A significant ruling on Section 54F, IT Act

This week’s article is about Sec. 54F of the Income Tax Act, under which one can claim deduction on long-term capital gains tax earned on sale of assets other than residential house by investing the net sale proceeds into a residential property. The remarkable feature of this particular case is that it allows deduction to be claimed in more than one assessment year for investment in the same property.

First the background. During the year, the assessee sold five assets other than residential houses and invested the net sale consideration received in construction of a residential property at Mehendi Farms, New Delhi. In the return of income filed, the assesse claimed deduction under section 54F of the Income-tax Act, 1961.

The Assessing Office disallowed this for a couple of reasons. The first one was that the for the investment in the Mehendi Farms property, the taxpayer had already claimed deduction u/s 54F in the previous year. So this was the second time he was claiming deduction for investing in the same property. Secondly, at the time of claiming deduction, the assesse owned more than one residential house and therefore was not eligible for deduction under section 54F of the Act which stipulates that a taxpayer cannot own more than one house other than the new house to claim deduction under Sec. 54F.

In response, the assesse submitted that he was having only one residential house at Vasant Vihar, New Delhi, apart from the house at Mehendi Farms for which deduction u/s 54F was being claimed. The CIT-(A) after considering the submission of the assesse allowed the deduction with the following observations:

Although the appellant had one house at Vasant Vihar, the same was let out during the year, which is also evident from the computation of income for the relevant assessment year, wherein the rental income from the same house has been declared as income from house property. This indicates that the appellant was not using that house as his residence during the relevant assessment year. At the same time, the construction of residential house at Mehendi Farms was also not complete and the appellant was residing during the relevant period in a residential property in the name of HUF at Naraina Vihar, New Delhi. This fact is also evident from the documents such as telephone bill, copy of passports and copy of correspondences with IFCI. The appellant shifted to his residential house at Mehendi Farms on 21.7.2010 which is evident from the completion certificate as well as the other evidences such as copies of Passports, identity cards issued by the election commission of India etc. which is available on the record.

It is worthwhile to mention here that section 54F is a beneficial section and it has to be interpreted liberally, as held by various courts. It is further observed that proviso of subsection (1) of Section 54F itself provides that sub section (1) of section 54F shall not apply where the assessee owns more than one residential house, other than the new asset on the date of transfer of the original asset. Even if it is accepted that the appellant was having one residential house at Vasant Vihar, the appellant was not owning another house other than the new asset at Mehendi Farms, on the date of transfer of the original asset. Therefore, it is clear that the appellant was not having more than one residential house (i.e. at Vasant Vihar) other than the new asset (i.e. at Mehendi Farms) on the date of transfer of original asset. Therefore, the appellant was eligible for deduction as per the proviso of section 54F in respect of the long term capital gains earned during the relevant assessment year.

Also, it was further observed that there is no bar in section 54F for claiming deduction second time or third time for the same property if cost of the property is within the capital gain arisen to the appellant. In the instant case, total capital gain arisen to the appellant in all the three years 2009-10 to 2011-12 was less than the cost of construction of the residential property at Mehendi Farms. So on these facts and circumstances of the case, deduction u/s 54F of the Income Tax Act was to be allowed.

Lastly, in the previous assessment year, the Assessing Officer had allowed deduction under section 54F of the Act on same set of circumstances and therefore in view of the principle of consistency, the deduction under section 54F of the Act, in the year under consideration, is also allowable.

A couple of additional issues in the case were that the Revenue had challenged the inclusion of Rs. 50,000 on account of business promotion expenses as well as Rs. 120,000 as vehicle running expenses as these were deemed to be of personal nature. This action of the Revenue was also overturned and the expenses claimed allowed as the disallowance made by the Revenue was only on surmises and without bringing any evidence on record of the personal use of the business promotion expenses and the vehicle running and maintenance expenses. Not a single voucher of expense has been pointed out by the Assessing Officer to indicate that the business promotion expenses or the vehicles were used by the appellant for his personal purposes. Moreover, the Assessing Officer has not given any basis for making the aforesaid disallowances. In the absence of any cogent material evidence on record of the personal use of the business promotion expenses and the vehicles, the estimated disallowance made by the Assessing Officer was reversed.

To Sum The significant take home from this case is that there is no bar in section 54F for claiming deduction second time or third time for the same property if cost of the property is within the capital gain arisen to the taxpayer. The same logic would apply to other instances too where if the cost of the new asset covers the capital gain earned over multiple years, then disallowance cannot take place on account of the fact that it is investment in the same property that the tax deduction is being sought for in multiple years. Many taxpayers stand to benefit from this seemingly innocuous ruling that nonetheless is bound to have far reaching consequences.

The authors may be contacted at wonderlandconsultants@yahoo.com