Chennai ITAT Permits Tax Deduction U/S 54F for Construction of a New Residential Unit

The deduction under Section 54F of the Income Tax Act on the construction of the new dwelling/residential unit has been permitted by the Chennai Bench of Income Tax Appellate Tribunal (ITAT).

The bench of Aby T. Varkey (Judicial Member) and Amitabh Shukla (Accountant Member) has marked that the taxpayer had released the burden to prove construction of a residential house/dwelling unit (first floor with separate staircase, kitchen, new electrical connection, water connection, etc.), and it is not disputed that construction of the new dwelling/residential unit was within the time specified u/s 54F of the Income Tax Act.

The income return has been filed by the taxpayer. The taxpayer’s income comprises the salary, income from other sources, long-term capital gain, and losses of the current year.

For scrutiny under CASS, the RoI was selected, and the AO completed the assessment dated 30.03.2015 by making a disallowance of a claim under section 54F of the Income Tax Act.

The taxpayer had sold the land at Noombal Village for a consideration of Rs. 78,48,000 on 29.02.2012 and admitted LTCG and claimed deduction u/s 54F to the tune of Rs. 57,41,274 on the investment made in the newly constructed house.

The taxpayer as per AO extended his old house by constructing the first floor to the existing grounds floor whose construction was initiated a year ago before the transfer date. The AO remarked that under the norms of section 54F of the Income Tax Act., the taxpayer can merely purchase a residential house 1 year before the transfer.

As there is no new residential house was purchased or constructed and the same was merely an extension of the old house, AO disallowed to avail of the taxpayer u/s 54F of the Income Tax Act. On appeal, the CIT(A) has confirmed the action of the AO.

It was argued by the taxpayer that u/s 54(1), the capital gain that emerges via the transfer of a residential house is not be levied to the income tax as the income of the last year when the taxpayer has within 1 year before or two years post the transfer date of that of the residential house, purchased another residential house in India or has, within 3 years after the date of transfer, constructed a residential house in India.

If the cost amount of the residential house that has been purchased or constructed is identical to or less than the capital gain amount. The taxpayer shall be authorised for deduction if he purchased a residential property one year before or post two years from the date of transfer or constructed a residential house in 3 years from the transfer date.

The taxpayer has made a house (first floor on the top of the ground floor building, which already exists) and claimed deduction under Section 54F of the IT Act. on the constructed first floor, which has been refused merely on the foundation that the same claim u/s 54F of the act could be permitted merely when the taxpayer has made a house within 3 years from the transfer date.

The cause of the AO could not have been carried out because if the taxpayer u/s 54F of the Income Tax Act., has bought a house one year before the transfer date then the taxpayer can have a claim for the deduction.

While permitting the petition of the taxpayer the tribunal ruled that it is not a requisite of section 54 that construction cannot have started before the transfer date of the asset resulting in capital gain.

If the capital gain amount is more than the cost of the new house then the difference between the capital gain amount and the cost of the new asset is to be levied u/s 45 as the income of the previous year. If the capital gain is equal to or less than the cost of the new residential house, including the land, no capital gain will be charged.