Recently, ITAT MUMBAI BENCH, in Smt. Pramila R. Wadhawan v Assistant Commissioner of Income-tax held that the assessee shall not be liable to claim exemption under section 54F, i.e. the exemption is to be denied if the assessee had purchased residential house again after purchasing earlier residential unit within a period of one year from date of transfer.

Facts of the case:

The assessee had acquired leasehold rights of the land and building through will from late father, but later on these leasehold rights were sold. On account of long term capital gain, arising out of sale of leasehold right of the property the assessee claimed deduction under section 54F. A residential flat was purchased and the capital gain arising out of transfer of capital asset was utilised for the above purchase. Moreover, the assessee also purchased two adjacent flats in different locality in different building. Claim of exemption under section 54F was denied by the Assessing officer on ground that the assessee had purchased residential house again after purchasing earlier residential unit within a period of one year from the date of transfer which clearly prohibits the claim of deduction under section 54F.

In response, the assessee submitted that the claim under section 54F, is made for investment in residential house for Forest Castles Flat at Pune in connection with the capital gain arising from the sale of lease right of Shelley Estate. The other two flats purchased in Water Front at Pune was not meant for residential purpose but the basic intention of the assessee was to use it for commercial purpose. Besides this, till 31st March 2007, possession of this property was not given to the assessee by the builder as it was given on 29th May 2007, the assessee was handed over the possession of the said flats, therefore, the claim cannot be withdrawn. The Assessing Officer rejected the assessee’s contention and held that the proviso (a)(ii) to section 54F(1) clearly prohibits the claim of deduction under section 54F if the assessee has purchased any other residential house besides one residential house, purchased within the period of one year.

On appeal the Commissioner(Appeals) upheld the order of the assessing officer. Aggrieved by the decision of the Commissioner(Appeals), further appeal was made by the assesse.

It was held that:

The Assessing Officer as well as the learned Commissioner (Appeals) denied the assessee’s claim of deduction as there is a clear violation of conditions laid down in proviso to section 54F(1) . The Assessing Officer rightly pointed out there is no merit in the second residential units purchased on where intended to be for commercial purposes as it is without any basis. The Assessing Officer also mentioned that the purchase agreement clearly mentions that these units are residential units and not commercial complex or shop.

The documents submitted by the assessee i.e., purchase agreement clearly suggested that the two new flats at Water Front were residential units and hence, the intention to use as commercial as claimed by the assessee, does not absolve the assessee. Accordingly, he held that exemption under section 54F on the purchase of residential flat on long term capital gain will not be available to the assessee.

Thus, under the facts and the clear cut provision of law, the finding recorded by the Commissioner (Appeals) was declared factually and legally correct and the same was affirmed. Thus, ground raised by the assessee was dismissed.