Deduction u/s54F upheld as under-construction villas treated as business assets, not additional residential houses

ITAT Ahmedabad dismissed the Revenue's appeal and upheld the CIT(A)'s order allowing deduction under s.54F. It held that, on the date of transfer of the original capital asset (Artwork/Painting), the assessee was not the owner of more than one "residential house" within the meaning of the proviso to s.54F, as Villa Nos. 13 and 14 were still under construction and not available for occupation. Further, these villas were later sold and their income was consistently offered and assessed under the head "business and profession," reinforcing their character as business assets. Consequently, the assessee's s.54F claim on investment in a new residential property was held valid.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether deduction under Section 54F was admissible where, on the date of transfer of the original capital asset (Artwork/Painting), the assessee allegedly owned more than one residential house, in view of the proviso to Section 54F.

1.2 Whether the two villas (Villa Nos. 13 and 14) under construction on the date of transfer constituted "residential houses" owned by the assessee for the purposes of the proviso to Section 54F, or were correctly classifiable as business assets.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Admissibility of deduction under Section 54F and characterization of Villa Nos. 13 and 14

Legal framework (as discussed)

2.1 The proviso to Section 54F bars deduction if, on the date of transfer of the original capital asset, the assessee owns more than one residential house (other than the new asset) or constructs/acquires additional residential house(s) within the prescribed period. The dispute centered on whether the assessee was "owner of more than one residential house" on the relevant date and whether the two villas under construction could be treated as such residential houses.

Interpretation and reasoning

2.2 The Tribunal recorded that the assessee had an old residential villa acquired in 2006, which was let out and its income was consistently returned as "income from house property". This was accepted as the sole residential house held by the assessee on the relevant date.

2.3 The assessee had purchased 5 acres of land on which three villas, numbered 12, 13 and 14, were being developed. Villa No. 12 was for residential purpose; its construction was completed on 12.01.2020 and it was sold on 18.08.2021, with the gain offered to tax as short-term capital gain. Consequently, Villa No. 12 was not owned by the assessee on the date of sale of the Artwork/Painting.

2.4 Villa Nos. 13 and 14 were found, on the facts, to be business assets: (i) they were under construction on the date of sale of the Artwork/Painting and not available for occupation; (ii) the Assessing Officer himself admitted that their construction was still in progress on that date; (iii) advances against their sale were received on 12.01.2021 and 13.01.2021, i.e., prior to sale of the Artwork/Painting, and were duly reflected in the bank statements and Schedule AL of the return; (iv) buyers had deducted TDS on the advances in Assessment Years 2021-22 and 2022-23; and (v) profits on eventual sale of Villa Nos. 13 and 14 in a later year were offered to tax as business income. These factors were accepted by the first appellate authority and not effectively rebutted by the Revenue.

2.5 On these facts, the Tribunal held that Villa Nos. 13 and 14, being incomplete and treated as business ventures from inception, could not be regarded as "residential houses" owned by the assessee for purposes of the restrictive proviso to Section 54F. The assessee, therefore, was not in possession of more than one residential house on the date of transfer of the Artwork/Painting.

2.6 The Tribunal noted that the Assessing Officer rejected the assessee's claim that Villa Nos. 13 and 14 were business assets "without cogent reason" and contrary to the subsequent treatment of the sale proceeds as business income. It endorsed the detailed factual findings of the appellate authority, observing that the Revenue was unable to controvert them.

2.7 The Tribunal also confirmed that the long-term capital gain arising from the sale of the Artwork/Painting on 16.09.2020/16.09.2021 was duly invested in the purchase of a residential house on 31.03.2022 for Rs. 22,50,00,000/-, and the conditions of Section 54F regarding investment of sale consideration were fulfilled.

Conclusions

2.8 On the date of transfer of the original capital asset (Artwork/Painting), the assessee owned only one residential house (the old villa acquired in 2006); Villa No. 12 had already been sold and Villa Nos. 13 and 14, being under construction and treated as business assets, did not constitute residential houses owned by the assessee.

2.9 The assessee was not hit by the mischief of the proviso to Section 54F, and the deduction under Section 54F could not be denied on the ground of ownership of more than one residential house.

2.10 The investment of the capital gain in the new residential property on 31.03.2022 satisfied the substantive requirements of Section 54F. The deduction claimed under Section 54F was, therefore, correctly allowed by the first appellate authority, and the disallowance made by the Assessing Officer was rightly deleted.

2.11 Consequently, the Tribunal upheld the appellate order allowing deduction under Section 54F and dismissed the Revenue's appeal in entirety.

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