Under section 54 and 54F provides for exemption from Long Term Capital Gains for certain investments.  Under section 54, the Assessee should appropriate the capital gains towards “cost of the residential house purchased or constructed”.  Similarly, under section 54F, the assessee should appropriate the net sale consideration towards “cost of new asset (purchased or constructed, one residential house in India)”.

 The meaning of the term “cost of the residential house” is therefore important.  Issues have arose before Courts, whether cost of land, furniture etc can be considered for calculating cost of the residential house.  These issues are discussed below:

Circular : No. 667, dated 18-10-1993: The Board has examined the issue whether, in cases where the residential house is constructed within the specified period, the cost of such residential house can be taken to include the cost of the plot also.  The Board are of the view that the cost of the land is an integral part of the cost of the residential house, whether purchased or built.  Accordingly, if the amount of capital gain for the purposes of section 54, and the net consideration for the purposes of section 54F, is appropriated towards purchase of a plot and also towards construction of a residential house thereon, the aggregate cost should be considered for determining the quantum of deduction under section 54/54F, provided that the acquisition of plot and also the construction thereon, are completed within the period specified in these sections.

C. Aryama Sundaram vs. CIT; 407 ITR 1 (Mad) – The Assessee sold a residential house property on 15/01/2010 for a total consideration of Rs. 12.50 crores and the total LTCG was Rs. 10.48 crores.  On 14/05/2007, the assessee had purchased a property with a superstructure thereon for a total consideration of Rs. 15.96 crores.  After demolishing the existing structure, the Assessee constructed a residential house at a cost of Rs. 18.73 crores.  For the A. Y. 2010-11, the Assessee claimed entire LTCG as exempt from tax under sec 54.  The Assessing Officer held that only that part of the construction expenditure that was incurred after the sale of the original asset was eligible for exemption u/s. 54.  Accordingly part exemption was granted by AO.

The Madras HC held that section 54(1) did not exclude the cost of land from the cost of the residential house.  As per the provisions, LTCG had to be adjusted against the cost of the new residential house.  The HC held that it was the cost of the new residential house and not just the cost of construction of the new residential house, which was to be adjusted.  The HC observed that the cost of the new residential house would necessarily include the cost of the land, material used in the construction, labour and any other cost relatable to the acquisition or construction of the residential house.  The exemption was accordingly allowed.

Rajat B Mehta vs. ITO (ITAT Ahmedabad) ITA No 19/Ahd 2016, 169 ITD 178 (Ahmedabad ITAT) – The Assessee claimed exemption u/s 54 for investment residential house including furniture.  The AO disallowed the claim for furniture.  The ITAT held that the expression “cost of the residential house so purchased” in s. 54 is not confined to the cost of civil construction but includes furniture and fixtures if they are an integral part of the purchase. The ITAT held that cost of residential house is entire cost of house, and it cannot be open to Assessing Officer to treat only cost of civil construction as cost of house and segregate cost of other things as not eligible for deduction under section 54. 

Shrinivas R. Desai v. ACIT [2013] 35 taxmann.com 170 (Ahmedabad – Trib.) – The ITAT held that additional cost incurred towards residential house post purchase is eligible for exemption.  The ITAT observed as follows: “The use of words ‘purchased or construed’ does not mean that the property can either be purchased or constructed and not a combination of both the actions. A property may have been purchased as a readymade unit but that does not restricts the buyer from incurring any bonafide construction expenditure on improvisation or supplementary work. Accordingly, in our considered view, as long as the assessee has incurred the bonafide construction expenditure, even after purchasing the unit, the additional expenses so incurred would be eligible for qualifying investment under Section 54.”

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