Written Submissions
(Challenging the denial of exemption under section 54F)
BEFORE THE INCOME TAX APPELLATE TRIBUNAL
[____] BENCH, [CITY]
In the matter of: Smt. Meera Jayakrishnan (“the Appellant/Assessee”)
Versus
Income-tax Officer, Ward–[__] (“the Respondent/Revenue”)
Subject
Written Submissions on behalf of the Appellant challenging the denial of exemption under section 54F of the Income-tax Act, 1961 (“the Act”) in respect of investment of long-term capital gains in the construction of a residential house, and seeking consequential relief.
(i) Name of the assesses ------------ and address---------------.
(ii) PAN----------------.
(iii) Ayr-----------------.
(iv) DIN of the order appealed------------------.
(v) Appeal No. --------------.
Reference
Show Cause notice dated ………. DIN--------------------.
1. Issues raised in this Appeal
(i) Primary Issue (Section 54F): Whether, on the undisputed facts that the Appellant sold a long-term capital asset (being a gifted plot of land) and invested the sale proceeds in the construction of a new residential house within the prescribed period, the Appellant is entitled to deduction under section 54F even though the unutilized portion of the consideration was not deposited in the Capital Gains Accounts Scheme (“CGAS”) before the due date under section 139(1), when the amounts were nevertheless kept in a nationalized bank and actually utilized within three years for construction.
(ii) Ancillary Issue (Approach of the Authorities): Whether the authorities below erred in ignoring contemporaneously furnished construction evidence (invoices, contractor bills, bank withdrawals and cheques) and in resting the denial solely on a perceived non-compliance of section 54F(4), contrary to binding High Court precedent.
2. Facts of the Case (with Hypothetical Particulars)
(i) Background & Nature of Asset: The Appellant, an individual, received by way of gift from her husband in April 2003 a non-residential parcel of land admeasuring 0.42 acres located at Survey No. 112/2, Vasantpura Village, [District]. The gift deed was duly registered, and possession remained with the Appellant. The land continued to be held as a capital asset.
(ii) Sale of the Original Asset: The Appellant sold the said land on 25.01.2018 for a consideration of ₹69,00,000 (by account-payee cheque), as evidenced by the registered sale deed. The entire consideration was deposited into the Appellant’s savings account with a nationalized bank (State Bank of [__], A/c No. [xxxx]).
(iii) Investment in New Residential House (Construction): The Appellant intended to construct a small single-family residence on Plot No. 18, Sri Ganesh Enclave, (site area 132 sq. mtrs.), previously purchased in her name in 2016. Building plan approval from the local municipal authority was received on 22.12.2018. Construction commenced in January 2019 and was substantially completed in October 2020.
(iv) Evidence submitted before the AO included:
i. Contractor agreements dated 05.01.2019 and 20.04.2019;
ii. Progress running bills and site measurement sheets;
iii. Material bills (cement, steel, bricks, wood, tiles, sanitary, electrical);
iv. Bank statements evidencing withdrawals and cheque payments to vendors and labour contractors;
v. Photographic evidence of construction progress and completion certificate (15.12.2020);
vi. Summary of construction cost totaling ₹41,20,664, financed by withdrawals/cheques from the same nationalized bank account into which the sale proceeds were credited.
(v) Return and Reassessment Proceedings: Information under risk parameters indicated a high-value sale. The Appellant, a homemaker with limited literacy (documents bear her thumb impression attested by a notary), filed her return pursuant to notice under section 148 on 26.04.2022, declaring long-term capital gains and claiming deduction u/s 54F on the investment in the new residential house under construction. The AO framed assessment u/s 147 r.w.s. 143(3), inter alia, (a) determining the indexed cost of acquisition at ₹26,92,131 and (b) allowing a separate claim u/s 54B on a distinct agricultural transaction (₹16,01,435, not in dispute here), but denied 54F solely because the Appellant had not deposited the net consideration in CGAS by the due date u/s 139(1).
(vi) CIT(A) Proceedings: The Appellant reiterated that actual utilization within the statutory window of three years is the substantive condition; deposit in CGAS is directory, applicable only if funds are not so utilized before return filing. The CIT(A) nevertheless dismissed the appeal by a brief ex parte order, stating that conditions of sections 54F(2) & 54F(4) were not satisfied, without adverting to or controverting the detailed evidence of construction utilization.
3. Reasons of Decision by the AO
(i) Non-deposit in CGAS: The AO held that because the Appellant did not deposit the net consideration in a CGAS account by the due date u/s 139(1) for AY 2018–19, the entire claim u/s 54F failed, regardless of subsequent actual construction.
(ii) Timing of Utilization: The AO observed that construction disbursements started from January 2019 (FY 2018–19), i.e., after the sale year, and treated that as fatal in the absence of a CGAS deposit.
(iii) No Specific Defect in Evidence: While acknowledging production of bills, vouchers, and bank proofs, the AO recorded no adverse finding on genuineness of the construction expenses; the disallowance was solely technical, pivoted on section 54F(4).
4. Reasons of Decision by the CIT(A)
(i) Literal View of Section 54F(4): The CIT(A) adopted the AO’s reasoning that the Appellant did not satisfy section 54F(4) because funds were not parked in CGAS by the due date u/s 139(1).
(ii) Silence on Evidence: The CIT(A) did not deal with the Appellant’s documentary corpus evidencing construction and actual utilization within the 3-year window, nor with consistent High Court jurisprudence holding that CGAS is required only when amounts are unutilized by the return filing date and the assessee seeks to retain cash.
5. Grounds of Appeal (Concise)
(i) The authorities below erred in denying deduction u/s 54F notwithstanding full, contemporaneous evidence of investment in construction within the statutory period; the denial based on non-deposit in CGAS is contrary to binding precedents.
(ii) The authorities failed to appreciate that section 54F(4) applies only where the sale consideration is not utilized for purchase/construction before the due date of return; where the assessee does invest within the overall window, non-deposit is not fatal.
(iii) The orders are vitiated for non-consideration of material evidence, and for applying an unduly rigid, hyper-technical interpretation at odds with the beneficial purpose of section 54F.
(iv) The Appellant, being a homemaker with limited literacy, acted through a nationalized bank account, maintained transparent records, and substantially completed construction within three years; denial frustrates the legislative object.
6. Submissions on Facts
(i) Identity and Flow of Funds: The entire sale consideration was deposited into a nationalized bank. From the same account, the Appellant made progressive withdrawals and cheque payments to the civil contractor and suppliers from January 2019 through October 2020. The bank trail aligns with the invoices and progress bills. There is no allegation of diversion of funds for any other purpose.
(ii) Construction within Statutory Window: Section 54F(1) allows construction within three years from the date of transfer. Transfer occurred on 25.01.2018; construction spanned January 2019–October 2020 (approx. 33 months), comfortably within the 3-year horizon. A completion letter dated 15.12.2020 and electricity/water connection documents are on file.
(iii) Documented Expenditure: The Appellant produced a comprehensive dossier:
i. Bills: cement (UltraTech, Dalmia), steel (TMT), bricks, sand, timber, tiles, sanitary fittings, electricals;
ii. Contractor bills and site measurement sheets;
iii. Payment proofs (cheques, NEFTs, cash withdrawals with contemporaneous petty cash vouchers for small purchases and labour);
iv. Municipal plan sanctions, tax receipts, and photos showing progression from basement to roofing and finishing.
(iv) No Adverse Finding: Neither the AO nor the CIT(A) has disputed genuineness of the construction. The denial is purely technical, premised on the absence of CGAS deposit by the due date u/s 139(1).
(v) Beneficial Provision; Honest Conduct: The Appellant is a non-technical, non-business taxpayer. She complied with the substance of section 54F by investing in a single residential house and not owning more than one residential house on the transfer date. Her conduct was transparent; she responded to notices, furnished all proofs, and sought to utilize her capital gains to build a modest dwelling for self-occupation.
7. Submissions on Law:
A. Scheme and Purpose of Section 54F: Section 54F grants exemption where an individual/HUF, on transfer of a long-term non-residential capital asset, purchases a residential house within 1 year before or 2 years after, or constructs one within 3 years after the date of transfer, subject to certain conditions (e.g., ownership of not more than one other residential house). The provision is beneficial, intended to promote housing and re-investment in residential property. Courts have consistently held that such provisions must be liberally construed to advance their purpose.
B. Role of Section 54F(4) and the CGAS Requirement:
(i) Trigger for CGAS: Section 54F(4) addresses a specific contingency: where the net consideration is not appropriated/utilized for purchase or construction before the date of furnishing the return of income under section 139. In such case, to retain the benefit prospectively, the assessee must deposit the unutilized amount into CGAS on or before the due date u/s 139(1).
(ii) When CGAS becomes Irrelevant: Where the assessee actually utilizes the consideration towards construction within three years, and (to the extent so utilized) even before filing the return, the raison d’être for CGAS disappears. Courts have therefore held that non-deposit is not fatal if the assessee demonstrates real investment within the statutory period.
(iii) Section 139(4) Perspective in Purchase/Construction Cases: Several High Courts have also clarified that the expression “section 139” in section 54/54F(4) is not confined to section 139(1) and that deposit up to the time allowed under section 139(4) satisfies the requirement when the assessee is otherwise within time and genuinely invests the capital gain.
C. Binding / Persuasive Judicial Precedents:
(i) Karnataka High Court — CIT v. K. Ramachandra Rao [2015] 56 taxmann.com 163 (Karnataka): The Hon’ble Karnataka High Court held that section 54F(4) applies only when the sale consideration is not invested in purchase or construction within the period specified in section 54F(1). If the assessee does invest in construction within three years, non-deposit in CGAS does not disentitle the exemption. The Court emphasized that if the intention is not to retain cash but to invest in construction, section 54F(4) is not attracted. The ratio squarely covers the Appellant’s case: funds were maintained in a nationalized bank and progressively deployed for construction within the 3-year period.
(ii) Gauhati High Court — CIT v. Rajesh Kumar Jalan [2006] 157 Taxman 398 (Gauhati): The assessee sold his residential property on 21-12-1995, earning substantial capital gains. He entered into agreements in May 1996 to purchase a new residential flat. The Assessing Officer denied Section 54 exemption, arguing that the assessee failed to deposit the unutilized capital gain in the Capital Gains Deposit Scheme before the due date under Section 139(1).
The Gauhati High Court held that Section 54(2) uses the term “Section 139” without restriction to sub-section (1). Therefore, it includes Section 139(4), which allows filing of returns up to one year from the end of the assessment year or before completion of assessment, whichever is earlier. Consequently, the assessee could make the required investment or deposit up to 30-03-1998.
Emphasizing that Section 54 is a beneficial provision, the Court applied a liberal interpretation to advance its purpose of promoting residential reinvestment. Hence, the assessee was entitled to claim full exemption on the entire capital gain.
(iii) Karnataka High Court — Fathima Bai v. ITO — ITA No. 435/2004 (Karnataka HC, 17.10.2008): The High Court allowed exemption where the assessee invested the capital gains in purchase/construction within the permissible period, even though the CGAS condition was not strictly complied with before the due date u/s 139(1). The decision underscores substance over form.
(iv) Madras High Court — CIT v. Sardarmal Kothari & Anr (2008) 302 ITR 286 (Madras):
The assessees sold capital assets and invested the entire net consideration in purchasing land and constructing residential houses, claiming exemption under Section 54F. The Assessing Officer denied the claim, stating that construction was not fully completed at the time of inspection.
The Madras High Court upheld the orders of the CIT(A) and ITAT, which allowed the exemption based on evidence such as house-warming invitations and municipal completion certificates. It held that completion and occupation of the house are not mandatory within three years. What matters is that the assessee substantially invests the net consideration in the construction of a residential house within the stipulated period
The Court rejected reliance on CBDT Circular No. 667 (1993) and distinguished D.P. Mehta v. CIT (Delhi HC), noting that in this case, there was no finding that the construction was incomplete or unfit for residence. Procedural lapses cannot defeat genuine investments, and the exemption under Section 54F was rightly granted.
(v) Punjab & Haryana High Court — Ms. Jagriti Aggarwal v. CIT (2011) 339 ITR 610 (P&H): The assessee sold her residential house on 13-01-2006 and purchased another property jointly on 02-01-2007, claiming exemption under Section 54. The Assessing Officer denied the claim, arguing that the purchase was made after the due date under Section 139(1) (31-07-2006) and that the assessee neither deposited the capital gain in the Capital Gains Account Scheme nor utilized it before that date.
The Punjab & Haryana High Court held that Section 139(4) operates as a proviso to Section 139(1) and extends the due date for filing returns by one year from the end of the assessment year. Thus, if the assessee purchases or utilizes the capital gains before this extended due date, the condition under Section 54(2) is satisfied.
Since the property was purchased on 02-01-2007, well before 31-03-2007, the assessee had complied with the law. The Court emphasized a beneficial interpretation of Section 54 to promote genuine reinvestment in housing, dismissing the Revenue’s appeal.
Collectively, these rulings establish a coherent principle: where funds are actually invested in constructing the residential house within the statutorily prescribed period, deduction under section 54F cannot be denied for want of CGAS deposit, which is directory in such circumstances. The contrary, overly literal view would defeat the legislative purpose.
D. Application to the Appellant’s Facts:
(i) Undisputed Utilization: The Appellant utilized the sale proceeds within three years. The AO/CIT(A) did not fault the genuineness of construction or the bank trail.
(ii) Nationalized Bank Holding: The sale proceeds remained in the Appellant’s savings account with a nationalized bank and were progressively deployed towards construction—a pattern the Karnataka High Court in K. Ramachandra Rao considered sufficient to obviate section 54F(4).
(iii) No Multiple Houses: The Appellant did not own more than one other residential house on the date of transfer, and no violation of the proviso to section 54F(1) is alleged.
(iv) Beneficial Construction Window: All disbursements fall within January 2019–October 2020, well within three years from 25.01.2018.
(v) Substance Over Form: The assessee is a homemaker with limited literacy; insisting on CGAS despite proven utilization would be hyper-technical and inequitable.
E. Rebuttal to the Revenue’s Position:
(i) “Mandatory” Reading of CGAS: The Revenue’s submission that CGAS is mandatory in all cases is incorrect. High Courts have clarified that CGAS is a facilitative mechanism for assessees retaining cash beyond the return filing date; it is not a punitive precondition where the entire consideration is actually utilized in construction within time.
(ii) Reliance Solely on Section 139(1): Even where deposit is germane, courts have held that section 139(4) timelines are relevant. The CIT(A)’s insistence on section 139(1) to the exclusion of section 139(4) is out of step with several High Courts.
(iii) Evidentiary Silence: The AO/CIT(A) offered no finding challenging the credibility of construction evidence; therefore, the substantive precondition of section 54F(1)—construction within three years—stands satisfied.
8. Case Laws in Support (Illustrative and Non-exhaustive)
(i) CIT v. K. Ramachandra Rao — (2015) 56 taxmann.com 163 (Karnataka): Held: Section 54F(4) applies only where the amount is not utilized towards purchase/construction within the stipulated period; if invested, non-deposit in CGAS is not fatal.
(ii) CIT v. Rajesh Kumar Jalan — (2006) 286 ITR 274 (Gauhati): Held: “Section 139” in section 54/54F(4) includes 139(4); deposit/investment up to the extended time suffices.
(iii) Fathima Bai v. ITO — ITA No. 435/2004 (Karnataka HC, 17.10.2008): Held: Where actual investment in a residential house is made within the statutory period, exemption cannot be denied merely for non-deposit in CGAS before the due date u/s 139(1).
(iv) CIT v. Sardarmal Kothari & Anr. — (2008) 302 ITR 286 (Madras): Held: Actual investment in construction within 3 years is determinative; procedural lapses cannot deny relief.
(v) Ms. Jagriti Aggarwal v. CIT — (2011) 339 ITR 610 (P&H): Held: Deposit/compliance by section 139(4) date meets the requirement; the provision must be read beneficially.
(vi) CIT v. Jagtar Singh Chawla — (2013) 215 Taxman 154 (P&H): Held: Liberal interpretation of time-limits in beneficial provisions where substantial compliance is established.
The assessee sold agricultural land and a residential house on 20-06-2006 for ₹2.24 crore. He claimed exemption under Section 54F, having purchased a new residential property using the sale proceeds. The Revenue denied the exemption, arguing that the assessee neither deposited the unutilized gains in a Capital Gains Account Scheme nor acquired the new property before the due date under Section 139(1).
The Punjab & Haryana High Court held that Section 54F(4), read with Section 139, must be interpreted liberally as a beneficial provision. Relying on CIT v. Rajesh Kumar Jalan and Fathima Bai v. ITO, it ruled that Section 139(4) extends the due date for investment or deposit until one year from the end of the assessment year.
Since the assessee had paid a substantial portion of the purchase price and taken possession by 30-03-2008, within the extended period, the exemption was valid. Substantial compliance was sufficient, and strict procedural defaults could not defeat the relief.
The Appellant will furnish a compendium of the above judgments at the time of hearing. The ratio decidendi is relied upon; factual analogies are indicative and not determinative.
9. Prayer: In the premises aforesaid, it is most respectfully prayed that this Hon’ble Tribunal may be pleased to:
(i) Allow the appeal and direct that the Appellant’s claim for exemption under section 54F be granted to the extent of the actual investment made in the construction of the residential house within the statutory period, as evidenced by the records;
(ii) Hold that non-deposit of the unutilized consideration in CGAS by the due date under section 139(1) is not fatal on the facts of the case where the Appellant has demonstrably utilized the funds for construction within three years of transfer, consistent with the law laid down by the Karnataka High Court and other High Courts;
(iii) Remand is unnecessary since the material required to allow the claim is already on record and uncontroverted; however, without prejudice, if any arithmetical reconciliation is required, direct the AO to verify quantum of eligible investment strictly with reference to the documentary evidence already furnished and grant the deduction;
(iv) Grant all consequential reliefs, including recomputation of long-term capital gains and reduction of demand; and
(v) Pass such other and further orders as this Hon’ble Tribunal may deem fit in the facts and circumstances of the case and in the interest of justice.
Place: [City]
Date: [•]
For the Appellant-Assessee
[Name], Advocate
Enrolment No.: [•]
Chambers: [Address]
Email: [•] | Phone: [•]
Annexure – Indicative List (already filed / to be tendered at hearing)
Registered sale deed dated 25.01.2018 and bank statement showing receipt of ₹69,00,000.
Municipal plan sanction (22.12.2018), property tax receipts, and completion letter (15.12.2020).
Contractor agreements, running bills, site measurement sheets.
Invoices for cement, steel, bricks, timber, tiles, sanitary and electricals.
Bank statements evidencing withdrawals/cheques/NEFTs aligned with construction bills.
Photographs documenting construction progress.
Computation of long-term capital gains and working of section 54F claim.
Copies of judgments relied upon in a bound paper-book.
Executive Synopsis (for Bench convenience)
(i) Fact: Sale on 25.01.2018; consideration kept in nationalized bank; construction executed Jan 2019–Oct 2020; evidence uncontroverted.
(ii) Law: Section 54F is beneficial; CGAS under 54F(4) is compulsory only if cash is retained beyond return filing without utilization; otherwise directory.
(iii) Precedent: K. Ramachandra Rao (Kar HC) and allied rulings unequivocally support the Appellant.
(iv) Relief: Allow 54F to the extent of actual construction investment within three years; delete denial grounded solely on CGAS technicality.
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