ITAT Allows Section 54F Deduction On Construction Of The New Dwelling/Residential Unit

The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has allowed the deduction under Section 54F of the Income Tax Act on construction of the new dwelling/residential unit.

The bench of Aby T. Varkey (Judicial Member) and Amitabh Shukla (Accountant Member) has observed that the assessee had discharged the burden to prove construction of a residential house/dwelling unit (first floor with separate staircase, kitchen, new electrical connection, water connection, etc.), and it is not disputed that construction of the new dwelling/residential unit was within the time stipulated under Section 54F of the Income Tax Act.

The appellant/assessee filed a return of income. The income of the assessee consists of salary, income from other sources, long-term capital gain, and losses of the current year.

The RoI was selected for scrutiny under CASS, and the AO completed the assessment on 30.03.2015 by making disallowance of claim under section 54F of the Income Tax Act.

The assessee had sold the land at Noombal Village for a consideration of Rs. 78,48,000 on 29.02.2012 and admitted LTCG and claimed deduction under Section 54F to the tune of Rs. 57,41,274 on the investment made in the newly constructed house.

However, according to the AO, the assessee has extended his old house by constructing the first floor to the existing ground floor, whose construction started a year ago before the date of transfer. The AO noted that as per the provisions of Section 54F of the Income Tax Act, the assessee could only have purchased a residential house one year before the transfer. Since no new residential house was purchased or constructed and it was only an extension of the old house, the AO disallowed the claim of the assessee under Section 54F of the Income Tax Act. On appeal, the CIT(A) has confirmed the action of the AO.

The assessee contended that under Section 54(1), the capital gain arising from the transfer of a residential house is not to be charged to income tax as income of the previous year if the assessee has, within a period of one year before or two years after the date of transfer of that residential house, purchased another residential house in India or has, within a period of three years after the date of transfer, constructed a residential house in India. If the amount of the cost of the residential house so purchased or constructed is equal to or less than the amount of capital gain. The assessee would be allowed deduction if he purchased a residential property one year before or after two years from the date of transfer or constructed a residential house within three years from the date of transfer. The assessee had constructed a house (first floor on the top of the ground floor building, which was already existing) and claimed deduction under Section 54F of the Act on the constructed first floor, which has been denied only on the ground that such a claim under Section 54F of the Act can be allowed only if an assessee constructed a house within three years from the date of transfer. This reason of the AO can't be accepted because, under Section 54F of the Income Tax Act, if the assessee had purchased a house one year before the date of transfer, then the assessee could have successfully claimed deduction.

The tribunal, while allowing the assessee's appeal, held that it is not a requisite of Section 54 that construction could not have commenced prior to the date of transfer of the asset resulting in capital gain. If the amount of capital gain is greater than the cost of the new house, the difference between the amount of capital gain and the cost of the new asset is to be charged under Section 45 as the income of the previous year. If the amount of capital gain is equal to or less than the cost of the new residential house, including the land on which it is constructed, the capital gain is not to be charged.

Counsel For Appellant: Sathyanarayanan

Counsel For Respondent: P. Sajit Kumar

Case Title: Shri Chandra Bhavani Sankar Versus ITO

Case No.: ITA No.101/Chny/2024

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