Section 54F benefit available on sum invested in construction of house nonetheless parts of investment may be from different sources and not from capital gains
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 nonetheless parts of the investments may be from different sources and not from capital gains
In the instant case, the assessee had sold a house property for Rs. 20 lakhs having registration value of Rs 36 lakhs as fixed by the State authorities under the Stamp Act and had sought exemption under section 54F as he had re-invested Rs. 24 lakh for construction of residential house. The AO had deducted the cost price of land paid by the assessee at Rs. 1.93 lakhs and Rs. 20 lakhs towards investment in construction of residential house from the value of Rs 36 lakhs of the property under section 50C, and determined the long-term capital gain of Rs. 14.06 lakhs. The Tribunal upheld the order of the AO. Aggrieved by the order of Tribunal, assessee filed the instant appeal.
The HC held in favour of assessee as under:
1) The assessee had stated that he has invested Rs. 20 lakhs out of the sale consideration and had made further investment of Rs. 4 lakhs of agricultural income towards construction of the house. The total amount shown to have been invested for construction of house was Rs. 24 lakhs. The benefit of exemption of Rs. 4 lakhs was disallowed, which didn’t appear to be sound and proper;
2) As the ultimate object and purpose of section 50C is to see that the undisclosed income of capital gains received by the assessees should be taxed and the law should not encourage and permit the assessee to peg down the market value at his whims and fancy to avoid tax. In other words, the ultimate object is to curb the growth of black money;
3) When the capital gain is assessed on a notional basis, whatever amount is invested in new residential house within the prescribed period under section 54F, the assessee should get the benefit of deduction, irrespective of the fact that the funds from other sources are utilized for new residential house;
4) In that context, whatever amount was actually invested by the assessee for construction of house should be deducted, irrespective of the fact that parts of the investments were from different sources and not from the capital gains. Thus, full reinvestment made by assessee (i.e., 24 lakhs) in construction of residential house was to be allowed under section 54F – GOULI MAHADEVAPPA V. ITO  33 taxmann.com 47 (Karnataka)