Section 54F benefit for under-construction flats

This week's case is about a taxpayer who filed his return of income on 29.7.11 for AY 2011-12 declaring income of Rs 1.43 crore. In the return of income, the taxpayer showed sale of shares on 13.7.2010 for a consideration of Rs 80 lakh and offered long-term capital gain of Rs 79.85 lakh. The taxpayer had booked a flat on 18.8.2006, for which he paid various installments over a period of time totaling to Rs 1.42 crore. Accordingly, the taxpayer claimed the benefit towards investment in the said flat, against the above referred long-term capital gains, under section 54F of the Income Tax Act ('the Act').

During the course of assessment proceedings, the tax officer examined the claim and was of the view that as per the provisions of section 54F of the Act, a taxpayer was allowed two time limits; one for purchase of a new property and second for the construction of a new property. In the current case, the tax officer observed from the payment schedule submitted to him that the construction of the flat had not started at the time of booking. It commenced only in 2007, and was completed during the financial year 2012-13 i.e. by 21.8.12. Based on these facts, the tax officer concluded that it's a case of construction of new house property. He further noted that the taxpayer had started investing in the new house from 18.8.06 which is approx. 3 years and 11 months before the date of sale. Also, 90% of the total investment in the new asset had been made before the date of the sale of the original property. In the taxman's view, the taxpayer would have been eligible to claim deduction u/ 54F had the entire investment in the construction of the new house been made during the period 13.2.10 to 12.7.13. As this condition was not fulfilled, the tax officer denied the deduction u/s 54F of the Act and assessed the taxpayer's income at Rs 2.23 crore.

The taxpayer preferred an appeal, but the first appellate authority dismissed the appeal.

The matter was further referred to Delhi tax Tribunal. The taxpayer relied upon a number of judicial decisions where it has been held that the benefit u/s 54F cannot be denied where the construction of new house started before sale of the original asset and that there is no requirement laid down u/s 54F that the same money received from sale of original assets should be used in buying the new house.

Based on the facts of the case, the Tribunal disagreed with the tax officer's view that the current case qualifies as a case of construction and not purchase. The Tribunal relied upon a Delhi High Court decision and concluded that purchase of a flat with a builder, wherein the builder gets construction done in a phased manner and payments are linked to construction is a case of purchase and not the construction of new asset.

The Tribunal further placed reliance on another decision of the Delhi High Court where it was held that merely because the construction of the new property had commenced before the date of sale of the original asset, the deduction u/s 54F cannot be denied. As long as the construction has been completed within the time stipulated u/s 54F, the taxpayer is allowed the exemption. Based on this decision, the Delhi Tribunal reversed the order of the tax officer and allowed the exemption of Rs 79 lakh u/s 54F of the Act to the taxpayer.

The writer is a Sebi-registered investment advisor