Section 54F of the Income Tax Act, 1961, provides a valuable exemption to taxpayers on the capital gains arising from the sale of a residential property. Over the years, various court rulings and case laws have helped clarify and interpret the provisions of Section 54F. In this blog post, we’ll delve into the nuances of Section 54F and highlight key case laws that have shaped its application.

Understanding Section 54F: Section 54F offers an exemption to individuals or Hindu Undivided Families (HUFs) on the long-term capital gains generated from the sale of a residential property, provided certain conditions are met. To avail of the exemption, the taxpayer must invest the net sale proceeds in purchasing or constructing another residential property within a specified time frame.

Key Conditions of Section 54F:

1. The exemption is available to individuals and HUFs.
2. The capital gains must arise from the sale of a residential property other than the new property being purchased or constructed.
3. The entire net sale proceeds must be reinvested in the purchase or construction of the new residential property.
4. The new residential property must be purchased within one year before the sale or two years after the sale, or constructed within three years from the date of sale.
5. If the entire net sale proceeds are not reinvested, the exemption is allowed proportionately.

Key Case Laws:

1. CIT vs. Smt. P. Sarojini Devi (1976):

   • In this landmark case, the Supreme Court held that the term “a residential house” under Section 54F should be construed liberally to include more than one residential house. Therefore, if the taxpayer invests the net sale proceeds in more than one residential property, the exemption can still be claimed.

2. CIT vs. C. Gopalakrishnan (2010):

   • The Supreme Court clarified that for the purpose of claiming exemption under Section 54F, the construction of a new residential property must be completed within the stipulated three-year period from the date of sale of the original property. Any delay in construction beyond this period would render the exemption invalid.

3. Smt. Anju Bhatia vs. ACIT (2018):

   • In this case, the Income Tax Appellate Tribunal (ITAT) ruled that the exemption under Section 54F cannot be denied solely on the ground that the taxpayer already owned a residential property at the time of sale of the original property. The taxpayer must not own more than one residential property, other than the new property being purchased or constructed, to avail of the exemption.