that:- It is clear from Sub-section (4) in the event of the assessee not investing the capital gains either in purchasing the residential house or in constructing a residential house within the period stipulated in Section 54F(1), if the assessee wants the benefit of Section 54F, then he should deposit the said capital gains in an account which is duly notified by the Central Government. In other words if he want of claim exemption from payment of income tax by retaining the cash, then the said amount is to be invested in the said account. If the intention is not to retain cash but to invest in construction or any purchase of the property and if such investment is made within the period stipulated therein, then Section 54F(4) is not at all attracted and therefore the contention that the assessee has not deposited the amount in the Bank account as stipulated and therefore, he is not entitled to the benefit even though he has invested the money in construction is also not correct. - Decided in favour of assessee. Issues:1. Whether the assessee is entitled to the benefit under Section 54F when the sale consideration is utilized for constructing a residential house on a site owned by him within one year from the date of transferRs.2. Can the exemption under Section 54F be denied if the entire sale consideration is invested in constructing a residential house within three years from the date of transfer without depositing the amount in the capital gains account scheme before the due date prescribed under the IT ActRs.Analysis:Issue 1:The judgment discusses Section 54F of the Income-tax Act, which provides for the exemption of capital gains on the transfer of certain assets if invested in a residential house. It outlines the conditions for claiming the exemption, including the timeline for purchase or construction of the new asset. Sub-section (4) of Section 54F mandates the deposit of unutilized sale consideration in a specified account if not appropriated for the new asset before the due date for filing income tax returns. However, this provision applies only when the sale consideration is not utilized for purchasing or constructing a residential house. The judgment clarifies that there is no requirement for the assessee to purchase a residential site before constructing a house, as long as the investment is made within the specified timelines. In the case discussed, the assessee had purchased a site before the sale of the original asset and started construction on it, making all investments eligible for exemption under Section 54F. The appellate authorities correctly granted the benefit to the assessee, and no error was found in their decision.Issue 2:Regarding the second issue, the judgment emphasizes that Sub-section (4) of Section 54F applies when the capital gains are not invested in purchasing or constructing a residential house within the specified period. If the intention is to invest in construction or property purchase within the stipulated timeline, the requirement of depositing the amount in a notified account by the Central Government does not apply. Therefore, the argument that the assessee should have deposited the amount in a bank account, even though the investment was made in construction, is deemed incorrect. The judgment concludes that both substantial questions of law are answered in favor of the assessee and against the Revenue. Consequently, all four appeals are dismissed.In summary, the judgment clarifies the provisions of Section 54F regarding the exemption of capital gains on the transfer of assets for constructing a residential house. It highlights the conditions for eligibility, the timeline for investments, and the requirement of depositing unutilized sale consideration in a specified account. The judgment affirms the assessee's entitlement to exemption based on the investments made in construction, even without depositing the amount in a bank account, as long as the conditions of Section 54F are met.