Section 54F Deduction allowed on LTCG from sale of inherited jewellery : ITAT

Sale of capital assets is one of the important areas where taxation plays an important role. Any gains arising on such sale of capital assets are also eligible for certain deductions from income tax. Capital gains usually long term capital gains attracts various tax benefits as provided by the income tax act. One of such important deduction is provided in section 54F of income tax where, long term capital gains arising out of sale of a long term capital asset other than a residential house property are exempt from tax if invested in purchasing a new residential house property, subject to certain conditions.

One such case was decided by The Bangalore bench of the Income Tax Appellate Tribunal where AO had initially declined the deduction under section 54F for gains arising from sale of inherited jewellery where jewellery being the capital asset in the concerned case. ITAT later decided to allow the deduction to assessee.

What does Section 54F provides?

Section 54F of the IT Act allows an exemption on capital gain from sale of any capital asset other than a residential house. This exemption is subject to certain conditions which are:

Entire net sales from the sale of capital asset are invested in purchase of new residential house
New residential house is either purchased within 1 year before or within 2 years after the date of sale of capital asset OR if new residential house is being constructed then the construction must be completed within 3 years from date of sale
Assessee should not own more than one residential house on the date of sale, other than the new residential house purchased for claiming exemption under this section.
The maximum deduction to be claimed is capped at Rs 10 crore effective from 1st April 2023

Issues Involved:

Assessee inherited jewelley under a Will document from his mother-in-law, where he sold the imherited jewellery and the sale proceeds are stated to be re-invested in purchase of a new residential house property. While filing the IT return assessee claimed the deduction under section 54F which was denied by the respective Assessing Officer on the grounds stating that such sale proceeds would qualify for “Income from other sources” and taxed accordingly.

Facts Explained:

Assessee upon inheriting jewellery from his mother-in-law, sold the same for an amount of Rs.7,09,53,800/- resulting in a capital gain of Rs.6,29,20,349/-. AO denied the deduction of section 54F and treated the entire amount of sale proceeds as “IFOS” as per Section 56.

Upon taking this issue for consideration, National Forum on Advance Rulings (NFAC) concluded that the sale proceeds of inherited jewelry should not be treated as income from other sources but rather as a long-term capital asset inherited from the assessee’s mother-in-law.

NFAC directed the learned AO to cancel out the addition made to income under the head of IFOS and to allow the assessee the benefit of deduction under Section 54F of the Act.

However, from assessee’s wealth tax returns it was found that there were certain differences in the quantity and weight of jewellery as mentioned in wealth tax reports and as mentioned in computation of income for the relevant assessment year.

Upon learning this it was observed that this issue has to be required to be re-examined at the end of CIT (A)/NFAC and the assessee is directed to reconcile the quantum of jewellery inherited through the impugned Will along with valuation report issued by Navarathan Jewellers Pvt. Ltd.(the party to whom jewellery in question was sold) valuing the jewellery as at the end of relevant financial year.

Conclusion:

It is important to ascertain actual status of a particular income to qualify the same in correct head of income. In the given case AO had denied the deduction claim straightaway by adding the income to IFOS whereas a relief was given to assessee to claim the deduction under section 54F. However, due to certain differences in valuation reports pertaining to relevant year involving information regarding the quantum of the capital assets involved in the case, it was decided by ITAT to have a re-examination of issue by CIT(A) by giving enough opportunity of being heard to the assessee .

About Author:

CA Chinmay Shirish Agate

Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.