The Shanbhag Column

Sec. 54F: A ruling with far reaching consequences

- A.N and Sandeep Shanbhag

This month’s article is about Sec. 54F of the Income Tax Act, under which one can claim deduction on long-term capital gains tax earned on sale of assets other than residential house by investing the net sale proceeds into a residential property. The remarkable feature of this particular case (ITA No. 5254/Del/2014) is that it allows deduction to be claimed in more than one assessment year for investment in the same property.

First the background. During the year, the assessee sold five assets other than residential houses and invested the net sale consideration received in construction of a residential property at Mehendi Farms, New Delhi. In the return of income filed, the assesse claimed deduction under section 54F of the Income-tax Act, 1961.

The Assessing Office disallowed this for a couple of reasons. The first one was that for the investment in the Mehendi Farms property, the taxpayer had already claimed deduction u/s 54F in the earlier year. So this was the second time he was claiming deduction for investing in the same property. Secondly, at the time of claiming deduction, the assesse owned more than one residential house and therefore was not eligible for deduction under section 54F of the Act which stipulates that a taxpayer cannot own more than one house other than the new property to claim deduction under Sec. 54F.

In response, the assessee submitted that he was having only one residential house at Vasant Vihar, New Delhi, apart from the house at Mehendi Farms for which deduction u/s54F was being claimed.

The CIT-(A) after considering the facts of the case, allowed the deduction to the assessee with the following observations: