Taxpayer Gets Capital Gains Exemption Under Section 54F Despite Owning Two Houses Previously

ITAT Hyderabad allowed exemption u/s 54F for capital gains from transfer of equity shares. Assessee owned two residential houses but had gifted one to daughter in 2015, leaving only one house on transfer date. ITAT held gift valid despite absence of registered deed, following SC precedent that benevolent provisions should be interpreted liberally. Second property booking occurred before transfer date but possession taken after one year, satisfying statutory conditions. Investment in residential property within due date qualified for exemption. Revenue's appeal dismissed.

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The core legal questions considered in this appeal revolve around the eligibility of the assessee to claim exemption under section 54F of the Income Tax Act, 1961, in respect of long-term capital gains arising from the sale of unquoted equity shares. The principal issues include:

1. Whether the assessee was disqualified from claiming exemption under section 54F due to ownership of more than one residential house as on the date of transfer of the original asset.

2. Whether the gift of a residential house property to the assessee's daughter, made orally in 2015 but registered later, is valid for the purpose of determining ownership on the date of transfer.

3. Whether the purchase of another residential house property within one year of transfer of the original asset violates the proviso to section 54F(1), thereby disqualifying the assessee from exemption.

4. Whether the assessee complied with the due date for investment or deposit of capital gains amount as prescribed under section 54F(4) and section 139(1) of the Act, particularly considering the due date applicable to a partner in a firm subject to audit.

5. Whether the investment in purchase of vacant land, with construction of residential house on only a portion of the land, qualifies for exemption under section 54F.

Issue-wise Detailed Analysis

1. Ownership of More Than One Residential House on Date of Transfer

Legal Framework and Precedents: Proviso to section 54F(1) disqualifies exemption if the assessee owns more than one residential house (other than the new asset) on the date of transfer of the original asset. The proviso is subject to the condition that income from such other house is chargeable under "Income from house property". Judicial precedents emphasize liberal interpretation of exemption provisions.

Court's Interpretation and Reasoning: The Assessing Officer relied on the assessee's earlier return showing ownership of two residential houses as on 31.03.2021 and rejected the claim of gift on the ground of absence of registered gift deed at the time of alleged gift in 2015. The CIT(A) and the Tribunal rejected this technical objection, accepting the oral gift based on customs and traditions, supported by subsequent registered gift deed and streedhan agreement, and the daughter's income tax returns evidencing her ownership.

Key Evidence and Findings: Registered gift deed dated 25.06.2022, streedhan agreement dated 30.11.2017, oral gift on marriage in 2015, and daughter's ITRs showing ownership. The Tribunal relied on the Supreme Court decision in Sanjeev Lal vs. CIT, which recognizes creation of right in personam even without registered deed, particularly in familial contexts.

Application of Law to Facts: The Tribunal held that the gift was valid despite late registration, and the assessee was not owner of the gifted house on the date of transfer (16.06.2021). Therefore, the assessee did not own more than one residential house at that time.

Treatment of Competing Arguments: The Revenue's reliance on section 123 of the Transfer of Property Act requiring registration for immovable property gift was held to be inapplicable in the context of oral gift recognized by custom and later formalized. The mortgage of the gifted property by the assessee with consent of the daughter did not negate the gift.

Conclusion: The assessee was not disqualified under proviso to section 54F(1)(a)(i) for owning more than one residential house on the date of transfer.

2. Purchase of Another Residential House Within One Year

Legal Framework: Proviso to section 54F(1)(a)(ii) disqualifies exemption if the assessee purchases any residential house other than the new asset within one year after the date of transfer.

Court's Reasoning: The assessee's purchase of Flat No.1605, My Homes Bhooja was registered on 07.07.2021, after the transfer date of 16.06.2021. However, substantial payment was made before the transfer date, and possession was taken only in June 2022, more than one year after transfer.

Findings and Application: The Tribunal accepted that booking and substantial payment prior to transfer date meant the purchase was not within one year after transfer for the purpose of proviso. Also, the property was self-occupied and under construction on the date of transfer, so income was not chargeable under "Income from house property".

Treatment of Arguments: The Revenue's argument that registration date alone determines purchase was rejected as contrary to facts and commercial realities of under-construction property purchase.

Conclusion: The assessee did not violate the proviso by purchasing another residential house within one year after transfer.

3. Compliance with Due Date for Investment/Deposit Under Section 54F(4)

Legal Framework: Section 54F(4) requires investment in new asset or deposit of unutilized sale consideration in Capital Gains Account Scheme on or before the due date for filing return under section 139(1). The due date depends on the category of assessee and whether accounts are required to be audited under section 44AB.

Court's Interpretation: The Assessing Officer contended the due date was 31.07.2022, since the partnership firm's turnover was below Rs. 10 crores and audit was not required under proviso to section 44AB. The assessee contended the due date was 31.10.2022, since the partnership firm's accounts were audited and audit report filed on 07.10.2022.

Key Evidence: Tax audit report of partnership firm in Form 3CB filed on 07.10.2022; statutory provisions and Explanation below section 139(1).

Application of Law to Facts: The Tribunal held that since the partnership firm obtained audit report, the due date for the partner's return was 31.10.2022. The Assessing Officer's reliance on the proviso to section 44AB was misplaced as it only relaxes audit requirement but does not negate the fact that audit was conducted.

Conclusion: The assessee complied with the due date requirement by investing in land on 18.10.2022 and depositing Rs. 10.67 crores in Capital Gains Account Scheme on 28.10.2022, both within the due date of 31.10.2022.

4. Investment in Vacant Land and Construction of Residential House

Legal Framework: Section 54F requires investment in a residential house. The question arises whether purchase of vacant land qualifies if construction of residential house is completed within prescribed period.

Court's Reasoning: The Assessing Officer denied exemption on ground that only 6% of purchased land was used for construction, rest remained vacant. The Tribunal relied on judicial precedents including Madras High Court decision in C. Aryama Sundaram vs. CIT, holding that cost of land forms part of cost of residential house and that construction may commence before or after transfer date.

Evidence: Sale deed for land purchase dated 18.10.2022, construction contracts, revised contracts, and occupancy certificate dated 18.06.2024.

Application: The Tribunal held that since the assessee purchased land for construction and completed residential house within three years, exemption under section 54F was admissible regardless of extent of land constructed upon.

Conclusion: Investment in land coupled with construction of residential house within prescribed time qualifies for exemption under section 54F.

5. Validity of Oral Gift and Registration Timing

Legal Framework: Section 123 of the Transfer of Property Act requires gift of immovable property to be by registered instrument. However, the Supreme Court in Sanjeev Lal vs. CIT recognized that a right in personam can arise even without registered deed in certain cases.

Court's Interpretation: The Tribunal accepted the oral gift made on marriage occasion in 2015 as valid, supported by customs and traditions, and later formalized by registered gift deed and streedhan agreement.

Application: The Tribunal held that the gift was effective to transfer ownership rights for the purpose of section 54F, notwithstanding late registration.

Conclusion: Oral gift recognized by custom and later registered is valid for exemption purposes.

Overall Treatment of Competing Arguments: The Revenue's reliance on technical and procedural grounds such as absence of registered gift deed at the time of gift, timing of purchase registration, due date for filing return, and extent of land constructed upon was rejected. The Tribunal emphasized the benevolent nature of section 54F, requiring liberal interpretation to effectuate legislative intent to encourage investment in residential houses.

Significant Holdings

"Section 54F is a beneficial provision allowing for exemption from chargeability of Capital Gains in certain cases, where the net sale consideration is invested in new residential house. In a plethora of judgements, Courts have firmly laid down the rule that a provision for deduction, exemption or relief should be interpreted liberally, reasonably in favour of the assessee; and it should be construed so as to effectuate the object of the legislature, and not to defeat it."

"The gift was given at the time of a social occasion (ie. marriage), in accordance with prevailing traditions; and it was made between two natural persons having bonds of natural love and affection. The gift has been later recognized in two registered documents also, namely the Streedhan Agreement and by way of Gift Deed. Therefore, the appellant cannot be regarded as owner of the said residential House Property at Gayatri Gardens, as on the sale of shares in June 2021."

"The due date for furnishing return of income under section 139(1), as applicable to the appellant being partner in a firm, whose accounts have indeed been audited under section 44AB of the Act, was 31st October 2022. The appellant has made the qualifying investment towards construction of new house, by way for purchase of land, on 18th October 2022. Further, the appellant has made the qualifying deposit of unutilized part of the sale consideration in the Capital Gains Accounts Scheme on 28th October 2022. In other words, the appellant has duly satisfied the technical requirements enjoined under sub-section (4) of section 54F."

"It is irrelevant whether the assessee has constructed building on entire portion of land and has only utilised portion of land for residential house and kept remaining land vacant. In our considered view, what is required to be seen is, whether the land purchased by the assessee for construction of residential house or notRs. Once the land is purchased for the purpose of construction of house property, then, there is no reason to disallow deduction only on the ground that the assessee has used part of land for construction of house property."

"The provisions of section 54F has been interpreted by various Courts and held that, once an assessee falls within the ambit of a beneficial provision, then, the said provision should be liberally interpreted."

The final determinations on each issue are:

- The assessee was not disqualified under proviso to section 54F(1) for owning more than one residential house on the date of transfer, as the gift to the daughter was valid despite late registration.

- The purchase of another residential house within one year after transfer did not violate proviso to section 54F(1), as substantial payment was made prior to transfer and possession was taken after one year.

- The assessee complied with the due date for investment/deposit under section 54F(4) and section 139(1), being 31.10.2022 applicable to partner in audited firm.

- Investment in purchase of vacant land coupled with construction of residential house within prescribed period qualifies for exemption under section 54F.

- The exemption claimed under section 54F amounting to Rs. 53,22,48,667/- was rightly allowed, and the addition disallowing exemption was deleted.

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