Income Tax Act | To Claim Deduction U/S 54F, Assessee Must Show Intention To Repay Borrowed Funds With Capital Gains: Kerala HC

Section 54F of the Income Tax Act, 1961, allows a tax exemption on capital gains earned from selling a residential property, but only if certain rules are followed.

Justice Ziyad Rahman A.A. stated that "...even in a case where, the residential building was purchased, or it was constructed utilising the borrowed funds or funds from other sources, there is an obligation on the part of the Assessee to satisfy the authorities that, the funds were spent by the assessee either through borrowing or arranging from other sources at his/her own risks and costs, in anticipation of or with an intention to appropriate the income to be subjected to capital gain tax, for such purchase or construction…"

Therefore, the mere claim of the assessee by itself is not sufficient, but what is relevant is the satisfaction of the appropriate authority that the assessee had indeed utilised the funds, which are otherwise subject to tax, for the purposes referred to Section 54F of the Income Tax Act, added the bench.

The assessee/petitioner had utilised the funds generated from the transfer of her property, within the period of three years from the date of such transfer, for the construction of a residential building for her.

The construction was completed by using the funds borrowed by her from her daughter and son-in-law, and she wants to repay the debt by utilising the amounts in the said property.

The case of the petitioner is that the construction was made by her, utilising the borrowed funds with an intention to appropriate the amounts lying in the deposit for repaying the same.

However, the said contentions are rejected by the Income Tax Officer/1^st respondent, and it was found that the petitioner failed to utilise any amount from the funds she received from the transfer of her property.

According to the petitioner, purchasing or constructing the residential building, by utilising the funds borrowed by the assessee and later appropriating the funds from the transfer of property to those transactions, is also permissible under Section 54F.

The bench observed that Section 54F does not prohibit such an exercise and therefore, nothing would preclude the assessee from arranging funds from other sources for fulfilling the obligation of purchasing or constructing a residential building within the period stipulated.

The bench referred to Section 54F of Income Tax Act and stated that ….one of the essential requirements for claiming the benefit under the said provision is that, the amount acquired by the Assessee from the transfer of the property must have been utilised within a period of one year before or within two years after the date on which the transfer took place, for purchasing one residential building, or the said amounts must have been utilised for constructing a residential building within three years from the date of the said transfer……

In the case of construction, the period fixed is after three years from the date of transfer of property, and adjustment of the amount spent prior to the transfer of property is not contemplated. However, the permission granted to appropriate the funds spent by the assessee within one year before the transfer of property, in the case of the purchase of the residential building, clearly conveys the scheme envisaged in section 54F, where such adjustment is permitted, stated the bench.

In view of the above, the bench disposed of the petition directing the 1^st respondent to grant permission to the petitioner to release the balance amount, if any, in the Capital Gain SB Account maintained by the petitioner with the 2^nd respondent-Bank, after retaining the amounts equivalent to the liability of the petitioner.

Case Title: Mrs. Sainaba Hamza Koya v. The Income Tax Officer

Case Number: WP(C) NO. 40744 OF 2024

Counsel for Petitioner/Assessee: Akhil Suresh, Kalliyani Krishna B., Amrith M.J., Isabell Manoj, Rahul T

Counsel for Respondent/Department: Cyriac Tom

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