2025 (10) TMI 140 - AT - Income Tax

Section 54F: 'purchase' broadly construed; registration date alone doesn't defeat exemption; proportionate relief for partial reinvestment

ITAT Hyderabad allowed the assessee's exemption under s.54F, holding that 'purchase' in s.54F(2) is not confined to registered sale deed or possession but ... Exemption u/s. 54F - scope of the term “purchase” - Date of purchase versus Actual Date of Registration of Property - denial of exemption as new residential property was purchased and got registered on 07.12.2021 i.e beyond the period of 2 years as stipulated u/s. 54F - HELD THAT:- The word ‘purchase’ as used in sub-section (2) of Section 54F is not restricted or confined to a registered sale deed or even to possession, but has a wider connotation. We concur with the case of CIT Vs. T.N. Aravinda Reddy [1979 (10) TMI 1 - SUPREME COURT] had observed that the provisions of Section 54F, being an analogous section, calls for a more liberal interpretation and application, as the intent of the section was to encourage investment in residential house by an individual or a Hindu Undivided Family out of the sale proceeds earned. Also, we find that a similar view had been taken in the case of Pradeep Kumar Chowdhry [2015 (2) TMI 451 - ITAT HYDERABAD] and Narsimha Raju Rudra Raju [2013 (11) TMI 415 - ITAT HYDERABAD] As in the case of CIT Vs. Kuldeep Singh[2014 (8) TMI 463 - DELHI HIGH COURT] has held that the word “purchase” used in sub-section (2) of Section 54 is not restricted or confined to the registered sale deed or even possession but has a wider connotation. It was observed that the basic purpose behind Section 54 is to ensure that the assessee is not taxed on the capital gain, if he replaces his house with another house and spends money earned on the capital gains within the stipulated period. Assessee’s claim for deduction u/s 54F of the Act was in order, uphold the same. Investment made by the assessee in the new residential house within the prescribed period contemplated under Section 54F(1) is less than the net consideration received by her on the sale of the original asset - As the assessee had though sold the capital assets, viz. 25 plots situated at Medipally, Uppal, Hyderabad and 4 plots at Bhongir District for a total consideration but had made an investment of a lesser amount in the new residential house, therefore, the A.O is directed to allow his claim of exemption under Section 54F in the same proportion as the cost of the new residential house (i.e investment made within the prescribed period) bears to the net sale consideration of the properties sold by him. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether an assessee who has paid substantial consideration for purchase of a new residential house within the statutory period, but whose title was registered after the two-year period specified in sub-section (2) of Section 54F, is entitled to deduction under Section 54F? 2. Whether the word 'purchase' in sub-section (2) of Section 54F is confined to completion of legal title by registration/possession, or has a wider connotation encompassing payment/contractual commitment and effective investment of sale proceeds within the stipulated period? 3. Whether ownership of more than one residential house at the date of transfer of the original asset disqualifies the assessee from claiming deduction under Section 54F, and how evidentiary proof of the nature (residential vs. commercial) of pre-existing properties affects this question? 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Entitlement to deduction under Section 54F where registration occurs after the two-year period Legal framework: Section 54F provides exemption from capital gains tax where an individual/HUF, having sold a long-term capital asset other than a residential house, purchases a residential house within two years of transfer (or constructs within three years). Sub-section (2) contemplates treatment of amounts invested or deposited and deems amounts utilized for purchase/construction to be cost of the new asset. Precedent treatment: The Court relied upon earlier decisions of the Supreme Court and coordinate appellate authorities that interpret 'purchase' and Section 54(1)/(2) purposively, and appellate authority decisions treating Section 54F as a beneficial provision to be construed liberally. Those authorities were followed. Interpretation and reasoning: The Tribunal reasoned that 'purchase' is not rigidly confined to execution of registered sale deed or formal transfer of legal title. If the assessee has demonstrably invested the sale proceeds (through agreement to purchase, stage payments and taking possession for interior works) within the statutory period, the objective of Section 54F - to encourage reinvestment of capital gains into residential accommodation - is satisfied. Practicalities (e.g., COVID-related travel restriction preventing timely registration) and documentary proof of payments and possession/possession letter were material. The Court adopted a purposive approach: registration delay caused by contingencies does not defeat exemption where consideration was paid and reinvestment was made within time. The statutory scheme in sub-section (2) (deposit of unspent amount and deeming provision) supports a wider meaning of 'purchase'. Ratio vs. Obiter: Ratio - Where the assessee proves reinvestment of sale proceeds into a new residential house within the stipulated period (by agreement, payments and taking possession), delayed registration/transfer beyond two years does not automatically deprive the assessee of deduction under Section 54F; the term 'purchase' bears a wider meaning. Obiter - observations about pandemic travel restrictions as factual cause for delayed registration are contextual to this appeal. Conclusion: The Court upheld the CIT(A)'s conclusion that the assessee was entitled to deduction under Section 54F to the extent of the amount invested within the prescribed period, notwithstanding registration executed after two years, and directed proportionate allowance where investment was less than net consideration. Issue 2 - Scope of the term 'purchase' in sub-section (2) of Section 54F Legal framework: Statutory text of Section 54F(1) and sub-section (2) (deeming of amounts utilized or deposited) and the proviso dealing with unutilized deposits within the three-year window. Precedent treatment: The decision followed Supreme Court jurisprudence and High Court/appellate authorities that have read 'purchase' in Sections 54/54F broadly - to include payments under agreed contracts, part-payments, stage payments for flats/apartments and constructive steps towards acquisition - and treated the provisions liberally to effectuate the exemption's object. Interpretation and reasoning: The Court applied purposive interpretation: exemption aims to relieve capital gain tax when proceeds are applied to acquire another residential house. The statutory mechanism for depositing unspent funds and treating amounts already invested as deemed cost indicates legislative acceptance of investments short of formal title transfer. Hence 'purchase' includes contractual commitment and payment evidencing bona fide reinvestment, not solely completion of registered title or issuance of occupancy certificate. Ratio vs. Obiter: Ratio - The term 'purchase' in Section 54F includes investments evidenced by agreement and payment within the stipulated period; strict formalism (registration/occupancy certificate) is not an absolute requirement. Obiter - general policy observations about construction/registration delays in the housing sector. Conclusion: The Court confirmed that 'purchase' carries a wider connotation and that the assessee's payments and contractual rights, supported by possession/possession letter and stage payments, sufficed to show reinvestment within the statutory period. Issue 3 - Existence of pre-existing residential house(s) and evidentiary burden on character of properties Legal framework: Section 54F disqualifies an assessee who, on the date of transfer of the original asset, is the owner of more than one residential house (subject to provisos). Characterization of properties (residential vs commercial) at that date therefore determines entitlement. Precedent treatment: The Court applied orthodox evidentiary principles: nature of property must be proved by adequate documents (lease deeds, purchase deeds, municipal/SRO certificates, tax receipts, electricity bills, photographs, etc.). Coordinate authority findings on similar factual matrices were followed. Interpretation and reasoning: The Assessing Officer initially considered eight of nine properties to be commercial and one (Ghatkeswar) possibly residential; however, on fuller evidence (lease deed, purchase deed, property tax receipts), the appellate authority concluded the disputed property was commercial. The Court accepted the appellate finding that the assessee had demonstrated that she did not own more than one residential house on the relevant date. The matter therefore turned on proof satisfying the AO's concerns; where evidence proves non-residential character, the disqualification under Section 54F does not arise. Ratio vs. Obiter: Ratio - Entitlement under Section 54F depends on demonstrable proof of the character of pre-existing properties; adequate documentary evidence can establish that properties are commercial and thereby remove the disqualification. Obiter - description of specific documents useful to establish character. Conclusion: The Court upheld the conclusion that the assessee was not the owner of more than one residential house on the date of transfer and therefore met that statutory condition for claiming deduction under Section 54F. Ancillary disposition - Proportionate relief where investment < net consideration Legal framework: Section 54F(1)(d) prescribes that where investment in the new residential house within the prescribed period is less than the net consideration, exemption is allowed proportionately to the amount invested. Interpretation and reasoning: The Court directed that, since the assessee had reinvested an amount less than the total sale consideration, the AO must allow exemption proportionate to the ratio of investment made within the prescribed period to the net sale consideration. Ratio vs. Obiter: Ratio - When reinvestment is partial, exemption under Section 54F must be allowed proportionately as per statutory formula; AO to compute accordingly. Conclusion: AO directed to allow deduction under Section 54F pro rata to the investment made within the stipulated period. Overall Conclusion The Tribunal affirmed the appellate authority's liberal and purposive interpretation of Section 54F: substantial contractual payments and demonstrable reinvestment of capital gains within the statutory period, supported by documents and contextual facts (including impediments to registration), qualify as 'purchase' for the purposes of Section 54F; pre-existing properties were properly characterized as non-residential on the evidence; and exemption is to be allowed proportionately where investment is less than net consideration. The Revenue's appeal was dismissed subject to the directed proportionate computation by the assessing authority.