2025 (8) TMI 1095 - AT - Income Tax

Taxpayer allowed Sec. 54F exemption where CGAS deposit, clear intention and construction within three years satisfied conditions

ITAT allowed the taxpayer's appeal under Sec. 54F, holding that deposit of the sale proceeds in a CGAS account within the return-filing date, demonstrable ... Exemption u/s 54F - benefit of deduction in determining the capital gains - As per revenue Assessee has not construed a new residential house, but in-fact purchased fully constructed house, thus, the Assessee cannot avail deduction - HELD THAT:- In view of the fact that the Assessee has deposited the impugned amount in the CGAS Account well within time the date of filing of return u/s 139 (1) of the Act, considering the intention of the Assessee and ultimate utilization of the said amount and also considering the expenses spent by the Assessee for the construction activity within the period of three years, since the provisions of Section 54F has to be interpreted liberally as held by various Courts. We are of the opinion that the Ld. CIT(A) committed error in disallowing the exemption claimed by the Assessee u/s 54F - Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether exemption under section 54F is allowable where the assessee deposits capital gains in a Capital Gains Account Scheme (CGAS) before the due date for filing return under section 139(1), but completes acquisition (sale deed) of the new residential house after the two-year period from transfer of the original asset. 2. Whether amounts expended on alterations, improvements and interior works to a purchased habitable residential property (including fall ceilings, carpentry, modular kitchen, flooring, UPVC glazing, sewage/painting works) constitute 'cost of new asset' for the purposes of section 54F (i.e., are eligible to be treated as part of cost for computing exemption), when such expenditure is incurred within three years from the date of transfer of the original asset. 3. Whether failure to press procedural grounds (grounds alleging ex-parte decision, denial of opportunity and non-consideration of written submissions) affects adjudication of substantive relief claimed under section 54F. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of section 54F exemption where deposit into CGAS precedes acquisition beyond two-year purchase period Legal framework: Section 54F permits exemption from capital gains where net consideration is invested in a new residential asset. Section 54F(4) treats amounts deposited in a Capital Gains Account Scheme before the due date of filing the return under section 139(1) as deemed cost of the new asset. The proviso to section 54F(4) provides that amounts not utilized within the prescribed period shall be charged to tax under section 45 in the previous year in which the three-year period expires. Precedent treatment: The decision follows the principle that deposit into CGAS before the due date evidences intention and satisfies the statutory condition under section 54F(4) that the amount be deposited in CGAS within time. The Court applied this statutory scheme to uphold the claim where the assessee deposited funds timely and later utilized them within statutory timelines for acquisition/construction. Interpretation and reasoning: The Court emphasized that timely deposit in CGAS satisfies one of the conditions of section 54F(4) and is indicative of intention to utilize the funds for acquisition/construction. The fact that the sale deed was executed slightly beyond the strict two-year mark for purchase (booking/initial payment two days beyond two years, balance and registration later) was examined in the factual matrix: the assessee had deposited funds in CGAS before filing due date, had booked the property and paid amounts leading up to registration, and ultimately incurred the total consideration reflected in the sale deed. The Court treated the CGAS deposit and subsequent utilization as complying with section 54F when viewed in light of legislative allowance for CGAS and its proviso dealing with deferred utilization (chargeability under section 45 only if funds remain unutilized after the three-year period). Ratio vs. Obiter: Ratio - timely deposit into CGAS under section 54F(4) and subsequent utilization within statutory timeframes suffices to satisfy the statutory scheme for exemption under section 54F, notwithstanding minor delays in the timing of registration when funds were duly deposited and utilized. Obiter - observations on the notion of 'intention' as evidenced by CGAS deposit are explanatory but grounded in statutory text. Conclusion: The Court concluded that the assessee satisfied the conditions of section 54F by depositing Rs. 2,50,00,000 in CGAS before the due date under section 139(1) and by utilizing those funds for acquisition within the relevant statutory periods; therefore the disallowance of exemption under section 54F was erroneous and the exemption must be allowed. Issue 2 - Treatment of improvements/alterations as part of 'cost of new asset' under section 54F Legal framework: Section 54F requires consideration of 'cost of new asset' when determining exemption. The statutory language refers to cost rather than merely consideration paid for acquisition. Precedent treatment: The Court relied on established judicial treatment that costs of additions, alterations, modifications and improvements to an acquired property can form part of the cost of the new asset for section 54F purposes. The Court cited a higher court decision that held expenditures for flooring replacement, kitchen alterations, compound wall, grill work and other repairs should be included in cost of the new asset for computing capital gains exemption. Interpretation and reasoning: The Court found that the sale deed expressly contemplated purchaser's obligation to make the property habitable and undertake necessary repairs/maintenance. The expenses claimed (fall ceilings, carpentry, modular kitchen, flooring, UPVC glazing, sewage and painting works) were incurred within three years of transfer and were aimed at making the house habitable and functional, not merely providing luxuries. The Court rejected the Assessing Officer's classification of such expenses as purely aesthetic or luxury enhancements, noting that the nature of expenses and their timing rendered them integral to making the asset usable as a residence and hence part of the cost of the new asset. The statutory emphasis on 'cost of new asset' permits inclusion of legitimate improvement/construction expenses incurred within the prescribed period. Ratio vs. Obiter: Ratio - expenditures for improvement/alteration that make an acquired residential property habitable and are incurred within the statutory time frame qualify as part of the 'cost of new asset' under section 54F. Obiter - commentary on the borderline between aesthetic/luxury enhancements and necessary improvements is contextual and fact-sensitive. Conclusion: The Court held that the claimed construction/improvement expenses of Rs. 57,25,000 were legitimately part of the cost of the new asset incurred within three years and therefore to be taken into account for computation of exemption under section 54F. Issue 3 - Procedural grounds not pressed Legal framework: Appellant's grounds alleging denial of opportunity and non-consideration of submissions are procedural/contentions of natural justice. Reasoning and conclusion: The appellant did not press grounds 1-3 and general ground 6; those grounds were dismissed. The Court proceeded to decide substantive issues (Grounds 4 and 5) which were fully argued. No separate adjudication on merits of the unpressed procedural grounds was necessary. Overall Conclusion The Tribunal allowed the appeal on substantive grounds: the assessee satisfied section 54F(4) by timely depositing capital gains in CGAS and by utilizing the funds for acquisition/construction within statutory periods; and improvement/construction expenditures incurred within three years that make the property habitable constitute part of the cost of the new asset for section 54F. The assessing officer's disallowance of exemption under section 54F was set aside and the exemption of Rs. 1,80,85,057 was directed to be allowed.