BENEFIT ON SALE OF UNDER CONSTRUCTED PROPERTY U/S 54F

 

According to Income Tax Act 1961, Assessee being an Individual of HUF, is entitled to claim exemption u/s 54F of Income tax Act on long term capital gain on sale of any capital asset other than residential house property, if he/she purchases a residential house before 1 year or after 2 years of sale of property or constructs a residential house within a period of 3 years from the date of transfer of capital asset.

Now, the question that arises is- Whether exemption u/s 54F of Income Tax Act, 1961 will be available on transfer of “under construction” property?

 

CASE LAW-

CIT vs. Kalpana Hansraj, ITA NO. 767 of 2016 dt. 07/01/2019 (Bom.)(HC)

 

FACTS OF THE CASE-

The Assessee is an Individual and had filed the return of income for the year under consideration. The AO during the assessment proceedings noted that the Assessee had sold property at South Mumbai for a consideration of Rs. 1, 42, 80,000/-. The capital gain was arrived at Rs. 1, 52, 66,271/-. The Assessee had claimed exemption us/s 54F of Income Tax Act amounting to Rs. 66.66.491/- on account of investment of the part of above stated capital gains. The property sold by the Assessee was an “under construction” unit as the builder could not complete the construction and the scheme ran into multiple legal disputes. In the set aside proceedings, the AO observed that the asset transferred by the Assessee was a residential house and hence claim of exemption u/s 54F of Income Tax Act was not admissible to the Assessee.

 

HELD-

Section 54F of Income Tax Act, 1961 attracts transfer of capital asset other than residential house. The term residential house has not been defined in this section or elsewhere in the Act.

Whether incomplete flat of the Assessee falls within the ambit of “residential house” as stated u/s 54F of Income Tax Act?

Incomplete flat, as in the present case of the Assessee, is a property under construction and not a residential house. For the purpose of section 54F of Income Tax Act, 1961, the word “residential house” has to be interpreted to mean

• A completely built structure having a roof, dwelling place, wall doors, windows, electric and sanitary fittings etc. If one or more such components are lacking, then it cannot possibly be said that the “residential” is a complete structure for the purpose of section 54F of Income Tax Act, 1961.
• A residential house is a unit, which is complete for habitation having minimum bare required facilities.

The legislative intent is clear and implicit that the word residential house means a flat or unit which can be actually occupied for residence or being capable of put to use for residence.

This test has to be applied on the date of transfer of the capital asset.

If on the date of transfer of capital asset the property is fit or residence, though not actually used as such, it will be a transfer of residential house, but if on the date of transfer, asset cannot be put to use for residence, then what is transferred is the right with respect to a property, and not a residential house.

 

CONCLUSION-

The property in question sold by the Assessee could not be constructed by the builder for a sufficient long time, also the property sold could not be classified under the meaning if “residential property” as stated above and the said property could not be categorized as residential house and therefore the claim of the Assessee has rightly been allowed by the Ld. CIT(A) u/s 54F of Income Tax Act.