Query No. 1 (Exemption u/s. 54F)

A flat was sold. The AO adopted stamp duty value. The assessee invested full stamp duty value in another flat. Whether the assessee is entitled for deduction under section 54F?


The Karnatka High Court in Gauli Mahadevappa v. ITO [356 ITR 90]
has held that where capital gain is assessed on notional basis under section 50C, whatever amount is invested in new residential house within prescribed period under section 54F would get benefit of deduction irrespective of the fact that funds from other sources are utilised for new residential house.

Further, in Raj Babbar v. ITO [56 SOT 1], the Mumbai Tribunal has held that if investment in new asset was more than net consideration received as well as full value of consideration computed as per section 50C, the assessee would be entitled for deduction.

On the basis of above decisions, the assessees is entitled for the amount invested in another flat under section 54F of the Act.

Query No. 2 (TDS not paid by deductor)

A demand has been raised on ‘X’ for the short credit in 26AS in respect of TDS deducted by the deductor but not paid to the Government. Whether ‘X’ is liable to pay the demand.


Section 205 of the Income-tax Act, 1961 provides that in case tax is deductible at source under chapter XVII of the Act, the assessee shall not be called upon to pay the tax himself to the extent of the deduction so made irrespective of the fact whether the tax so deducted has been actually deposited with the Government by the payer.

The Karnataka High Court in
Smt. Anusuya Alva v. SCIT [278 ITR 206] has held that once deduction was made, the revenue was expected to look to the person who had deducted the tax for realising the amount, if such person failed to remit the amount to the Central Government, the consequence shall fall only on the Revenue and cannot be forced on the assessee. The deduction was under the statutory obligation and on behalf of the Revenue. Section 205 provides a protection to the assessee and to prevent the Revenue from embarking on the recovery proceedings in respect of such amount. The word “deduct” accruing in the said section can not be understood “deducted and remitted”. Even on the general principles of law, the law of principal and agent, for a default of the agent of the Revenue, the assessee who was third party in relation to such relationship could not be penalised. The only course open to the Revenue was to recover the amount from the very person who had deducted and not from the assessee.

In Yashpal Sahani v. Rekha Hajarnavis ACIT [293 ITR 539] the Bombay High Court, further held that complete machinery is provided under the Act for recovery of TDS from the person who has deducted such tax at source and the Revenue was barred from recovery of the amount from the person from whose income tax has been deducted at source.

Query No. 3 (Can legal heir claim exemption u/s. 54)

The assessee sold residential house and planned to construct a new house for claiming exemption u/s. 54. The assessee expired in April, 2014. Can legal heir who has to file Return of Income can claim benefit u/s. 54 of the Act, and how?


This point has been decided by the Madras High Court in C.V. Ramanathan v. CIT [125 ITR 191], wherein the Court held that one of the concessions provided for persons deriving capital gains under the Income-tax Act is that where a person sells property used for his residence and substitutes another its place, then any capital gain derived by him would not be liable to assessment so long as the entire capital gain is reinvested in the newly acquired property. Section 54 of the Act, which gives the concession contemplates later events, i.e. substitution of property within one or two years to be taken into account. Hence, it is important to see if this condition is satisfied .

The legal representative cannot be differentiated from the assessee for this purpose. If the assessee were liable to pay capital gains tax, the benefit of section 54 which forms part of the scheme of taxation of capital gains cannot be denied because the latter condition of section 54 was fulfilled by his legal representative.

Similarly, in Late Mir Gulam Ali Khan v. CIT [165 ITR 228], the Andhra Pradesh High Court has held that the object of granting exemption under section 54 of the Act, is that a person who sells a residential house for the purpose of purchasing another convenient house must be given exemption so far as capital gains are concerned. The word ‘assessee’ in section 54 must be given wide and liberal interpretation so as to include his legal heirs also. There is no warrant for giving the strict interpretation to the word “assessee” as that would frustrate the object of granting exemption.

Thus, it is clear from the above judgments that legal heir steps in the shoes of deceased and entitled for deduction under section 54 of the Act.

Query No. 4 (Capital gains – Short-term or Long-term)

‘A’ has purchased a plot in March, 2010 for Rs. 10/- lakh and spent Rs. 5/- lakh for construction during F.Y. 2011-12, and Rs. 5/- lakh during the F. Y. 2012-13. He sold the entire house in December, 2014 for Rs. 50 /- lakh Whether it is long-term or short-term gain?


Section 2(29A) defines “Long term capital asset” which means a capital asset which is not a short term capital asset. Section 2 (42A) defines “Short term capital asset” which means a capital asset held by an assessee for not more than thirty six months, other than listed shares. In that case, a period of not more than the twelve months to be considered for short term capital asset.

Now, in this case land was for more than thirty six months, hence the same is to be considered as long term capital asset. While super structure was for less than thirty six months, so it is to be considered as short term capital asset.

Therefore, the land would be assessed as long term capital gains, while super structure would be assessed as short term capital gains, on the basis of following judgments:

i) CIT v. Citibank N.A. [261 ITR 570 (Bom)]

ii) CIT v. Dr. D. L. Ramchandra Rao [236 ITR 51 (Mad)] and

iii) CIT v. Vimal Chand Golecha [201 ITR 443 (Raj)].

Query No. 5 (Whether transfer is complete)

‘P’ had to sold her property in order to finance her daughter’s medical expenses.

The agreement for sale was entered for Rs. 50/- lakh. She received only Rs. 35/- lakh due to dispute with the buyer. No possession of the property was given. She does not have money to invest in order to claim exemption u/s. 54. The AO passed the order levying tax on Rs. 50/- lakh. Whether AO is right?


In this case transfer is not complete, because of property has not been given and therefore there is no question of investing in another house to claim exemption under section 54.

In Chaturbhuj Dwarkadas Kapadia v. CIT [260 ITR 491] the Bombay High Court has held that clauses (v) and (vi) were introduced in section 2(47) of the Income-tax Act, 1961 with effect from April 1,1988. They provide that transfer includes (i) any transaction which allows possession to be taken/retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1982 and (ii) any transaction entered into in any manner which has the effect of transferring or enabling the enjoyment of any immovable property. Till then, no liability to capital gains arise.

The Bombay High Court reiterated the aforesaid view in
CIT v. Geetadevi Pasari [17 DTR (Bom) 280]. The Court held that the relevant assessment year for the purpose of computation of capital gains will be the assessment year in which the assessee was actually put in possession.

Thus, on the basis of above judgments it is clear that AO is not right in levying tax on Rs. 50/- lakh.

Note: Please send your queries relating to Direct, Indirect & International taxation, Accounting & Auditing Standards and Company Law, FEMA etc. to AIFTP, having interest to the Members.

CA. H.N. Motiwalla

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