section 54, section 54F, construction prior to transfer, instalments prior to transfer, completion of construction,
Section 54 provides for exemption from tax for capital gain arising from the transfer of long-term capital asset (being a residential house), if the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India.
Section 54F provides for exemption from tax for capital gain arising from the transfer of long-term capital asset (not being a residential house), if the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, one residential house in India.
Many a times, Assessee may enter into agreement to purchase a house with builder and instalments towards purchase might have been paid before the transfer of original asset. Similarly, assessee might have started the construction of his residential house before the transfer of the original asset. In such circumstances, the issue that arises for consideration is whether the assessee is eligible for exemption under section 54/54F if the purchase or construction of the residential house is completed within the time limit prescribed in the sections.
Case Laws in Favour of Assessee
Karnataka HC in J R Subramanya Bhat 165 ITR 571 has held that commencement of construction is not relevant for the purpose of section 54 and what is relevant is only completion of construction.
CIT v. H.K. Kapoor  234 ITR 753 (Allahabad) – Held that capital gains under section 54 cannot be refused merely on ground that construction of new house had begun before sale of old house.
Moturi Lakshmi [TS-452-HC-2020(MAD)] – In this case Madras HC held that investment/advance payment made by assessee towards purchase of flat prior to sale of original capital asset during AY 2013-14 is eligible for exemption. The HC also rejected the Revenue’s reliance on SC constitution bench ruling in Dilip Kumar holding that exemption provisions are to be construed strictly.
CIT v Bharti Mishra  41 taxmann.com 50 (Delhi HC) – The HC held that section 54F(1)(iii) stipulates that assessee shall within a period of three years after date of sale of original asset, construct a residential house and it does not specify that construction must begin after date of sale of original/old asset. Held that exemption claim u/s 54F cannot be denied on ground that construction of house had commenced before date of sale of shares. Followed in Reema Chawla TS-473-ITAT-2023(Del).
ACIT v Subhash Sevaram Bhavnani (2012) 23 Taxmann.com 94 (ITAT Ahd) – Assessee sold flat. Assessee had purchased land 23 months prior to transfer. Part construction before transfer and part after transfer. The AO disallowed the claim on the ground that construction had started before transfer of flat. Held that in order to claim deduction under section 54, construction of house has to be completed within prescribed time limit. The ITAT held that date of commencement of construction is not material. Held that since part construction after transfer, exemption u/ 54 available.
Kapil Kumar Agarwal v. DCIT  108 taxmann.com 299 (Delhi – Trib.), 178 ITD 255 (Delhi-Trib) – The assessee sold shares and entered into an agreement with a builder for purchase of new residential flat. The flat was to be constructed by the builder in phased manner and payment of which was linked to stage of construction. The AO held that it was case of construction and not purchase, and therefore investment should be made within 3 years of transfer of original asset. The AO disallowed the exemption claim on the ground that the assessee had started investing in the new asset from 3 years and 11 months before the date of sale and around 90 per cent of the total investment in the new asset was made before the date of sale of the original asset. The Tribunal held that it was case of purchase of residential house and not construction. The Tribunal further held that assessee would be entitled to benefit of deduction under section 54F despite fact that construction activities of new flat had started before date of sale of original asset.
CIT v Beena K Jain (1994) 75 taxman 145 (Bom-HC) – Assessee sold office premises on 23-7-1987, which resulted in long-term capital gains. Before the transfer, the assessee had entered into an agreement dated 4-9-1985 for purchase of a residential flat. Assessee paid consideration amount on 29-7-1988 and got the possession of said flat on 30-7-1988. The Tribunal held that new residential house was purchased by the assessee within two years after the sale of the capital asset which resulted in long-term capital gains and exemption was available. The HC held that no question of law arose.
Bastimal K Jain v ITO (2016) 76 taxmann.com 368 (Mum Trib) – The assessee sold his residential flat on 24-2-2010. He claimed deduction under section 54 in respect of purchase of flat vide agreement to purchase dated 28-12-2007. The Assessing Officer rejected claim on ground that flat was purchased one year before date of sale of property. The assessee claimed that the possession of the flat was handed over to the assessee only on 11-9-2009 and that date should be reckoned for the purpose of computation of claim of deduction under section 54F. The Tribunal allowed the claim of the assessee.
Raj Easow v ITO TS-155-ITAT-2022 (Mum) – The Tribunal held that for the purpose of section 54 the date on which possession is taken by the assessee should be taken as the date of purchase and not the date of registration of agreement of sale.
Case Laws in Favour of Revenue
Anu Agarwal 28 Taxmann.com 286 – construction not commenced, plot only purchased. Held that exemption is not available.
Sushil Kumar Bafna v. ITO  81 taxmann.com 50 (Indore – Trib.) – The Assessee sold a piece of land and invested part of sale consideration in plot of land. The Assessee claimed that balance sale consideration would be utilized in construction of property. Since, assessee had not constructed residential house within specified period of three years from date of transfer and further balance amount was also neither utilized in construction nor deposited in capital gains account scheme, the assessee was not entitled to exemption under section 54F.
Parswanath Padmarajaiah Jain v. ACIT  102 taxmann.com 92 (Bengaluru – Trib) – The assessee purchased a land on 17-4-2010. The capital asset was transferred on 1-4-2012. The Assessee claimed exemption under section 54F, of an amount of Rs.3.84 crores out of the capital gains of Rs.8.62 crores on the premise that the assessee’s case would fall within the purview of section 54F(1) as the assessee had carried out the construction within 3 years, which included the purchase of land. The Tribunal held that the assessee is not entitled to the benefit of section 54F in respect of the investment made by the assessee in purchasing the capital asset (land) prior to the period of one year from the sale of capital asset.
The Tribunal further observed that Section 54F is an exemption provision and though there is no ambiguity in reading of section 54F assuming there is some ambiguity; in that eventuality section 54F is required to be read in favour of the revenue as held by the Supreme Court in the matter of CC (Import) v. Dilip Kumar & Co.  95 taxmann.com 327/69 GST 239.