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.

In a typical case, the asset sold is in a single name.  Due to personal and social reasons, the assessee may invest the sale proceeds in a residential house in either joint name or in the name of other person.  In these cases, the money flow of sale proceeds and purchase price can easily be traced and it can be established that the assessee has invested the amount. 

In such cases, the tax department raises objection that since the asset is in joint name with other person or in the name of other person, the condition that the ‘assessee should purchase a residential house’ is not satisfied. The tax exemption is therefore denied.

In this regard, the predominant judicial view is in favour of the assessee and allowing the tax exemption.  However, in certain cases, the Courts have taken a contrary view. These cases are discussed below.

Cases wherein exemption was granted:

DIT vs. Mrs. Jennifer Bhide [2011] 15 82 (Kar HC) – The assessee, an NRI, sold her residential property and invested part of sale proceed on purchase of residential property and bonds & claimed exemption u/s 54 and 54EC of the Act.  The AO found that the above property was not in the name of the assessee alone but was in the name of her husband jointly.  Though the name of the assessee’s husband was shown in the sale deed as well as in the bonds, entire consideration for acquisition of the same is flown from the assessee.  The AO, therefore, allowed exemption only to the extent of 50%.  The Tribunal allowed the full exemption.

On Revenue appeal, the HC observed that on careful reading of section 54, it is not expressly stated that the purchase to be made or the construction to be put up by the assessee, should be there in the name of the assessee only.  The HC further observed that even in respect of section 54EC, the assessee has at any time within a period of six months after the date of such transfer invested the whole or any part of the capital gains in the long term specified asset then she would be entitled to the benefit mentioned in the said section.  The HC held that in absence of an express provision contained in these sections that the investment should be in the name of the assessee only, any such interpretation were to be placed, it amounts to Court introducing the said word in the provision, which is not there.  The claim of exemption was allowed.

CIT vs Ravinder Kumar Arora 342 ITR 38 (Delhi HC) – The assessee had LTCG from sale of a plot of land and claimed exemption under section 54F on account of purchase of new house property.  The AO noted that though entire purchase consideration was made by the assessee, the residential house was purchased jointly in the names of the assessee and his wife. Therefore, AO allowed only 50% of the investment as exempt in the hands of the assessee. 

The ITAT allowed the exemption (21 305 (Delhi ITAT)).  The Tribunal further observed that whole of the purchase consideration has been paid by the assessee and not even a single penny has been contributed by the wife in the purchase of the house. The Tribunal also noted the argument that the property was purchased by the assessee in the joint name with his wife for ‘shagun’ purpose and because of the fact that the assessee was physically handicapped.

The HC upheld the ITAT Order.  The HC held it would be treated as the property purchased by the assessee in his name and merely because he has included the name of his wife and the property purchased in the joint names would not make any difference.  The HC observed that such a conduct has to be, rather, encouraged which gives empowerment to women.  There are various schemes floated by the Government itself permitting joint ownership with wife.  The HC held that if the view of the AO or the contention of the Revenue is accepted, it would be a derogatory step.  The exemption was to be allowed.

CIT vs Kamal Wahal [2013] 30 34 (Delhi HC) {100% ownership in name of spouse} –

The Assessee sold his joint inherited property from his father, which gave rise to LTCG. 

Sale proceeds were invested in acquisition of vacant plot and purchase of a residential house in the name of his wife.  Exemption under section 54F was accordingly claimed.  AO denied the exemption.

The HC also observed that Section 54F being a beneficial provision enacted for encouraging investment in residential houses should be liberally interpreted.  Referring to various judicial decisions, the HC observed that “predominant judicial view, for the purposes of Section 54F, the new residential house need not be purchased by the assessee in his own name nor is it necessary that it should be purchased exclusively in his name. It is moreover to be noted that the assessee in the present case has not purchased the new house in the name of a stranger or somebody who is unconnected with him. He has purchased it only in the name of his wife. There is also no dispute that the entire investment has come out of the sale proceeds and that there was no contribution from the assessee’s wife.”  Exemption was accordingly granted.

CIT v. Gurnam Singh [2008] 170 Taxman 160, 327 ITR 278 (P&H HC) – The Assessee sold an agricultural land and out of sale proceeds purchased another agricultural land in his name and in name of his only son.  The assessee claimed deduction under section 54B.  AO disallowed the same on ground that land was purchased by assessee in name of his son as co-owner.  The HC held that admittedly, purchased land was being used by assessee only for agricultural purpose and merely because in sale deed his only son was also shown as co-owner, assessee could be denied deduction under section 54B.

CIT v. V. Natarajan [2006] 154 TAXMAN 399 (MAD HC) – The Assessee, who owned a house property, sold the same and purchased a property in name of his wife.  The Assessee claimed exemption under section 54.  The HC held that since assessee was owner of a house property, he would be entitled to exemption under section 54.

CIT v Sh. Mahadev Balai ITA 136/2017 (Raj HC) – The HC allowed exemption u/s 54B for investment made by the assessee in the name of his wife.

N Ram Kumar vs ACIT [2012] 25 337 (Hyd ITAT) – The Assessee had LTCG.  Out of sale consideration of shares, the assessee purchased a flat in the name of his minor daughter and claimed deduction u/s 54F(1) of the Act.  The AO disallowed the deduction claimed on the ground that the flat was not purchased by the assessee in his own name.  The Assessee submitted that minor daughter was considered auspicious and the income of the minor daughter was also assessed at the hands of the assessee only.

The ITAT held that on reading the section 54F makes it is clear that there is no requirement that the house has to be purchased in the name of the assessee only. The only requirement of the provision is the assessee must have purchased the house.  In the present appeal, the fact remains that the minor daughter has no ostensible source to make such investment in purchase of flat. It is the assessee who had actually made the investment out of the consideration received towards sale of shares.  The exemption was allowed.

Jitendra V Faria vs ITO [2017] 81 16 (Mumbai ITAT) – The assessee had shown capital gains on sale of residential property, which he owed with his wife.  The Assessee purchased a new property in his name and in the name of his brother. The AO concluded that the exemption claimed by the assessee will be restricted to 50% and rejected the contention of the assessee that brother’s name was included for the sake of convenience and the entire amount was paid by the assessee.  On the basis of various judgements, the ITAT held that there is no justification for giving only 50% benefit for investment in the new house.  The ITAT allowed exemption for 100% investment.

Smt. Saraswati Ramanathan vs ITO [2009] 116 ITD 234 (DELHI) (SMC) – Out of sale proceeds of shares, the assessee invested in rural electrification corporation bonds in the joint names of herself, being the first name, and her son. She claimed exemption from capital gains tax under section 54EC which was negatived by the AO on the ground that the investment in the bonds was in the joint names which was not permitted.

The Tribunal allowed the exemption.  The ITAT observed that normally, when an investment is made, particularly if it is made by a person of advanced age, precautions are taken to include another name – the name of a much younger person, preferably a heir (may be spouse or children) – is included so that no problems arise in future in case the person investing dies. It is quite common to find a person investing in a house to include the name of the spouse as a joint name. The object in doing so is merely to avoid any problem in future in case anything untoward should happen to the investor. The only condition is that the funds used for the investment must be traceable to the sale proceeds of the capital asset. Since this condition is satisfied in this case, exemption is available.

Krishnappa Jayaramaiah v. ITO – [2021] 125 110 (Bangalore ITAT) – The assessee had invested sale consideration received on transfer of Capital Asset in purchasing a new residential property in name of his married widowed daughter. 

Assessing Officer to grant exemption under section 54F on such amount invested in his daughter’s name

Shri Puranchand & Family (HUF) vs ITO [2017] 79 156 (Chennai – Trib.) – The assessee-HUF sold diamonds which resulted in LTCG.  The Assessee purchases a house property with three other coparceners of HUF.  The assessee claimed exemption under section 54F.  The AO disallowed the claim of exemption on three grounds – i) first, the capital asset was purchased in the individual name of coparcener of HUF; ii) borrowed funds were used for purchase of the new asset and not the sale proceeds of the diamond; and iii) there was no construction on the new asset.

The ITAT held that even though HUF is an independent assessable unit under Income Tax Act, under the common law, HUF cannot be considered to be a legal entity.  The HUF has to be represented through any one of the coparceners. Therefore, when the assessee HUF invested the funds in the name of any one of the coparcener, it has to be construed that the investment was made in the name of HUF. 

The Assessee had purchased the new asset from the borrowed funds as the sale was made after the date of purchase of the new property.  The Tribunal held that when the assessee borrowed the funds and utilized in purchasing the capital asset and thereafter uses the sale proceeds or capital gain for repaying the loan borrowed, that would amount to sufficient compliance of the requirement of Section 54F of the Act.

With respect to third issue, the Tribunal held that when the assessee has purchased a building and made some investment for making it fit for human habitation, the same has to be treated as part of the investment from out of the capital gain and the AO is not justified in rejecting the claim of the assessee on the ground that the assessee has not filed any proof/plan of the asset.

PCIT vs Vaidya Panalalmanilal (HUF) (2018) 98 189 (Gujarat) – The assessee HUF sold a capital asset & claimed exemption of such capital gain under section 54F on purchase of new residential house.  The AO noticed that the new asset was in the name of two members of HUF & not in name of HUF.  Therefore, the AO rejected the deduction claimed by the Assessee.

The tribunal held that there was substantial compliance with the requirement of section 54F of the Act when neither the source of acquisition of the new capital asset nor the account of such new asset in the name of the HUF are doubted.  The ITAT concluded that mere technicality that the sale deed was executed in the name of member of the HUF rather not HUF, would not be sufficient to defeat the claim of deduction.  The sale consideration arising out of the sale of the capital asset was used for acquisition of a new asset and that such newly acquired asset was also shown in the accounts of the HUF.  The names of two members of the HUF shown in the sale deed was only a cosmetic in nature.  The exemption was allowed.  The HC upheld the ITAT decision.

Shankar Lal Kumawat v. ITO – [2021] 125 347 (Jaipur – Trib.) – The assessee sold a residential house and invested sale consideration in purchase of a plot of land and carried out construction of a residential house thereon.  The ITAT held that mere fact that investment in new property was made in name of his wife could not be a reason for disallowance of deduction under section 54 to assessee.

Other favourable decisions are:

  • CIT v Dinesh Verma (2015) 233 Taxman 409 (P&H)
  • ITO v Smt Rachna Arora (2021) 90 ITR(T) 575 (Chandigarh Trib)

Cases wherein exemption was denied:

Prakash vs ITO [2008] 312 ITR 40, 173 Taxman 311 (Bombay HC) – The assessee sold his agricultural land and invested sale proceeds in purchasing a plot and constructing a residential house thereon in the name of his only adopted son.  The assessee claimed exemption under section 54F. The AO held that the investment made by the assessee in the name of his son did not qualify for exemption under section 54F and, therefore, he was liable to pay capital gain taxes.

The HC observed that the sale of original asset till the purchase and/or construction of the residential house, i.e., the ‘new asset’, the ownership and domain over the new asset is a must. The new property must be owned by the assessee and/or he must be having legal title over the same.  The HC observed that the deceased assessee, admittedly, though sold the property owned by him yet purchased the new property in the name of adopted son and paid consideration out of the sale proceeds in question, with clear intention to transfer the property to the adopted son. He, therefore, utilised the sale proceeds to construct a house by transferring the property and submitting plan in the name of the son only.  The intention was very clear from the day one to transfer the property even before the construction of residential house to the adopted son.  The Assessee transferred the property before the prescribed period, as per the scheme of section, and the son becomes the owner of the property for all the purposes. The deceased/ assessee, admittedly, had no domain and/or right whatsoever on the said property. This fact itself, therefore, disentitled him to claim any exemption as there were various non-compliances of the conditions as per the scheme of sections 54 and 54F of the Income-tax Act as mentioned above.

Ganta Vijaya Lakshmi vs ITO [2015] 54 301 (AP HC) – The assessee purchased new asset in the name of her married daughters, who are also her heirs.  The HC denied the exemption under section 54B and 54F. 

Kalya v. CIT 22 67 (Raj HC) – The Assessee transferred agricultural land.  The HC held that word ‘assessee’ used in Income-tax Act needs to be given a legal interpretation and not a liberal interpretation and, consequently, an assessee would not be entitled to get exemption under section 54B for land purchased by him in name of his son and daughter-in-law.

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