The Ahmedabad ITAT has delivered a landmark ruling confirming that bona fide post-purchase reconstruction and renovation costs can form part of the Section 54F cost of the new asset. In the case of Rustom Homi Vakil vs. Assistant Commissioner of Income-tax, Mumbai, the Tribunal held that where an assessee purchases a residential house and thereafter incurs bona fide expenditure on construction, reconstruction, alterations or modifications, such expenditure can qualify as part of the 'cost of the new asset' for computing Section 54F exemption. The ruling specifically overturned the Assessing Officer's restriction of exemption to only the original purchase price, stating that the exemption cannot be restricted merely on the ground that the house was already habitable. Recent judicial precedent from Subramanian Swaminathan v ACIT(IT) (2023) further clarified that even if a builder has not completed construction or handed over possession, an assessee who has entered into an agreement and invested capital gains is entitled to Section 54F deduction.
Taxpayers can include stamp duty and registration charges while calculating the cost of new residential property for Section 54F exemption claims. According to CA Abhishek Soni, CEO & Co-founder, Tax2win, these expenses are directly related to purchasing the property and are considered part of the total investment amount. The Income Tax Department's Section 54F provision specifically refers to the 'cost of the new asset' when explaining how exemption calculations are made. Circular No. 667 issued on 18/10/1993 by the Central Board of Direct Taxes clarified that the benefit of Section 54F would be available in case of purchase of plot of land and construction thereon carried out by an assessee, with the quantum of deduction computed taking into consideration the cost of plot of land and the construction cost.
The Income Tax Department's Section 54F provisions have been interpreted to provide greater flexibility for construction timelines. Recent judicial precedent from Subramanian Swaminathan v ACIT(IT) (2023) established that if a right in the property is extinguished by execution of an agreement to sell, the capital asset can be deemed to have been transferred. This interpretation enables taxpayers to claim Section 54F benefits by considering the date of agreement as the date of acquisition rather than the completion date. The ruling specifically noted that in modern days, it is not easy to construct a house within the time limit of two years, and under government schemes, construction takes years. Therefore, substantial investment in construction should be deemed sufficient to satisfy Section 54 requirements, even if possession is not handed over within the statutory period.
Beyond the purchase timeline, Section 54F has specific ownership restrictions that taxpayers must meet. According to Balwant Jain, Mumbai-based tax and investment expert, the exemption is available only if the taxpayer does not own more than one residential house on the sale of capital assets, except the house for which the exemption is being claimed. Jain also notes that purchasing a house within one year before the sale of capital assets does not automatically prevent the taxpayer from claiming the exemption under Section 54F. The Ahmedabad ITAT ruling emphasized that Section 54F is a beneficial provision intended to promote investment in residential housing, with the expression 'purchase'/construction' of a residential house receiving a liberal construction. However, the Tribunal recognized a limitation: movable items of personal comfort, such as consumer electronics, entertainment equipment, air-conditioners, furniture and bedding, do not constitute purchase or construction cost and cannot qualify merely because they are installed in the new house.
