Section 54F Exemption on Long-Term Capital Gains: Liberal Interpretation by ITAT Kolkata

The Kolkata Bench of the Income Tax Appellate Tribunal in Saroj Goenka Vs ITO has delivered an important ruling on the scope of Section 54F of the Income Tax Act 1961. The Tribunal has directed deletion of a substantial addition of ₹26.77 crore, holding that the assessee was fully eligible for exemption under Section 54F on long-term capital gains arising from sale of shares of Emami Ltd.

The decision clarifies multiple recurring controversies under Section 54F, including:

  • Whether vacant or industrial land can be treated as a “residential house” for the restrictive proviso in Section 54F(1)
  • Whether joint ownership of another residential property disqualifies the assessee
  • Whether construction must begin only after the sale of the original capital asset
  • Whether exemption is denied if the actual sale proceeds are not directly used for construction
  • How to view gifts of shares and allegations of “colourable device” in the context of Section 54F

The Tribunal ultimately concluded that Section 54F is a beneficial incentive provision and must be interpreted liberally once the basic eligibility conditions are met.

Background of the Case

Return of Income and Capital Gains

The assessee had filed her return of income on 20.12.2021 declaring total income of ₹1,87,69,130 for AY 2021-22. The case was selected for scrutiny under CASS because of a large claim of deduction under Section 54F.

During the relevant previous year, the assessee had:

  • Sold 36,00,000 shares of Emami Ltd. on 13.07.2020
  • Received total sale consideration of ₹33,77,64,511
  • Earned long-term capital gain of ₹26,77,72,881

She claimed that this capital gain was fully exempt under Section 54F, as she had invested in construction of a new residential house at 1 Queens Park, Kolkata.

Claim under Section 54F

The assessee submitted that:

  • She had incurred ₹53,86,80,198 towards construction of a new residential property at 1 Queens Park up to 31.03.2021
  • The completion certificate for that residential building was issued on 09.06.2022
  • This date fell within three years from the date of transfer of the original asset (13.07.2020)
  • Since the cost of construction up to 31.03.2021 itself exceeded the capital gains, the entire long-term capital gain was eligible for exemption under Section 54F

Assessment Order: Reasons for Denial

The Assessing Officer (AO) denied the assessee’s claim for exemption under Section 54F and taxed the entire capital gain of ₹26,77,72,881. The AO relied mainly on the following objections:

  1. Ownership of more than one residential house

    • The AO held that the assessee owned two immovable properties:
      • Property at 110, Southern Avenue
      • Property at 13, BT Road
    • On this basis, the AO concluded that the assessee had violated clause (i) of the proviso to Section 54F(1), which restricts the benefit where the assessee owns more than one residential house (other than the new asset).

  2. Construction commenced much before the sale of shares

    • The AO noted that construction of the new house at 1 Queens Park had started more than five years prior to the sale of shares on 13.07.2020.
    • He reasoned that investment in the “new asset” could not cover amounts spent earlier than one year before the date of transfer, and therefore Section 54F relief should not be available.

  3. Sale proceeds not directly used for construction

    • The AO also took the view that the cost of construction was not met out of the share sale proceeds.
    • He held that, since the capital-gain proceeds were not directly deployed in construction, the assessee failed to satisfy the requirements of Section 54F.

On these grounds, the AO denied the exemption in toto.

First Appeal Before CIT(A)

In appeal, the NFAC, Delhi acting as CIT(A) upheld the AO’s order and added one more adverse finding. The CIT(A) alleged that:

  • The shares of Emami Ltd. had been acquired by way of gift from the assessee’s spouse shortly before the sale;
  • Consequently, the arrangement was described as a colourable device allegedly devised to claim exemption under Section 54F.

Thus, according to the CIT(A), the claim under Section 54F was not only factually untenable but also tax-avoidant in nature.

Assessee’s Submissions Before the Tribunal

On Number of Properties Owned

The assessee’s authorised representative (AR) strongly challenged the finding that she owned more than one residential house on the date of transfer of the shares.

  1. Property at 110, Southern Avenue

    • The AR pointed out that this property was jointly held with other family members.
    • Since the assessee was not the exclusive owner, the bar under the proviso to Section 54F(1) could not be invoked.
    • Reliance was placed on judicial precedents holding that joint ownership of another property does not amount to owning “more than one residential house” for the purposes of the restrictive proviso.

  2. Property at 13, BT Road

    • The assessee clarified that she owned only vacant land at this address, categorised as industrial land.
    • The factory building/super-structure standing on this land had been constructed and owned by the tenant, **M/s Sneh Enclave Pvt.