Land Ownership not compulsory for claiming deduction Sec 54F

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.

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