S. 54F Benefit not available If Construction Work Precedes Transfer of Immovable Property: Gujarat HC [Read Judgment]

In Ushaben Jayantilal Sodhan Vs. Income Tax Officer, the Gujarat High Court held that the benefit under Section 54F of the Income Tax Act, 1961 could not be availed by an assessee, if construction work precedes the transfer of immovable property.

The assessee on her land constructed 8 flats, out of which 4 were retained for her use and the other 4 were sold.  The assessee considered the proportionate land apportioned to the 04 flat purchasers as the sale of land belonging to her and disclosed long-term capital gain of Rs.58.87 Lacs in the process. The Assessing Officer (A.O.), during the scrutiny assessment of the Return filed by the assessee, raised an objection to the assessee’s claim of deduction from the capital gains received by her on the ground that no construction was carried out after 23.10.2008, which is the date on which the Building Use Permission was granted.

The flats were sold after such date by executing the sale deeds. This was not in tune with the statutory requirements for claiming the deduction. The Tribunal confirmed the view of the Revenue and held that the construction of the building was carried on between 01.02.2007 and 23.10.2008. Since the Building Use Permission was granted on 23.10.2008, it held that no construction activity took place after such date.

According to the Tribunal, for grant of deduction u/s.54F of the Income Tax Act, in case of construction of a residential house, the condition is that the assessee has to, within a period of three years after the date of transfer of a long-term asset, construct a residential house. In the present case, it found that the construction took place prior to the date of transfer and therefore, the conditions of Section 54F of the Act were not fulfilled.

The Counsel for the assessee argued that upon execution of the agreements to sell, there would be a transfer of capital asset and that in the present case all agreements to the sale were executed prior to completion of construction. He submitted that the Tribunal, therefore, committed a serious error in denying the benefit of deduction u/s.54F of the Act to the assessee. He relied on a number of case laws to support his contention.

The Departmental Representative (D.R.) contended that the flats which were sold after such date would not fulfill the conditions laid down in Section 54F of the Act for claiming the deduction. He argued that mere agreement to the sale couldn’t be equated with the sale of any immovable property. He further contended that even though under the agreement to sell certain important rights are created, it couldn’t be stated that upon execution of the agreement to sell, a capital asset would stand transferred.

The Bench comprising of Justice B.N. Karia and Justice Akhil Kureshi observed “What subsection (1) of Section 54 of the Act requires is that the assessee, after the date of transfer, purchases or within three years after such date, constructs a residential unit, only then the benefit of the deduction would be granted. Under the circumstances, if the sale deeds are considered on the date on which the transfer of capital asset took place, the case of the assessee would not fall within the parameters of the said provision.”