Whether essence of law for availing Sec 54F benefits is to ensure that capital gains earned by assessee are invested in residential house irrespective of unfinished construction within 3 years - YES: HC

THE issues before the Bench are - Whether the essence of law for availing Sec 54F benefits is to ensure that capital gains earned by the assessee are invested in a residential house and Whether when the construction of the building is not completed within the stipulated period of three years after the assessee earns capital gains, even then the assessee is entitled to claim the benefits Sec 54F. And the verdict goes against the Revenue.

Facts of the case

The AO came to the conclusion that the construction was not complete even after lapse of three years of time from the date of transfer of the shares on which the capital was derived. He held that the assessee had neither purchased the property within the period of two years nor constructed the property within the period of three years after the date of transfer of the asset, on which the capital gain was derived, and Section 54F was not applicable to the assessee. The CIT(A) held that the house which the assessee intended to purchase/construct was not even fit to be called a house, not to speak of residential house. It was neither purchased nor constructed in the true sense of the terms. Hence the assessee was not eligible to the benefit u/s 54F. The Tribunal was of the opinion that the authorities below were not justified in depriving the exemption legitimately claimed by the assessee u/s 54F.

On Appeal before the HC the Revenue's counsel contended that the undisputed material on record discloses that within the period of three years stipulated u/s 54F, the building was not complete in all respects. It was not in a position to occupy, and no sale deed had been executed in terms of the agreement. The assessee's Counsel submitted that no doubt the building was not complete in all respects and the sale deed was not executed within three years, but within the period of three years, the assessee had invested a sum of Rs.2,16,61,670/- in construction of the building. After three years period, sale deed was executed in his favour. He had taken possession and was living in the said premises.

Held that,

++ section 54F of the Act is a beneficial provision for promoting construction of residential houses. Therefore, the said provision has to be construed liberally for achieving the purpose for which it was incorporated in the statute. The intention of the legislature was to encourage investments in the acquisition of a residential house and completion of construction or occupation is not the requirement of law;

++ the words used in the section are 'purchased' or 'constructed'. For such purpose, the capital gain realized should have been invested in a residential house. The condition precedent for claiming benefit under the said provision is the capital gain realized from sale of capital asset should have been parted by the assessee and invested either in purchasing a residential house or in constructing a residential house. If after making the entire payment, merely because a registered sale deed had not been executed and registered in favour of the assessee before the period stipulated, he cannot be denied the benefit of section 54F. Similarly, if he has invested the money in construction of a residential house, merely because the construction was not complete in all respects and it was not in a fit condition to be occupied within the period stipulated, that would not disentitle the assessee from claiming the benefit u/s 54F;

++ the essence of the said provision is whether the assessee who received capital gains has invested in a residential house. Once it is demonstrated that the consideration received on transfer has been invested either in purchasing a residential house or in construction of a residential house even though the transactions are not complete in all respects and as required under the law, that would not disentitle the assessee from the said benefit