Long Term Capital Gains-Exemption u/s 54F
Long Term Capital Gains from all capital assets attract a special rate of income tax. Long Term Capital Gains may result from a transaction of sale which in itself may not be in the nature of a regular source of income; it may be during the process of conversion of an asset into another or to meet out other personal obligations or as a result of liquidating the long term investments. However, the transaction may entail a high amount of liability on account of income tax on such Long Term Capital Gains. The intention of the statute is not to create a hardship on this account but has enacted section 54F to give a relief in the form of exemption besides creating a boosting factor to motivate the growth and development in the housing sector.
In the case of an assessee being an individual or a Hindu undivided family, having income from long term gains on any asset other than house property and who uses all the sales consideration within a specified period for purchase or constructing a residential house. The specified period in case of house purchase is one year before or two years after the date of transfer of asset on which gains were made. However, for construction, section 54F provides, time limit of three years.
The following paragraphs will deal with the relevant provisions along with a reference to various case laws, circulars and the schemes resulting out of court pronouncements, clarifications and amendments. In a given situation these may help in understanding the issue and taking an appropriate decision.
CAPITAL GAIN ON TRANSFER OF CERTAIN CAPITAL ASSETS NOT TO BE CHARGED IN CASE OF INVESTMENT IN RESIDENTIAL HOUSE.
(1) Subject to the provisions of sub-section (4), where in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed 842a , a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, - (a) If the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) If the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45 :
Provided that nothing contained in this sub-section shall apply where the assessee owns on the date of the transfer of the original asset, or purchases, within the period of one year after such date, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head "Income from house property", other than the new asset.
Explanation : For the purposes of this section, - "Net consideration", in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.
(2) Where the assessee purchases, within the period of two years after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head "Income from house property", other than the new asset, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.
(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head "Capital gains" relating to long-term capital assets of the previous year in which such new asset is transferred.
(4) The amount of the net consideration which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :
Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then, - (i) The amount by which - (a) The amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of the new asset as provided in clause (a) or, as the case may be, clause (b) of sub-section (1), exceeds,
(b) The amount that would not have been so charged had the amount actually utilised by the assessee for the purchase or construction of the new asset within the period specified in sub-section (1) been the cost of the new asset, shall be charged under section 45 as income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and (ii) the assessee shall be entitled to withdraw the unutilised amount in accordance with the scheme aforesaid.
Situations where one finds himself in dilemma and conflict; whether exemption under section 54F will be available or not:
To qualify investment for construction under section 54F the crucial date is the date of allotment
Assistant Commissioner of Income-tax, Circle 25(3) v. Smt. Sunder Kaur Sujan Singh Gadh.
Brief facts of the case are, that the assessee had sold a residential flat No. 4 in Vasant Vihar, 14th
Decision of the Tribunal
To qualify investment for construction under section 54F the crucial date is the date of allotment of flat by DDA and payment of installments was only a follow-up action and taking possession of the flat is only a formality, of course, instalments have to be paid by the allottee as per the schedule fi xed by the DDA. The Board after referring to the above mentioned Circular extended the facility of exemption under sections 54 and 54F in respect of allotment of flats/house by co-operative societies and other institutions, and the allotment and construction of the flat by co-operative societies and other institutions are to be considered in similar manner for the purpose of allowing exemption under section 54. The above circulars are binding on the revenue authorities under section 119 of the Act. Since the flat has been allotted to the assessee by the builder who would fall in the category of other institutions mentioned in the circulars, it has to be taken as a case of construction of the residential flat and not as a purchase of a residential flat.
Explained in - In CIT v. Mrs. Hilla J.B. Wadia  69 Taxman 114 (Bom.), it was observed that the Board had stated in Circular No. 471, dated 15-10-1986 that when an allotment letter is issued to an allottee under this scheme on payment of the first instalment of the cost of construction, the allotment is final unless it is cancelled. The allottee, thereupon, gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking delivery of possession is only a formality. The Board has directed that such an allotment of flat under this scheme should be treated as cost of construction for the purpose of capital gains.
Explained in - The above two circulars (dated 15-10-1986 and 16-12-1993) were explained in Mrs. Seetha Subramanian v. ACIT  59 ITD 94 (
“. . . The assessee also relied upon certain circulars issued by the CBDT. One of the circulars was [Circular No. 471, dated 15th October, 1986. This was issued by the CBDT clarifying the position that where an assessee acquires a flat by an allotment under the self-financing scheme of the Delhi Development Authority, the allotment itself is sufficient compliance for getting the benefit under section 54F, even though the assessee has not paid all the instalments due under the said scheme. Later by another Circular No. 672, dated 16th December, 1993, the CBDT has issued clarification extending the same benefits for acquisition of houses or flats on allotment under similar schemes. Therefore it was contended that the intention of the Legislature was to invest in the acquisition of a residential house and completion of construction or occupation is not required. We find force in the argument of the learned counsel for the assessee. The said intention is very clear from the two circulars issued by the CBDT, where it was held that an assessee is entitled to the benefit of sections 54 and 54F, if an assessee gets an allotment under the self-financing scheme and pays the first instalment of the cost of the construction. From that it is clear that in order to get the benefit under section 54F the assessee need not complete the construction of the house and occupy the same. . . .” (p. 98)
Applied in - In Smt. Shashi Varma v. CIT  224 ITR 106 (MP), the above circular was relied on, and the Court observed :
“This clinches the matter and it was not proper for the Tribunal to have ignored the circular because it has a persuasive value and it was in the nature of granting relief. Therefore, the Tribunal should have considered the circular sympathetically and granted the relief. . . ” (p. 108)
If not utilized before the date of filing of Return under Section 139
Nipun Mehrotra Vs. Asst C.I.T. 29/03/2007 297 ITR (AT) 110
Held by the hon`ble bench that section 54F does not mention any sub-section of section 139, thus it cannot be interpreted as section 139(1). The amount of consideration from the sale of shares utilised before the date of filing of return u/s 139(4) is entitled for exemption under section 54F.
New residential house to be purchased in the name of the assessee only
Prakash Vs. ITO ITA NO. 15 of 2002 dated September 12, 2008 - HIGH COURT OF
The assessee did not make the investment in the new asset in his own name but invested in the name of his adopted son. Therefore, he rendered himself liable to pay tax on capital gains arising out of the transfer of a capital asset
The deceased assessee admittedly sold and purchased the property from the realisation but in the name of the adopted son, who in the scheme of the Act and Section 54F is not an assessee, who after selling the old asset purchased and constructed the new property. He was not the owner of the new purchased property. In M/s. Ponds India Ltd. (Merged with H.L. Ltd.) v. Commissioner of Trade Tax, Lucknow; JT 2008 (9) SC 94, the Apex Court's following declaration supports the view we have taken based upon the principle of interpretation of revenue/taxation status.
“39. When a case of obvious intent on the part of the Legislature is made out, a meaning which subserves the legislative intent must be given effect to. It is however also well known that when a word is defined by the legislature itself, the same meaning may be attributed even in the changed situation.”
The burden is on the assessee to prove that new residential house has actually been constructed
Commissioner of Income-tax, T. Nadu-I Vs V. Pradeep Kumar  153 taxman 138 (mad.)
In the above case it was held that the burden was on the assessees to prove that they had actually constructed new residential houses for purpose of the exemption under section 54F. It was stated by the assessees that the assessees had constructed new residential houses, but they were unauthorised constructions and the same unauthorised constructions were later demolished for purpose of modernisation. In the instant case, there was no tangible material to even infer that a residential house was constructed. One of the assessees said that there was an extension to an existing structure and the other said that the out-house was demolished; a new construction was put up in its place and both being unauthorised, had been pulled down on their own voluntarily. Section 54F emphasizes on construction of residential house. The said construction must be real one. It should not be a symbolic construction.
Investment in a flat under the self-financing scheme of the
1. Sections 54 and 54F provide that capital gains arising on transfer of a long-term capital asset shall not be charged to tax to the extent specified therein, where the amount of capital gain is invested in a residential house. In the case of purchase of a house, the benefit is available if the investment is made within a period of one year before or after the date on which the transfer took place and in case of construction of a house, the benefit is available if the investment is made within three years from the date of the transfer.
2. The Board had occasion to examine as to whether the acquisition of a flat by an allottee under the Self-Financing Scheme (SFS) of the D.D.A. amounts to purchase or is construction by the D.D.A. on behalf of the allottee. Under the SFS of the D.D.A., the allotment letter is issued on payment of the first instalment of the cost of construction. The allotment is final unless it is cancelled or the allottee withdraws from the scheme. The allotment is cancelled only under exceptional circumstances. The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking the delivery of possession is only a formality. If there is a failure on the part of the D.D.A. to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for recovery of possession.
3. The Board have been advised that under the above circumstances, the inference that can be drawn is that the, D.D.A. takes up the construction work on behalf of the allottee and that the transaction involved is not a sale. Under the scheme the tentative cost of construction is already determined and the D.D.A. facilitates the payment of the cost of construction in instalments subject to the condition that the allottee has to bear the increase, if any, in the cost of construction. Therefore, for the purpose of capital gains tax the cost of the new asset is the tentative cost of construction and the fact that the amount was allowed to be paid in instalments does not affect the legal position stated above. In view of these facts, it has been decided that cases of allotment of flats under the Self-Financing Scheme of the D.D.A. shall be treated as cases of construction for the purpose of capital gains.
Circular : No. 471 [F. No. 207/27/85-IT(A-II)], dated 15-10-1986.
Whether, in cases where the residential house is constructed within the specified period, the cost of such residential house can be taken to include the cost of the plot also
1. Sections 54 and 54F provide for a deduction in cases where an assessee has, within a period of one year before or two years after the date on which the transfer of a capital asset takes place, purchased, or has within a period of three years after that date constructed, a residential house. The quantum of deduction is itself dependent upon the cost of such new asset. It has been represented to the Board that the cost of construction of the residential house should be taken to include the cost of the plot as, in a situation of purchase of any house property, the consideration paid generally includes the consideration for the plot also.
2. The Board has examined the issue whether, in cases where the residential house is constructed within the specified period, the cost of such residential house can be taken to include the cost of the plot also. The Board are of the view that the cost of the land is an integral part of the cost of the residential house, whether purchased or built. Accordingly, if the amount of capital gain for the purposes of section 54, and the net consideration for the purposes of section 54F, is appropriated towards purchase of a plot and also towards construction of a residential house thereon, the aggregate cost should be considered for determining the quantum of deduction under section 54/54F, provided that the acquisition of plot and also the construction thereon, are completed within the period specified in these sections.
Circular : No. 667, dated 18-10-1993.
Taxability of unutilised deposit under the Capital Gains Accounts Scheme, 1988 in the hands of the legal heirs of the assessee
1. Under sections 54, 54B, 54D, 54F and 54G of the Income-tax Act, 1961, capital gain is not chargeable to tax if the amount of capital gain or net consideration has been utilised for specified purposes by the assessee within the stipulated period laid down in the relevant section. These provisions also provide for the deposit in specified Banks, etc., of the amount of capital gain which is not utilised by the assessee for the acquisition of new assets before the date of furnishing the return of income under section 139(1). The amount of capital gain already utilised for the acquisition/construction of new asset together with amount deposited is deemed to be the cost of new asset and, consequently, this amount is not chargeable to capital gain in the year of transfer of asset. The provisions of sections 54, 54B, 54D, 54F and 54G further provide that if the amount deposited is not utilised wholly or partly for the prescribed purposes, within the period specified, the amount not so utilised shall be charged under section 45 as the income of the financial year in which the period of two/three years (as prescribed in the relevant section) from the date of transfer of the original asset expires.
2. A question has been raised regarding the taxability of the unutilised deposit amount in the case of an individual who dies before the expiry of the stipulated period.
3. The matter has been considered by the Board and it is clarified that in such cases the said amount cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them.
Circular : No. 743, dated 6-5-1996.
Capital Gains Accounts Scheme, 1988
It applies to all assessees who are eligible for exemption under section 54, 54B, 54D, 54F or 54G of the Income-tax Act, 1961 (43 of 1961).
Deposits how to be made - A deposit or deposits may be made under the provisions of section 54 or section 54B or section 54D or section 54F or section 54G of the Act by any depositor intending to avail of the benefit under the said section or sections of the Act, as the case may be, in accordance with the provisions of this Scheme.
Types of deposits - (1) There shall be two types of deposit accounts, namely—
(i) “Deposit Account-A”, and
(ii) “Deposit Account-B”-Term Deposit which may be cumulative or non-cumulative
Deposits may be made in one lump sum or in instalments at any time on or before the due date of furnishing the return of income under sub-section (1) of section 139 of the Act.
Forms to be used under the scheme:
Application for opening account – Form ‘A’; Separate application to be given to claim exemption under different sections.
If the deposit is made by a cheque or a draft then, subject to such cheque or draft being realised, the effective date of deposit for the purpose of claiming exemption under the Act will be the date on which the cheque or draft is received by the deposit office alongwith the application.
Transfer of deposit from Term Deposit(Account B) to Savings Account (Account A) or vice versa – Form ‘B’
Withdrawal from the account - Form ‘C’
Furnishing details of utilization of earlier withdrawals at the time of fresh withdrawal from Account-A - Form ‘D’
Explanation : For the removal of doubts, it is hereby clarified that the deposit office shall refuse the depositor to withdraw any amount lying in his account, in case of failure on his part to furnish all the details as required.
Nomination by the depositor – Nomination is to be applied in Form ‘E’
Closure of the account - Application shall be made with the approval of the Assessing Officer in Form ‘G’
Utilisation of the amount of withdrawal - (1) A depositor, withdrawing any amount out of the deposit made in pursuance of sub-section (2) of section 54 or sub-section (2) of section 54B or sub-section (2) of section 54D or sub-section (4) of section 54F or sub-section (2) of section 54G, shall utilise the whole or any part of the amount so withdrawn for the purposes specified in sub-section (1) of the section in relation to which the deposit has been made.
(2) The amount withdrawn shall be utilised by the depositor within SIXTY DAYS from the date of such withdrawal for the purposes specified in sub-paragraph (1) and the amount or any part thereof which has not been so utilised shall be re-deposited in Account-A immediately thereafter.
Charge of alienation – Not allowed
It is in the interest of every assessee who plans to enter into a transaction for sale of a Long Term Capital Asset to understand the legal position and then chalk out a strategy in advance as the exemption under section 54F may be availed if the sale consideration is re-invested properly in the purchase and construction of a new residential house under the given legal framework.