I put the whole sale consideration into building a house within the section 54F time limit but never opened a Capital Gains Account. Can the officer deny me the exemption on that ground alone?
No. The Karnataka High Court held that section 54F(4) is attracted only where the net consideration is not used to purchase or construct the house. If the assessee actually invests within the periods in section 54F(1), the deposit requirement never comes into play and exemption cannot be refused for want of a Capital Gains Account Scheme deposit. The Court also held there is no bar on constructing the new house on a site the assessee already owns; investments in that construction within one year before and three years after the transfer qualify. All four Revenue appeals were dismissed.
Decided by the High Court (High Court of Karnataka at Bangalore - Justice N. Kumar and Justice B. Manohar (judgment delivered by N. Kumar, J)) on 2014-07-14, reported as ITA No. 47/2014 c/w ITA No. 46/2014, ITA No. 494/2013 and ITA No. 495/2013 (Karnataka High Court). It bears on section 54F(4), section 54F(1), section 54F, section 139(1), section 54B of the Income Tax Act 1961, in Capital Gains and Capital Gains Exemptions matters.
This is the judgment practitioners cite when the only objection to a section 54 or 54F claim is the missing Capital Gains Account deposit - one of the commonest grounds of disallowance and one that assessees regularly walk into because the deposit has to be made by the section 139(1) due date. The Court reads sub-section (4) for what it is: a machinery provision for money still lying uninvested, not an independent condition of eligibility. The reasoning applies equally to section 54. It carries a second, less noticed point that helps clients who bought a plot earlier and build on it later: the section does not require the assessee to buy a site out of the sale proceeds, so construction on land already owned qualifies, and pre-transfer spending within the one-year window counts too.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee sold converted lands at Laxmipura and Kalkere villages, Jigani Hobli, Anekal Taluk, to Paramahamsa Foundation Trust for Rs.2,87,28,750. In returns filed under section 153A he computed long term capital gains on that amount and claimed exemption under sections 54B and 54F. He had bought a vacant site on 31 March 2001, had contributed Rs.31 lakh towards construction of a house on it by 31 March 2005, and had taken a bank loan of Rs.2.10 crore which also went into the construction. He claimed section 54F exemption of Rs.1,63,23,064 on the footing that Rs.1.36 crore had gone into the house. The Assessing Officer disallowed the claim on two grounds: the assessee had not shown how much was spent after the date of sale, and he had not deposited the unutilised consideration under the Capital Gains Accounts Scheme or filed proof of any such deposit with the return. The Commissioner (Appeals) allowed the exemption for investment made after the sale and within the eligible window, and the Tribunal affirmed. The Revenue filed four connected appeals under section 260A.
All four appeals were dismissed and both substantial questions answered in favour of the assessee. On the first, the Court held that section 54F contains no requirement that the assessee buy a site out of the sale proceeds; he may construct on a site he already owns, and every investment in that construction within one year before the transfer and three years after it qualifies for exemption under section 54F(1). On the second, and more important, the Court held that section 54F(4) applies only where the net consideration is not used for purchase or construction. Where the assessee's intention is not to retain cash but to invest, and the investment is in fact made within the periods in section 54F(1), sub-section (4) is not attracted at all, and exemption cannot be denied because no deposit was made in the notified account before the due date under section 139(1).
The Court set out section 54F in full and read sub-sections (1) and (4) together. Sub-section (1) grants relief where a residential house is purchased within one year before or two years after the transfer, or constructed within three years after it. Sub-section (4) is directed at the amount of net consideration "not appropriated" towards purchase within the earlier window and "not utilised" for purchase or construction before the return is furnished; that amount must go into the notified scheme. The Court took the plain consequence: the deposit obligation attaches only to money still lying uninvested. It is the route by which an assessee who wants exemption while retaining cash secures it, not a condition attached to an assessee who has actually spent the money. On the first question the Court worked from the language of the section and its proviso. The proviso lists the only disqualifications - owning more than one other residential house on the date of transfer, or buying or building another house within the stated periods. Nothing in the scheme prohibits construction on a site the assessee already owns, and it is not the requirement of law that he must first purchase a residential site. On the facts the site had been bought on 31 March 2001, the original asset sold on 27 August 2003, and construction had begun before the sale with bank borrowing, so investments within one year prior to the transfer and within three years after it were both eligible.
Sub Section (4) is attracted only to a case where the sale consideration is not utilized either for purchase or for construction of a residential house.
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Handle my notice → Ask a CA on WhatsAppNo. The Karnataka High Court held that section 54F(4) is attracted only where the net consideration is not used to purchase or construct the house. If the assessee actually invests within the periods in section 54F(1), the deposit requirement never comes into play and exemption cannot be refused for want of a Capital Gains Account Scheme deposit. The Court also held there is no bar on constructing the new house on a site the assessee already owns; investments in that construction within one year before and three years after the transfer qualify. All four Revenue appeals were dismissed. This was decided by the High Court (High Court of Karnataka at Bangalore - Justice N. Kumar and Justice B. Manohar (judgment delivered by N. Kumar, J)) and bears on section 54F(4), section 54F(1), section 54F, section 139(1), section 54B of the Income Tax Act 1961. It is reported as ITA No. 47/2014 c/w ITA No. 46/2014, ITA No. 494/2013 and ITA No. 495/2013 (Karnataka High Court). This is the judgment practitioners cite when the only objection to a section 54 or 54F claim is the missing Capital Gains Account deposit - one of the commonest grounds of disallowance and one that assessees regularly walk into because the deposit has to be made by the section 139(1) due date. The Court reads sub-section (4) for what it is: a machinery provision for money still lying uninvested, not an independent condition of eligibility. The reasoning applies equally to section 54. It carries a second, less noticed point that helps clients who bought a plot earlier and build on it later: the section does not require the assessee to buy a site out of the sale proceeds, so construction on land already owned qualifies, and pre-transfer spending within the one-year window counts too. If it applies to you, the first step is this: Where the deposit was missed, lead with proof of actual investment - contractor bills, bank statements, loan drawdowns - dated within one year before and three years after the transfer, and rely on this judgment to answer the section 54F(4) objection.
The assessee sold converted lands at Laxmipura and Kalkere villages, Jigani Hobli, Anekal Taluk, to Paramahamsa Foundation Trust for Rs.2,87,28,750. In returns filed under section 153A he computed long term capital gains on that amount and claimed exemption under sections 54B and 54F. He had bought a vacant site on 31 March 2001, had contributed Rs.31 lakh towards construction of a house on it by 31 March 2005, and had taken a bank loan of Rs.2.10 crore which also went into the construction. He claimed section 54F exemption of Rs.1,63,23,064 on the footing that Rs.1.36 crore had gone into the house. The Assessing Officer disallowed the claim on two grounds: the assessee had not shown how much was spent after the date of sale, and he had not deposited the unutilised consideration under the Capital Gains Accounts Scheme or filed proof of any such deposit with the return. The Commissioner (Appeals) allowed the exemption for investment made after the sale and within the eligible window, and the Tribunal affirmed. The Revenue filed four connected appeals under section 260A. The matter was decided on 2014-07-14 by the High Court (High Court of Karnataka at Bangalore - Justice N. Kumar and Justice B. Manohar (judgment delivered by N. Kumar, J)). On those facts the High Court held as follows. All four appeals were dismissed and both substantial questions answered in favour of the assessee. On the first, the Court held that section 54F contains no requirement that the assessee buy a site out of the sale proceeds; he may construct on a site he already owns, and every investment in that construction within one year before the transfer and three years after it qualifies for exemption under section 54F(1). On the second, and more important, the Court held that section 54F(4) applies only where the net consideration is not used for purchase or construction. Where the assessee's intention is not to retain cash but to invest, and the investment is in fact made within the periods in section 54F(1), sub-section (4) is not attracted at all, and exemption cannot be denied because no deposit was made in the notified account before the due date under section 139(1).
The Court set out section 54F in full and read sub-sections (1) and (4) together. Sub-section (1) grants relief where a residential house is purchased within one year before or two years after the transfer, or constructed within three years after it. Sub-section (4) is directed at the amount of net consideration "not appropriated" towards purchase within the earlier window and "not utilised" for purchase or construction before the return is furnished; that amount must go into the notified scheme. The Court took the plain consequence: the deposit obligation attaches only to money still lying uninvested. It is the route by which an assessee who wants exemption while retaining cash secures it, not a condition attached to an assessee who has actually spent the money. On the first question the Court worked from the language of the section and its proviso. The proviso lists the only disqualifications - owning more than one other residential house on the date of transfer, or buying or building another house within the stated periods. Nothing in the scheme prohibits construction on a site the assessee already owns, and it is not the requirement of law that he must first purchase a residential site. On the facts the site had been bought on 31 March 2001, the original asset sold on 27 August 2003, and construction had begun before the sale with bank borrowing, so investments within one year prior to the transfer and within three years after it were both eligible. In the words reproduced by the source cited on this page: "Sub Section (4) is attracted only to a case where the sale consideration is not utilized either for purchase or for construction of a residential house."
It was decided by the High Court on 2014-07-14 and is reported as ITA No. 47/2014 c/w ITA No. 46/2014, ITA No. 494/2013 and ITA No. 495/2013 (Karnataka High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 54F(4), section 54F(1), section 54F, section 139(1), section 54B, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. All four appeals were dismissed and both substantial questions answered in favour of the assessee. On the first, the Court held that section 54F contains no requirement that the assessee buy a site out of the sale proceeds; he may construct on a site he already owns, and every investment in that construction within one year before the transfer and three years after it qualifies for exemption under section 54F(1). On the second, and more important, the Court held that section 54F(4) applies only where the net consideration is not used for purchase or construction. Where the assessee's intention is not to retain cash but to invest, and the investment is in fact made within the periods in section 54F(1), sub-section (4) is not attracted at all, and exemption cannot be denied because no deposit was made in the notified account before the due date under section 139(1). It arises in Capital Gains and Capital Gains Exemptions matters, on section 54F(4), section 54F(1), section 54F, section 139(1), section 54B of the Income Tax Act 1961, and was decided by High Court of Karnataka at Bangalore - Justice N. Kumar and Justice B. Manohar (judgment delivered by N. Kumar, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Keep the amount actually spent after the date of transfer separately identifiable; the officer here disallowed the claim because that could not be told apart from earlier spending. If part of the consideration will genuinely remain uninvested by the return due date, deposit that part under the Capital Gains Accounts Scheme - this judgment does not excuse unutilised money. Do not concede that the new house must be built on land bought out of the sale proceeds; construction on a plot already owned is within the section.
Still good law. I read the common judgment through to the operative order dismissing all four appeals. The harvested page records it as cited in 88 later decisions and I found nothing in the text indicating it has been disturbed; I could not check separately whether the Revenue took it to the Supreme Court, and the point has been decided both ways in some other High Courts. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line dated the case to 2015; the judgment was delivered on 14 July 2014 and the date is taken from the judgment. The batch also listed sections 54 and 139(4); the judgment decides section 54F alone and does not discuss section 139(4) or the line of cases allowing a deposit up to the section 139(4) date - its route is that sub-section (4) is not attracted at all. The text as harvested carries an obvious slip in paragraph 2, which gives the date of sale as 17 December 2014, while the Court's own reasoning proceeds on a sale dated 27 August 2003 and a site purchased on 31 March 2001; I have used the dates in the reasoning. The source page carried no reporter citations, so the case numbers are given instead. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
All four appeals were dismissed and both substantial questions answered in favour of the assessee. On the first, the Court held that section 54F contains no requirement that the assessee buy a site out of the sale proceeds; he may construct on a site he already owns, and every investment in that construction within one year before the transfer and three years after it qualifies for exemption under section 54F(1). On the second, and more important, the Court held that section 54F(4) applies only where the net consideration is not used for purchase or construction. Where the assessee's intention is not to retain cash but to invest, and the investment is in fact made within the periods in section 54F(1), sub-section (4) is not attracted at all, and exemption cannot be denied because no deposit was made in the notified account before the due date under section 139(1).
TaxSphere, “CIT v K. Ramachandra Rao”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-k-ramachandra-rao/ (validity last checked 2026-08-29)
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I never deposited the unspent sale proceeds in a capital gains account. Can I still claim 54F?
I paid the whole price of the new house but put my wife's name on the deed alongside mine. Will the officer cut my section 54F exemption to half?
The Assessing Officer says my land was not agricultural land at all — it is inside municipal limits, next to a commercial area, and the buyer bought it to build on. Does that defeat s.54B?
The Assessing Officer says s.54B is only for long-term assets, that I cannot show two full years of agricultural use, and that part of the new land is in my wife's name. Where do I actually stand?
