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Section 54 / 54F Exemption availability w.r.t costs incurred prior to transfer

Started by Pritesh Jain, December 05, 2011, 01:41:43 PM

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Pritesh Jain

Would Exemption u/s 54 / 54F be available w.r.t the following amounts prior to Transfer of Eligible capital Asset(s), (assuming all other conditions  like completion of construction within 3 years etc have been fulfilled)

1. Cost of Land - (i) with one year before transfer (ii) prior to one year before transfer

2. Construction expenses incurred (i) with one year before transfer (ii) prior to one year before transfer

Further, would the exemption be available in cases where, the above expenses were incurred prior to transfer out of borrowed funds [ (i) with one year before transfer (ii) prior to one year before transfer], and consideration on transfer / other amounts are used to repay such loan(s) - Would this amount utilisation of amount(s) for the purpose of construction of House

ashutosh majumdar

S. 54 & 54F confer an exemption if the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house.

If you have incurred expenses on purchase of land & construction expenses beyond the one year period, then that will have to be excluded in computing the cost of the new house.

The fact that the funds are out of borrowed funds is not a problem because the section does not say that the purchase has to be out of the sale proceeds. In fact, that is not possible because you can purchase one year before the transfer. However, it is a good idea to keep a record to show that the loan was repaid out of the sale proceeds.

Pritesh Jain

This Karnataka high court judgement seems to have held to the contrary


There is no rule that the new house should be purchased/constructed with the sale proceeds of the capital asset sold as per the citations reported in 45 DTR 208(Mad), 49 SOT 504, 117 taxmann 123 and 107 taxman 591. However, it was held that new house should be purchased with the sale proceeds of the capital in the citation reported in 197 Taxman 52. For the expenses incurred before sale of the house and the construction of the house is completed after the sale of the capital asset the gainful reference can be made from the decisions reported in 165 ITR 571(as stated in earlier reply) and 234 ITR 753

bhaskar rao

Dear Sir,

Thank you for the case law illuminating. It is very useful.

Yours faithfully,

Bhaskar Rao, ITP

Pritesh Jain

The facts of the case are as follows:

- Land (being capital asset of the assessee) has been transfered to a partnership firm in which the assessee is a partner.Consideration has been decided however, no amount is received for the same - April 2011 as land is invested as the assessee's capital contribution. No withdrawl is permitted

- Residential House (incl land) purchased  - May 2011 - same will be demolished & reconstructed afresh - Bank loan is used for the same

Further would there be any tax effect if such investment in firm was made on or after June 2011

Would the exemption be available if such loan is repaid by way of

(i) own funds
(ii) Drawings from such partnership firm
(iii) both

ashutosh majumdar

Is this a query on s. 54/54F? Why is there a problem here? The introduction of the capital asset into the firm will be deemed to be a "transfer" u/s 45(3). If a residential house is purchased, exemption will be available.

What is the significance of June 2011?  ???

Pritesh Jain

Kerala HC has in the case of Commissioner of Income-tax, Cochin v. V.R. Desai held that exemption wouldnt be available if amount towards repayment of loan used for the purpose of construction arent repaid from consideration receivable from the firm.

My concern is whether an assessee can claim cost of construction incurred prior to Transfer of capital asset considering the fact that no amount is received from the firm which has been used to repay loan taken for construction
Awaiting reply