This article questions the Taxability of Capital Gain (CG), when it is invested in residential property but held for less than three years. This has a reference to the recent Judgment passed by the Hon’ble ITAT Chennai in the case of K.V. Vijayaraghavan Vs. DCIT [TS-7142-ITAT-2016(CHENNAI)-O] wherein the Hon’ble ITAT has rejected the CG benefit as the residential property bought using the CG amount was demolished within three years from the date when CG arose.

Facts and Issues before the ITAT

Object for enacting Sec 54F

The purpose of enacting Sec 54F was to encourage housing construction. The CBDT explains the objective via Circular No. 346 dated 30.6.1982. While Sec 54 provides for LTCG exemption on sale of residential property when invested in another residential property, Sec 54F provides for the same benefit when sale proceeds from non-residential property is invested in residential property.

Precedents relied on

The Department Representative advanced argument basing reliance on Hon’ble Madras HC decision in the case of K.M. Natarajan vs. ITO [TS-5057-ITAT-1992(CHENNAI)-O], wherein it was held that, the strict construction of the section grants exemption only if the property is residential property and used as residence by the buyer. Further, reliance is placed on the Apex court decision in the case of Grace Collis [TS-5-SC-2001-O] wherein it was held that if the old house is only meant for demolition, it may not satisfy the test of purchase of residential house, more particularly when it was demolished within two years. Thus, it may be a symbolic purchase of bungalow which may not pass the test of ‘purchase’ under section 54F of the Act or if it is treated as purchased, then demolition, being a voluntary act, may amount to ‘transfer’.

Held by ITAT

The Parliament enacted Sec 54F for encouraging housing construction and not for destruction of residential building. Sec 54F emphasizes construction of residential house which must be a real one and not a symbolic construction. Mere construction by extending an old existing house would not mean new construction u/s 54F. Considering these factors, we do not find it necessary to interfere with the order of the CIT(A)that exemption u/s 54F cannot be granted since he has demolished the newly acquired residential house instantly for the purpose of construction of a shopping complex.


The Authors humbly submit that the case was factually dealt wrongly as the claim of the Assessee could be only u/s 54 because 1.08 Crore which forms a part of the total 1.17 Crore investment arose from sale of the Assessee’s residential property which will fall only u/s 54 and only the investment of 15 Lakhs which arose from the sale of shops could fall u/s 54F. To sum up, the Assessee’s major claim of exemption should be covered under Sec 54 and not under Sec 54F.

Even if the Assessee had erroneously claimed exemption u/s 54F, the AO ought to have rejected the claim only stating for the reason that Sec 54F is not applicable for towards the investment in residential property made from the sale proceeds of a residential property.
It is to be noted that in the instant case, had the claim been made u/s 54 and not u/s 54F, the demolition of the property within three years wouldn’t have affected the exemption claim as the purpose enumerated u/s 54F is not applicable to Sec 54.

Citing the parliamentary discussion for insertion of Sec 54F and basing the discussion for rejecting the Assessee’s eligibility is not relevant w.r.t. 1.08 Crores when Sec 54F exclusively prohibits “Residential Property” from its ambit.

A glance at provisions dealing with exemptions under the head Capital Gains