Deduction under Section 54F and unexplained cash deposits: investment proof and sale evidence upheld, deductions allowed

Deduction under capital gains reinvestment provisions was allowed where the taxpayer produced break-up of bills, invoices and supplier/contractor details proving that construction was completed within the stipulated period, thereby satisfying the investment/completion requirement; the payment to advisors was accepted as expenditure wholly and exclusively incurred in connection with the transfer of a capital asset and therefore deductible for computation of capital gains. Cash deposits were treated as explained where the taxpayer produced a sale delivery receipt and contemporaneous bank deposit evidence for sale of a vehicle, negating unexplained income additions.

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Issues: (i) Whether the assessee is entitled to deduction under Section 54F of the Income-tax Act, 1961 in respect of investment of long-term capital gains in purchase of land and construction of residential house within the stipulated period; (ii) Whether the addition of Rs. 26,00,000 treated as unexplained cash deposit is sustainable.

Issue (i): Entitlement to deduction under Section 54F for investment in land and construction of residential house within three years of transfer of long-term capital asset.

Analysis: The assessee sold shares and claimed exemption under Section 54F by applying the sale proceeds to purchase of land and construction of a residential house. Documentary proof included bank statements showing payments to contractors and suppliers, ledger accounts, possession letter predating the sale deed, delivery of notices to the new residential address, electricity bill, valuation report, and bills/invoices for construction expenses. The purchase deed and completion evidence were furnished during appellate proceedings under Rule 46A. The payments for construction were completed within the statutory period and documentary records showed payments through banking channels. The Assessing Officer's objection based on absence of municipal completion/fitness certificate and alleged lack of original bills was not supported by enquiry or contrary documentary proof, and the professional/legal expenses incurred in relation to sale were supported by bills and admissible in computing capital gains.

Conclusion: Deduction under Section 54F is allowable as claimed; the assessee satisfied the statutory conditions by investing the capital gains in the purchase of land and construction of a residential house within the prescribed period, and the disallowance is deleted (in favour of the assessee).

Issue (ii): Sustenance of addition of Rs. 26,00,000 as unexplained cash deposit in bank account.

Analysis: The assessee produced delivery note, Form 29 and Form 30, transfer registration certificate, address proof of the buyer (Raheja Continental) and related documents evidencing transfer of the car and receipt of sale consideration. The evidence established that the car was transferred to Raheja Continental and the cash sale proceeds were deposited in the assessee's bank account. The Assessing Officer's reliance on the statement of an intermediary who denied purchase did not outweigh the documentary proof of registration and transfer.

Conclusion: The addition of Rs. 26,00,000 treated as unexplained cash deposit is deleted and the assessee's appeal on this issue is allowed (in favour of the assessee).

Final Conclusion: The revenue appeal against allowance of deduction under Section 54F is dismissed and the assessee's appeal against the addition of Rs. 26,00,000 is allowed; overall, the tax assessments are adjusted in favour of the assessee on the issues decided.

Ratio Decidendi: Where an individual invests long-term capital gains in purchase of land and construction of a residential house within the statutory period and substantiates such investment by bank payments, possession and occupancy evidence and supporting bills/vouchers, deduction under Section 54F is available; municipal completion/fitness certificates are not a statutory prerequisite for allowance under Section 54F, and expenses incurred wholly and exclusively in connection with the transfer of a capital asset are deductible under the capital gains computation provisions.

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