Unjustified conditions in Sec 54F

Capital gain is one of the heads of income quite often litigated by the taxpayers and tax gatherers. This could be attributed partly to the provisions which provide some leeway for availing some concessions and thereby avoid tax.

Section 54F is a benevolent provision meant for tax relief where the sale consideration is deployed in acquisition or construction of a residential house by the taxpayer.

Key factors governing the tax exemption under this section are (i) sale must be of any long-term capital asset other than residential house; (ii) on the date of sale, the taxpayer must not own more than one residential house; (iii) net sale consideration must be deployed in acquisition or construction of a residential house within the specified time; and (iv) no acquisition or construction of any more residential house during the specified lock-in period.

Unjustified restriction

A close look at the above said conditions show that there is enough scope for controversies in each of them. Sale of even depreciable asset held for more than 36 months and obtaining the status of long-term capital asset was held as eligible for tax exemption on re-investment (CIT v. Assam Petroleum Industries (P) Ltd (2003) 262 ITR 587 (Gau)).Obviously, owning residential houses in any other status is to be excluded while computing the number of houses for the purpose of this exemption.

When the net consideration is fully deployed in acquiring or building a residential house, whether section 50C could be applied is a recent controversy.

In Gouli Mahadevappa v. ITO (2011) 9 ITR (Trib) 129 (Bangalore), it was held that Section 50C and Section 54F operate in different fields. Section 54F cannot impede the operation of Section 50C and the proportion of actual net sale consideration so reinvested in residential house was held as eligible for exemption under Section 54F. Independent of the exemption under Section 54F, the deeming provisions contained in Section 50C will apply.

However, a contrary ruling could be found in Gyan Chand Batra v. ITO (2010) 45 DTR (JP) (Trib) 41 wherein it was held that ‘full value of consideration' as mentioned in Explanation to Section 54F(1) is not to be construed as having the same meaning as it is assigned in Section 50C.

The final rider for exemption likely the taxpayer must not construct or acquire any other residential house for some specified lock-in period seems to be both meaningless and redundant.

While these conditions attached to the exemption sound ridiculous, there exists ample scope for frustrating the same. A taxpayer acquiring a house must desist from acquiring another house, but could resort to construct a residential house, for which there is no embargo.

In the same manner, a tax payer constructing a residential house for availing exemption under Section54F is eligible to acquire one or more residential houses within the specified period which will not be a disqualification for the exemption.

Thus the provisions intended for exemption in respect of investment in residential house are toothless and have not addressed the practical reality. Fortunately, these conditions have not been imported into the Direct Taxes Code which is set to succeed the present statute.

(The author is an Erode-based chartered accountant.)

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