Facts of the Case

The assessee filed her return of income for Assessment Year 2021-22 declaring total income of ₹1,87,69,130. During the year, she sold 36,00,000 shares of Emami Ltd. on 13.07.2020 for a total consideration of ₹33,77,64,511, resulting in long-term capital gain of ₹26,77,72,881. The assessee claimed exemption under Section 54F on the ground that she had invested ₹53,86,80,198 up to 31.03.2021 towards construction of a new residential house at 1, Queens Park, Kolkata, the construction of which was completed on 09.06.2022, within three years from the date of sale. The Assessing Officer denied the exemption alleging that the assessee owned more than one residential property, that construction had commenced prior to sale of shares, and that sale proceeds were not directly utilised for construction. The CIT(A) upheld the denial and further alleged that transfer of shares was a colourable device. Aggrieved, the assessee preferred an appeal before the Tribunal.

Issues Involved

Whether jointly owned family property and ownership of industrial land disqualify an assessee from exemption under Section 54F, whether commencement of construction prior to sale disentitles exemption if construction is completed within three years, whether direct utilisation of sale proceeds is mandatory, and whether the transaction could be treated as a colourable device.

Petitioner’s Arguments

The assessee contended that the property at 13, B.T. Road was industrial land leased to a tenant who owned the factory structure and therefore did not constitute a residential house. It was submitted that the property at 110, Southern Avenue was jointly owned and the assessee was not the exclusive owner, and hence did not fall within the mischief of the proviso to Section 54F. It was further argued that Section 54F does not require construction to commence after sale of the original asset, nor does it mandate direct utilisation of sale proceeds. Reliance was placed on multiple High Court and Tribunal decisions holding that completion within three years is the determinative factor. The assessee also refuted the allegation of colourable device, clarifying that shares were gifted by her brother-in-law and not by her spouse, and that similar exemption had been allowed in the case of another family member for the same property.

Respondent’s Arguments

The Revenue supported the orders of the lower authorities, contending that the assessee owned more than one residential property, that construction began much before sale of shares, that sale proceeds were not directly utilised, and that the transaction involving gifted shares was designed to avoid tax.

Court Order / Findings

The ITAT Kolkata held that the property at 13, B.T. Road comprised industrial land with superstructure owned by the tenant and therefore did not qualify as a residential house for the purposes of Section 54F. The Tribunal further held that jointly owned family property at 110, Southern Avenue could not be treated as a residential house exclusively owned by the assessee and hence did not attract the proviso to Section 54F. On the issue of construction prior to sale, the Tribunal held that Section 54F does not prescribe any condition regarding commencement of construction and that completion within three years is sufficient. The Tribunal also held that there is no requirement under Section 54F to directly utilise sale proceeds for construction. The allegation of colourable device was rejected as being based on incorrect facts and conjectures. Accordingly, the Tribunal directed the Assessing Officer to allow the exemption claimed under Section 54F.

Important Clarification

The Tribunal clarified that Section 54F is a beneficial provision and must be interpreted liberally once eligibility conditions are satisfied. Joint ownership does not amount to ownership of multiple residential houses, industrial land does not qualify as residential property, commencement of construction prior to sale is immaterial, and direct nexus between sale proceeds and investment is not required.

Final Outcome

The appeal filed by the assessee was allowed. The order of the CIT(A) was set aside, and the Assessing Officer was directed to grant full exemption under Section 54F of the Income-tax Act in respect of the long-term capital gains arising from sale of shares for Assessment Year 2021-22.

Source Link- https://itat.gov.in/public/files/upload/1768222614-zZ26db-1-TO.pdf

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