Section 54F deduction cannot be denied if construction was in progress and was not complete on time: ITAT

The assessee is a resident of Kuwait & a doctor by profession. The Assessee in the year under consideration, sold a Plot of Land and earned LTCG, which was invested in the purchase and construction of a residential house and accordingly, deduction was claimed.

Thereafter, the case was opened for limited scrutiny by CASS to examine “large deduction claimed under section 54B. 54C, 54D, 54G & 54GA” as would be evident from the Assessment Order ( Para 2 , Page 1 of the Assessment Order)

During scrutiny proceedings, the said claim of deduction under section 54F, had been examined in detail and duly allowed. However, only the indexed cost of acquisition of Rs. 10,25,801 /- & the expense of Rs. 2,83,473 /- was disallowed.

The only effective issue involved in the present appeal is the disallowance of deduction under section 54 F, and enhancement made by the Ld. CIT(A) viz. a) that the amount of Sale Consideration was not deposited in the Capital Gains Account Scheme. b) That the claim of 54F is not applicable as the construction has not been completed.

ITAT Order:

12. In the instant case, undisputedly, the amounts for purchase of property and the construction thereon, were paid duly within the relevant period, as prescribed under law and that too from the Capital Gains Account. The said fact of the payments being made, has been admitted by the Ld. CIT( A), which is evident from the perusal of in para 5 .2.2 at Page 16 of his order. In such circumstances, the disallowance of the entire exemption only because the construction was not completed is without any basis and/or merit and the said action of the Ld. CIT( A) deserves to be quashed.

13. On this issue, reliance is being placed on the following judgments:

Smt. Rajneet Sandhu vs. CIT, [2011] 16 taxmann.com 210 (Chandigarh)

The construction was in progress and was not complete and in view thereof the benefit of exemption claimed under section 54 F was rejected by the authorities below. However, following the ratio laid down by the Madhya Pradesh High Court in the case of Smt. Shashi Varma v. CIT [1997] 224 ITR 106. It was found that there was no merit in the plea of the authorities in denying the exemption under section 54 F on the ground that the construction of the house had not been completed. The requirement of sections 54 and 54F is for the assessee to have either purchased a residential house being a new asset within the stipulated period or construct a residential house within a period of three years from the date of transfer. The section does not prescribe the completion of the construction of the residential house and the thrust is on the investment of the net consideration received on sale of original asset and the start of construction of a new residential house. In view thereof, where the assessee had invested the consideration received on sale of original asset in the purchase of the plot of land and started construction though not completed, the assessee had complied with the provisions of section 54F and hence was entitled to the benefit of exemption claimed. Accordingly, the order of the Commissioner (Appeals) was set aside and directed the Assessing Officer to allow the claim of the assessee in respect of the benefit of exemption claimed under section 54 F. [Para 11]

Smt. Shashi Varma v. CIT [1997] 224 ITR 106 ( MP.)

More so, section 54 only says that within two years, the assessee should have constructed the house but that does not mean that the construction of house should necessarily be complete within two years. What it means is that the construction of house should be completed as far as possible within two years. In the modern days, it is not easy to construct a house within the time- limit of two years and under the Government schemes, construction takes years and years. Therefore, confining to two years’ period for construction and handing over possession thereof is impossible and unworkable under section 54. If substantial investment is made in the construction of house, then it should be deemed that sufficient steps have been taken and this satisfies the requirements of section 54. Therefore, the view taken by the Tribunal was not correct.

Hasmukh N. Gala vs. ITO [2017 ] 83 taxmann.com 49

It was held that completion of the construction or possession of the residential house is not material if assessee has invested the substantial part of the money for acquisition or construction of residential house. In such a case deduction u/ s 54 or 54 F cannot be denied.

Pr. CIT vs. C. Gopalaswamy [2016] 384 ITR 307 ( Karn)

It was held that where the assessee has entered into an agreement with a builder and invested the capital gain for purchase of a residential unit, he is entitled to deduction u/s. 54 irrespective of the fact that builder has not completed the construction or has not yet handed over the flat.

14. Thus, we hold that the ld. CIT(A) erred in disallowing the claim by making factually incorrect observations that the assessee had not deposited any amount in the capital gains scheme account whereas the amounts were duly deposited in the capital gains scheme account and duly utilized from the said account only. The ld. CIT( A) further erred to even take cognizance of the capital gains account which was placed on record. Further, owing to availability of sufficient evidences on record, we also hold that the stamp duty registration cost of Rs. 2,83,473 /- are hereby allowed.

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