The Income Tax Appellate Tribunal, Hyderabad Bench, in Income-tax Officer v. Narasimha Reddy Duthala (ITA No. 1113/Hyd/2024), examined the allowability of exemption under Section 54F of the Income-tax Act, 1961, in respect of long-term capital gains arising from sale of unquoted equity shares, and the extent to which such exemption can be denied on alleged technical breaches of statutory conditions.

The assessee, an individual, sold unquoted equity shares of two companies during the relevant assessment year and earned long-term capital gains. Out of the total gains, the assessee claimed proportionate exemption under Section 54F by investing part of the consideration towards purchase of land for construction of a residential house and depositing the unutilised portion in the Capital Gains Account Scheme. The Assessing Officer did not dispute the quantum of capital gains or the factum of investment but denied exemption on multiple grounds.

The Assessing Officer held that the assessee owned more than one residential house on the date of transfer of the original asset, that investment and deposit were not made before the due date under Section 139(1), and that exemption could not be allowed where construction was carried out only on a small portion of the land purchased. The claim of the assessee that one residential property had been gifted to his daughter on the occasion of her marriage in 2015 was rejected on the ground that the gift deed was registered only subsequently.

The CIT(A) allowed the assessee’s claim, holding that the assessee had fulfilled the substantive conditions of Section 54F and that the denial by the Assessing Officer was based solely on hyper-technical interpretation of the proviso. The Revenue carried the matter in appeal before the Tribunal.

The Tribunal upheld the order of the CIT(A), observing that Section 54F is a beneficial provision intended to promote investment in residential housing and must be construed liberally. The Tribunal accepted that the assessee had made an oral gift of the residential house to his daughter at the time of her marriage, which was later formalised through a registered gift deed and corroborated by a Streedhan agreement and consistent conduct of the parties. Accordingly, the assessee could not be regarded as the owner of more than one residential house on the date of transfer.

On the issue of the due date, the Tribunal held that since the assessee was a partner in a firm whose accounts were audited under Section 44AB, the applicable due date under Section 139(1) was 31 October, and the investments and deposits made in October 2022 were within time. The Tribunal further held that purchase of land followed by construction of a residential house within the prescribed period satisfies the requirement of Section 54F, and the extent of land utilised for construction is not determinative.

Relying on the principles laid down by the Supreme Court in Bajaj Tempo Ltd. v. CIT (196 ITR 188), Sanjeev Lal v. CIT (365 ITR 389), and other judicial precedents emphasising liberal interpretation of exemption provisions, the Tribunal held that exemption under Section 54F cannot be denied for technical or venial breaches when the substantive conditions are duly fulfilled.

Accordingly, the appeal filed by the Revenue was dismissed and the exemption granted to the assessee under Section 54F was upheld.

Source- https://itat.gov.in/public/files/upload/1746766833-eSuQSj-1-TO.pdf

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