Section 54F Capital Gains Exemption Denied for Post-Purchase Amalgamated Properties: ITAT Delhi's Key Ruling

Case Overview

ACIT Vs Rahul Garg (ITAT Delhi)
Assessment Year: 2023-24
Proceedings under: Section 143(3) of the Income Tax Act, 1961

This ruling from the Income Tax Appellate Tribunal, Delhi, addresses a significant question surrounding the availability of capital gains exemption under Section 54F of the Income Tax Act, 1961, where two adjacent residential plots were purchased through separate registered sale deeds and subsequently amalgamated by the NOIDA Authority into a single unit. The Revenue's appeal challenged the CIT(A)/NFAC's order which had directed allowance of the claimed deduction of ₹28,81,62,921. The Tribunal's final determination, however, partially sided with the Revenue.

Background and Facts of the Case

Capital Gains Arising from Share Transfer

The assessee, an individual, earned substantial long-term capital gains amounting to ₹75,46,30,654 during Assessment Year 2023-24 from the sale of shares of M/s Mogli Labs (P) Ltd., a Singapore-based company. Against these gains, a deduction of ₹28,81,62,921 was claimed under Section 54F of the Income Tax Act, 1961, on account of investment made in two adjacent residential properties situated in Sector-44, Noida, along with deposits made under the Capital Gains Account Scheme, 1988.

Details of the Two Properties Purchased

The assessee acquired two neighbouring plots, the particulars of which are as follows:

In addition, ₹2,81,00,000 was deposited under the Capital Gains Account Scheme, 1988, bringing the total exemption claimed to ₹28,81,62,921 under Section 54F.

Timeline of Initial Payments

The assessee submitted that advance payments towards both properties were made simultaneously:

• 02.05.2022 — ₹50 lakhs paid for each property
• 06.05.2022 — ₹2 crores paid for each property
• By June 2022 — approximately 50% of the total purchase consideration for both properties had been remitted

The difference in registry dates was attributed entirely to the timing of transfer permissions granted by the NOIDA Authority to the respective seller parties — granted on 12.07.2022 for Plot F-9 and on 09.01.2023 for Plot F-8.

The Assessing Officer's Position

The Assessing Officer disallowed the entire deduction of ₹28,81,62,921 under Section 54F, reasoning as follows:

• The assessee had purchased two independent residential assets through separate registered deeds on 13.12.2022 and 23.01.2023 respectively.
• The second property (Plot F-8) was registered within one year of the transfer of the original asset, thereby attracting the restriction contained in proviso (a)(ii) to Section 54F(1) of the Income Tax Act, 1961.
• Since the statutory condition was violated, the entire claim for exemption stood disqualified.

The AO also noted from the drawings that a wall separated the two plots and questioned whether physical interlinking or amalgamation was even feasible.

Relevant Statutory Provisions

Section 54F(1) — Capital Gain Exemption Framework

Section 54F of the Income Tax Act, 1961 provides:

"Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual…, 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, one residential house in India (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…"

The proviso (a)(ii) to Section 54F(1) further stipulates:

"...nothing contained in this sub-section shall apply where the assessee purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset."