Section 54F exemption remains available on substantial residential-house investment within time, despite no occupancy certificate or full deposit.

Section 54F exemption was available where the assessee had substantially invested the sale proceeds in construction of a residential house within the statutory period and had taken completion steps under the relevant municipal framework, even though an occupancy certificate was not actually issued. The absence of a capital gains account deposit did not defeat the exemption when the capital gain was in fact deployed in the new house, and the exemption could not be restricted to the amount deposited in the bank account. The note also states that indexed cost of acquisition was allowable in computing capital gains and had to be given effect on recomputation.

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Issues: (i) Whether exemption under section 54F of the Income-tax Act, 1961 was admissible when the assessee invested the sale proceeds in a residential house within the stipulated period and had applied for occupancy certificate, notwithstanding the absence of actual issuance of the certificate and the deposit being limited to part of the consideration. (ii) Whether the cost of acquisition was required to be indexed while computing capital gains.

Issue (i): Whether exemption under section 54F of the Income-tax Act, 1961 was admissible when the assessee invested the sale proceeds in a residential house within the stipulated period and had applied for occupancy certificate, notwithstanding the absence of actual issuance of the certificate and the deposit being limited to part of the consideration.

Analysis: The investment in a semi-finished house was completed within three years from the transfer of the original asset. The relevant municipal law and building rules contemplated notice of completion and application for permission to occupy, and the assessee had moved the authority with the prescribed completion-related documents. On that footing, the house was treated as completed within time. The tribunal also held that where the capital gain is in fact invested in construction within the statutory period, the requirement of deposit in the capital gains account does not defeat the exemption. The exemption could not be restricted merely because only Rs. 80,00,000 was deposited in the bank account when the total investment exceeded the sale consideration.

Conclusion: The assessee was entitled to the full exemption under section 54F, and the restriction to the deposited amount was not sustainable.

Issue (ii): Whether the cost of acquisition was required to be indexed while computing capital gains.

Analysis: The assessee had produced the purchase deeds, and the authorities below had not properly adjudicated the claim. The indexed cost of acquisition was allowable in computing the correct capital gains, and the issue was also rendered consequential by the larger investment in the new house.

Conclusion: Indexation of the cost of acquisition was allowable and had to be given effect while recomputing capital gains.

Final Conclusion: The assessee succeeded on the substantive exemption claim and on the computation issue, while the Revenue's challenge failed.

Ratio Decidendi: If the assessee has in substance invested the capital gains in construction of a residential house within the statutory period, the exemption under section 54F cannot be denied merely for want of deposit in the capital gains account, and the capital gains must be computed after allowing the admissible indexed cost of acquisition.

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