Capital gains: Exemption u/s 54F: A. Y. 2006- 07: Sale of shares and part of net consideration paid to developer for construction of a residential house: Construction almost complete in three years: Assessee entitled to exemption u/s 54F.

In the previous year relevant to the A. Y. 2006-07, the assessee sold certain shares and invested a part of the net consideration in purchase of house property and paid the said amount to the developer. The assessee claimed exemption u/s 54F in respect of the said investment. The Assessing Officer found that the flooring work, electrical work, fitting of door shutters and window shutters were still pending. Therefore, the Assessing Officer came to the conclusion that the construction was not complete even after the lapse of three years of time from the date of transfer of the shares and hence the exemption u/s 54F of the Act, is not allowable. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“i) The assessee had invested Rs. 2,16,61,670/- as on October 31, 2006, within 12 months from the date of realisation of sale proceeds of the shares. Assessee had produced before the authorities the registered sale deed dated 07/11/2009, showing the transfer of the property in his favour. The assessee had been put in possession of the property and he was in occupation. The assessee had invested the sale consideration in acquiring residential premises and had taken possession of the residential building and was living in the premises.

ii) Section 54F of the Act is a beneficial provision of promoting the construction of residential house. Therefore, the 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 realised should have been invested in a residential house. The condition precedent for claiming the benefit under the provision is that capital gains realised from sale of capital asset should have been 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 of the Act.

iii) 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 of the Act. 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 as required under the law, would not disentitle the assessee from the benefit.

iv) The Tribunal was justified in extending the benefit of section 54F of the Act to the assessee.”