Section 54F fine print: ITAT clarified ownership, timelines, and funding rules for a Rs 26-crore capital gain exemption

Section F

• ITAT Kolkata allowed capital gains exemption under Section 54F
• Construction can begin before sale; proceeds use not required
• Joint or industrial property ownership doesn't bar Section 54F exemption

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Can you claim capital gains exemption if you already own property, start construction before selling shares, or don’t directly use the sale proceeds for the new house?

These questions lie at the heart of a recent ruling by the Income-Tax Appellate Tribunal (ITAT), Kolkata, which examined how strictly the conditions under Section 54F of the Income-tax Act should be interpreted. The tribunal ultimately allowed a taxpayer to claim exemption on Rs 26 crore gains from sale of listed shares after reinvesting in a residential house, rejecting the tax department’s objections.

What is the case?

The case relates to Saroj Goenka vs ITO, Ward-30(1), Kolkata (AY 2021–22) before the Income Tax Appellate Tribunal (ITAT), Kolkata Bench.

The assessee, Saroj Goenka, sold 36 lakh shares of Emami Ltd on July 13, 2020, for about Rs 33.77 crore, resulting in a long-term capital gain of Rs 26.77 crore. She claimed exemption under Section 54F of the Income Tax Act on the ground that she invested more than Rs 53.86 crore in constructing a new residential property at 1, Queens Park, Kolkata. The construction was completed within three years from the date of sale, and hence she claimed the entire capital gain as exempt.

The Assessing Officer (AO) denied the exemption on three grounds. First, the assessee already owned two residential properties (at Southern Avenue and BT Road), which violated the conditions of Section 54F. Second, construction had started before the sale of shares, so the exemption should not apply. Third, the sale proceeds were not directly used for construction.

In the appellate proceedings, the Ld. CIT(A) after considering the submissions of the appellant upheld the action of the AO. The Ld. CIT(A) additionally observed that, the assessee had acquired the shares of Emami Ltd by way of gift from her spouse few months prior to the sale and therefore according to him, this was a colourable device deployed to avail benefit of Section 54F of the Act.

Before the ITAT, the assessee argued that the BT Road property was industrial land with a factory constructed by the tenant, not a residential house. The Southern Avenue property was jointly owned, and she was not the exclusive owner. She also relied on High Court rulings to argue that construction can begin before sale as long as it is completed within three years, and that there is no requirement that the same sale proceeds must be directly used for construction.

The ITAT agreed with the assessee. It held that the BT Road property was industrial land and did not qualify as a residential house. The Southern Avenue property was jointly owned and therefore did not bar exemption. It further ruled that Section 54F does not require construction to begin only after sale, nor does it mandate direct utilisation of sale proceeds.

The Tribunal also rejected the tax department’s claim that the deal was arranged only to save tax. It said the shares were gifted by the husband’s brother, not by the husband. There was no proof of any wrongdoing. The Tribunal also noted that in similar cases, such tax benefits had been allowed.

Accordingly, the ITAT set aside the order of the CIT(A) and directed the AO to allow the exemption under Section 54F.

What is Section 54F?

Section 54F allows individuals to claim exemption from long-term capital gains if they sell assets like listed shares and invest the proceeds in a residential house within the prescribed timelines. “The law mainly looks at whether the key conditions are met, such as the investment in a house and the ownership limits. The recent tribunal ruling reinforces that the exemption should not be denied on technical grounds if the substantive requirements are satisfied,” said Madhura Samant, Managing Partner, Elarra Law Offices.

“Section 54F is a reinvestment incentive, not a loophole. It applies when long-term capital gains arise from the transfer of any asset other than a residential house, which includes listed shares. The assessee must invest the net consideration in one residential house within the prescribed timelines i.e one year before or two years after purchase, or three years for construction. On the date of transfer, the assessee should not own more than one residential house apart from the new one,” Rishabh Gandhi, Founder, Rishabh Gandhi and Advocates.

Mrugakshi Joshi, D. M. Harish & Co. explains conditions to avail exemption under section 54F:

The exemption is available only to individuals and Hindu Undivided Families (HUFs).

On the date of transfer, the Assessee must not own more than 1 residential house property (other than the new asset).

The Assessee should not purchase another residential house, within two years from the date of transfer of asset.

The Assessee should not construct any residential house, other than the new asset within a period of 3 years from the date of transfer of asset.

Cost of new asset shall be restricted to Rs 10 crore

How Long-term capital gains on listed equity shares are computed?

Long-term capital gains on listed equity shares are computed by deducting the cost of acquisition and eligible transfer expenses from the sale consideration. “Under section 112A of the Income-tax Act, 1961, gains exceeding Rs 1.25 lakh in a financial year are taxed at a flat rate of 12.5 percent, without the benefit of indexation, provided securities transaction tax has been paid on both acquisition and transfer. The final tax liability depends on the quantum of gains, availability of exemptions, and permissible set-offs,” said Himesh Thakur, Associate Partner, PSL Advocates & Solicitors.