Rs 2.63 crore Section 54F relief: ITAT says commercial property won’t count as second house

Fresh updates from the financial markets indicate that Buying a new home after selling a property can help taxpayers reduce their capital upside tax, but the exemption comes with specific conditions. One such condition under Section 54F relates to how many residential houses the taxpayer owns. In a recent case, the Chandigarh ITAT clarified that a commercial shop-cum-office cannot be treated as a residential house for this purpose and allowed a Rs 2.63 crore Section 54F deduction. The Tribunal additionally examined the taxpayer’s Section 54B claim for agricultural land and held that its location in an urban area, by itself, was not enough to deny the benefit. What is the case?

The case concerns an individual taxpayer who sold ancestral agricultural land for Rs 8 crore on 18 September 2017. The taxpayer calculated capital upside of Rs 7.72 crore and claimed deductions under Section 54F of Rs 2.63 crore for purchasing a residential property and under Section 54B for purchasing agricultural land. During assessment, the Assessing Officer disallowed both claims, resulting in an addition of Rs 6.36 crore to the taxpayer's income.

The main dispute under Section 54F was whether the taxpayer owned more than one residential house on the date of sale of the original agricultural land. The CIT(A) denied the Rs 2.63 crore deduction because the taxpayer had another property at SCO-7, Dhakoli, Zirakpur, which was treated as a residential property. The taxpayer argued that this was actually a shop-cum-office and commercial property, and as a result should not be counted as a residential house for Section 54F.

The ITAT asked the Assessing Officer to verify the actual nature of the property. The subsequent verification confirmed that SCO-7 was commercial in nature. The Tribunal as a result held that a commercial property cannot be counted as a residential house while determining whether the taxpayer owned more than one residential house for Section 54F. It consequently deleted the Rs 2.63 crore disallowance under Section 54F, subject to the other statutory conditions being met.

There was additionally a dispute over the Section 54B deduction. The taxpayer had purchased agricultural land after selling the original agricultural land and relied on purchase deeds dated 2 July 2018 for Rs 80 lakh and 1 August 2018 for Rs 45 lakh. The Topline objected partly because some of the purchased land was located in an urban area. That stated, factual verification confirmed that the properties were agricultural in character and had been purchased by the taxpayer. The ITAT held that merely because agricultural land is located in an urban area, the Section 54B benefit cannot be denied when evidence establishes that the land is agricultural.

In the final order Chandigarh ITAT allowed the taxpayer's appeal. It upheld the Section 54F deduction of Rs 2.63 crore and allowed the Section 54B deduction to the extent supported by documentary evidence, including the two disputed purchases. The Tribunal additionally stated that interest under Sections 234A, 234B and 234C would be recalculated consequentially.

Does this ruling apply to taxpayers?

Not automatically. “The Chandigarh ITAT ruling applies to the taxpayer in that particular case and does not by itself give every taxpayer a right to claim the same benefit. That stated, it can have persuasive value for taxpayers with similar facts, especially where a property being counted as a residential house for Section 54F is actually commercial in nature. In this case, the Tribunal relied on factual verification by the Assessing Officer, which confirmed that SCO-7, Dhakoli, Zirakpur was a commercial property,” stated stated Divya Bhanushali, CPO, TaxBuddy.

For taxpayers, the ruling highlights the importance of the actual nature and use of the property and supporting documents. A commercial property cannot be counted as a residential house merely to deny Section 54F eligibility. Similarly, for Section 54B, the Tribunal held that the fact that agricultural land is located in an urban area, by itself, is not enough to deny the deduction when documentary evidence establishes that the land is agricultural.