Is deduction U/S 54F available in case the construction of new house commences before the sale of capital asset?
1. Sec 54F:
Section 54F of the Income-tax Act, 1961 allows an exemption from capital gains arising from the transfer of a long-term capital asset (other than a residential house) if the net sale consideration is invested in:
Purchase of a residential house within 1 year before or 2 years after the date of transfer, or
Construction of a residential house within 3 years after the date of transfer.
2. CBDT Circular:
CBDT Circular No. 667 dated 18-10-1993 clarifies that if the construction of a residential house is commenced before the transfer of the original asset but completed within three years from the date of transfer, exemption under Section 54F shall be available.
3. Legal precedence:
A. In fact, courts have consistently interpreted the law liberally in favor of the assessee regarding the timing of construction commencement.
B. Delhi HC in CIT v. Bharti Mishra (2014) 41 taxmann 50 (Delhi HC) has held that even though construction had started before the date of sale, exemption was allowed since the construction of house was completed within 3 years.
C. Karnataka HC in CIT vs K Ramchandra Rao (ITA NOS.494/2013) has held that investments made in construction of a residential house within one year prior to the date of transfer of the original asset are eligible for exemption under Section 54F(1). It further held that non-deposit of the amount in CGAS will not disqualify the exemption, provided the conditions of utilization are met within the stipulated period.
4. Conclusion:
To summarise, deduction under section 54F may be claimed even if the construction of the new house starts before the date of sale, as long as:
The construction is completed within 3 years from the date of transfer, and
The net consideration is appropriately utilized.
The copy of the order is as under:
