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Land Ownership not compulsory for claiming deduction Sec 54F

Long Form Audit Report

Overview on Capital Gains Taxation under Section 54F

ITAT Chandigarh Ruling: Deduction u/s 54F allowed on flat constructed on land owned by mother

Key Takeaways from ITAT Chandigarh Ruling on Section 54F Deduction in the matter of: Sher Singh Vs ITO (ITAT Chandigarh) – ITA No. 647/CHD/2023

Facts of the Case:

The Commissioner of Income Tax (Appeals) rejected the Assessee’s claim for Section 54F deduction, stating that the new house was constructed on land owned by his mother. Assessee had utilized sale proceeds from agricultural land to construct a residential house. The Commissioner of Income Tax (Appeals) denied the claim on the grounds that land ownership was a prerequisite for claiming deduction u/s 54F.

ITAT Chandigarh’s Ruling:

There was no dispute that the Assessee had constructed the house using the capital gains and was residing in it along with his mother. Land ownership by the mother should not disqualify the claim u/s 54F, as long as the Assessee constructed and occupied the house. Income Tax Appellate Tribunal allowed the deduction u/s 54F, recognizing that the intention of the law is to promote reinvestment in residential property & not strictly require the taxpayer to own the land.

Implications of the Ruling: Ownership of land is not mandatory for claiming deduction u/s 54F

The decision clarifies that ownership of land is not mandatory, as long as the Assessee constructs a new residential house with the capital gains. This ruling will help taxpayers who build houses on land owned by parents or relatives. The Income Tax Appellate Tribunal focused on the actual reinvestment and residential use rather than just legal ownership of land.

Overview on Section 54F & Capital Gains Taxation after Budget 2024 & Multiple Investments ITAT Rulings: 

Finance Bill 2024 Amendments on Capital Gains Taxation

  • The indexation benefit, which was earlier removed, has been partially reinstated for immovable properties acquired before 23rd July 2024.  Taxpayers can choose between two methods for LTCG calculation:
    • 12.5% tax rate without indexation
    • 20% tax rate with indexation benefit

Exceptions to indexation benefit:

  • Available only for land and buildings (not for financial assets). and  section 54F Applicable only to individuals and HUFs (not for firms or companies). Morover  section 54F Cannot be used for computing investment or loss for exemption/carry forward.

Revised Capital Gains Tax Rates

  • LTCG Taxation: The exemption limit increased from ₹1 lakh to ₹1.25 lakh per annum. and Fat 12.5% tax rate introduced for all assets (both financial & non-financial).
  • STCG Taxation: 20% tax on specified financial assets. and other non-financial assets taxed at applicable slab rates. morover unlisted bonds, debt MFs, MLDs taxed as per slab rates, regardless of holding period.

ITAT Delhi’s Landmark Ruling on Section 54F

  • Multiple investments allowed under Section 54F: The ITAT ruled that taxpayers can claim exemption multiple times if they continue reinvesting capital gains into the same under-construction house. This benefits taxpayers who invest over multiple years instead of a one-time lump-sum investment.

Implications for Taxpayers: 

This is a major relief for real estate investors and individuals selling capital assets, offering them more ways to optimize tax liability. More flexibility in capital gains tax planning with indexation choice. Greater tax savings with multiple reinvestments under Section 54F. A higher exemption threshold of INR 1,25,000/- for LTCG reduces tax burden.

Ownership of a Part of the House and Exemption u/s 54F

Section 54F provides exemption from capital gains tax when an assessee reinvests the proceeds from the transfer of a long-term capital asset (other than a residential house) into a residential property.  However, litigation has emerged over the interpretation of the term “ownership” in cases where the assessee holds partial or joint ownership in a residential property.The key question is whether such ownership should be considered as “one” residential house under the proviso to Section 54F(1) of the Income Tax Act, 1961, thereby disqualifying the assessee from availing the exemption.

  • Original Restriction in 1982: Section 54F(1) disallowed capital gains exemption if the assessee owned any other residential house on the date of transfer.
  • Relaxation in 2000: The Finance Act, 2000, introduced a Proviso, allowing exemption even if the assessee already owns one residential house.

Interpretational Issues:

  • Does ‘owns’ include co-ownership?
  • Does ‘one residential house’ include a fraction of one?

Legislative Intent & Judicial Conflicts:

  • Unlike other provisions (e.g., Sections 194IA, 269UA, 32), the Proviso does not explicitly state that part-ownership counts as ownership. Some tribunal decisions interpret “one residential house” as including co-ownership, while others do not. The General Clauses Act defines “single” as including “plural,” but does not extend it to fractional ownership.
  • Depreciation Analogy (Section 32):Explicit wording in Section 32(1) allows depreciation for “wholly or partly” owned assets. In contrast, Section 54F does not include such a clarification, implying that co-ownership may not be a disqualifier.

Conclusion:

The better interpretation is to ignore co-ownership for the purpose of disqualification under Section 54F(1). This approach preserves the incentive nature of the section and aligns with judicial principles favoring taxpayers. Until the Supreme Court settles the matter, taxpayers should rely on favorable tribunal rulings in claiming exemption despite co-ownership.

Section 86 – Reinvestment Exemption on Capital Gains (Proposed Income-Tax Bill, 2025)

Section 86 of the proposed Income-Tax Bill, 2025 provides exemption from capital gains tax on the transfer of long-term capital assets other than residential houses, if the net sale consideration is reinvested in a new residential property.

To qualify for the exemption. The taxpayer must purchase the new residential house Within one year before, or Within two years after the date of transfer; or Construct the new residential house within three years from the date of transfer. This extends the reinvestment window from one year to two years, aligning with similar provisions under Section 54 for residential house transfers. 

Replacement of Section 54F (Current Law):

Under the existing Section 54F of the Income Tax Act, 1961 Exemption is allowed if net consideration (not just capital gain) is reinvested into one residential house within 1 year before, or 2 years after the sale, or construction within 3 years. The new Section 86 effectively replaces Section 54F, but liberalizes the timeline for reinvestment to encourage real estate reinvestments and bring parity with other capital gain exemptions. Greater flexibility in planning reinvestments. Useful for those selling non-residential assets (e.g., land, commercial property, shares) and looking to acquire a residential property. Likely to promote compliance and tax efficiency in long-term asset transactions.

How Section 56(2)(x) applies from the perspective of the purchaser of any immovable property, including rural agricultural land.

Yes, Section 56(2)(x) does apply to the purchase of rural agricultural land when acquired for inadequate consideration, i.e., for less than stamp duty value, even though Rural agricultural land is not a capital asset under Section 2(14) (and hence not taxable in the hands of the seller), But Section 56(2)(x) is applicable to the purchaser, and does not exclude rural agricultural land from the scope of “immovable property”.

Legal & Practical Reasoning:

  1. Wording of Section 56(2)(x): The provision applies to “any immovable property” received for inadequate consideration. The term “immovable property” is defined within the Explanation to Section 56(2)(x), and it includes land, without any exclusion for rural agricultural land.

  2. No Reference to “Capital Asset”: Section 56(2)(x) applies to “property” as defined under that section—not necessarily to “capital assets” as defined in Section 2(14). Hence, the exemption for rural agricultural land under Section 2(14) has no bearing on Section 56(2)(x).

  3. Judicial Precedents: As you rightly noted, ITAT Ahmedabad in Clayking Minerals LLP upheld that Section 56(2)(x) applies to purchase of agricultural land (even if it is rural), if acquired below stamp duty value. This follows the same logic as earlier rulings like: Arpan Foundation v. ITO (ITAT Delhi), and K. Raveendranathan Nair v. DCIT (ITAT Cochin),

  4. Which have emphasized the literal interpretation of “immovable property”.

CBDT Circulars:

CBDT has not issued any specific exemption or clarification to exclude rural agricultural land from the ambit of section 56(2)(x) for purchasers. Therefore, in the absence of legislative or administrative exclusion, the plain meaning of the section will apply.

Counter-Argument Rejected: “Since rural agricultural land is not a capital asset, 56(2)(x) cannot apply” — Incorrect reasoning. This argument relates to capital gains under Section 45 read with 2(14) — applicable only for the seller. It has no application in Section 56(2)(x) which deals with income from other sources in the hands of the purchaser, and defines “property” independently.

The Assessing Officer is justified in invoking Section 56(2)(x) and making the addition of ₹72,90,880 (difference between stamp duty value and purchase price) as income from other sources in the hands of the purchaser, despite the fact that the asset is rural agricultural land.

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