2026 (3) TMI 635 - AT - Income Tax

Capital gains exemption under Section 54F upheld where prior payments for an under construction residence qualify if completed within statutory period.

Examines eligibility for deduction under the capital gains exemption for investment in an under construction residential property where substantial ... Eligibility for deduction u/s 54F - investment in an under-construction residential property - claim denied as assessee had merely purchased an immovable property and not constructed the said villa, thereby disallowing the benefit u/s. 54F HELD THAT: - The Tribunal found that the assessee sold an old property and paid the full consideration for an under-construction villa prior to filing the return, and the contractor confirmed receipt of that consideration in 2014. Relying on the ratio in C. Aryama Sundaram [2018 (8) TMI 864 - MADRAS HIGH COURT] as affirmed by the Supreme Court [2023 (5) TMI 1119 - SC ORDER] wherein as held that not only cost of construction of new property incurred after sale of old property would be eligible for exemption u/s 54(1), but also cost to land on which new property was constructed, even if such land had been purchased three years prior to sale of old property. Tribunal held that section 54/54F does not preclude relief where expenditure on acquisition or construction of the new residential house (including land) was incurred prior to the date of transfer, provided the investment falls within the statutory time-limits and the capital gain is accordingly applied. The reassessment which disallowed the claim was held to be based on a wrong appreciation of facts and law. [Paras 7, 8] Final Conclusion: The Tribunal allowed the appeal, holding that the assessee was entitled to deduction under section 54F for investment in the under-construction residential property Issues: Whether the assessee is eligible for deduction under section 54F of the Income-tax Act, 1961 in respect of net sale proceeds invested in an under-construction residential property where payment was made prior to the sale of the old property, and whether the reassessment disallowing that deduction is liable to be quashed.Analysis: The appeal examines the scope of exemption under Section 54F of the Income-tax Act, 1961 and the temporal tests for acquisition or construction of a new residential property. Relevant facts include sale of an old property on 19.08.2014, payment of substantial consideration for an under-construction villa between February and May 2014, claim of deduction under Section 54F in return filed 24.08.2015, and execution/purchase deed dated 26.04.2017. Authorities relied upon establish that Section 54(1)/54F does not mandate that the very same money received on sale must be physically applied only after the date of transfer, and that acquisition or construction within statutory periods may include prior payments/land costs where the new property is completed within the prescribed time. On the recorded facts the assessee had paid the sale consideration prior to filing return and documentary confirmations support application of the invested amount to the new residential unit. The reassessment and appellate orders disallowed the deduction on the ground that possession/purchase deed date fell beyond the two-year limit; however, precedent affirms that prior purchase/land cost and payments made before transfer can be considered for exemption where statutory conditions are otherwise satisfied.Conclusion: Deduction under section 54F of the Income-tax Act, 1961 is allowable to the assessee on the facts and documentary evidence presented; the reassessment disallowing the deduction is quashed and the appeal is allowed in favour of the assessee.