ITAT Allows Section 54F Deduction Where Multiple Under-Construction Villas Were Held as Business Assets

The assessee filed his return forIncome 2022-23 declaring total income of Rs. 3.85 crore. During the year, he sold an artwork/painting on 16.10.2021 for Rs. 17.74 crore and claimed deduction under Section 54F by investing Rs. 22.50 crore in the purchase of a residential house on 31.03.2022. The case was selected for scrutiny to verify the Section 54F claim.

The Assessing Officer disallowed the deduction on the ground that the assessee already owned one residential house and had constructed two additional villas within one year of the sale of the capital asset, thereby violating the proviso to Section 54F. The assessment was completed by denying the deduction and taxing the capital gains. On appeal, the CIT(A) allowed the assessee’s claim. The Revenue carried the matter in appeal before the Tribunal.

Main Issue: Whether deduction under Section 54F could be denied on the ground that the assessee owned or constructed more than one residential house, when two villas were under construction and claimed to be business assets on the date of transfer of the original capital asset.

Tribunal Held: The ITAT dismissed the Revenue’s appeal and upheld the order of the CIT(A). The Tribunal held that on the date of sale of the artwork, the assessee owned only one residential house. The two villas relied upon by the Assessing Officer were under construction and were not fit for occupation on the date of transfer. These villas were developed as business assets, later sold, and the profits were offered to tax as business income.

As the assessee was not the owner of more than one residential house on the relevant date and had duly invested the capital gains in a residential property within the prescribed time, the conditions of Section 54F were satisfied. The disallowance was therefore unsustainable.

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