🏡 Section 54F: Multiple Houses, Oral Gifts & the Path to Exemption

Section 54F of the Income Tax Act, 1961 offers capital gains exemption when the gains from a long-term capital asset (other than a residential house) are invested in purchasing or constructing a residential house, subject to certain conditions.

But the most contested condition is:

❗ “The assessee should not own more than one residential house other than the new asset on the date of transfer.”

🧩 Case in Focus: ITO vs. Narasimha Reddy Duthala

Citation: [2025] 174 taxmann.com 1073 (Hyderabad – Trib.)

🧾 Facts of the Case:

• The assessee sold a long-term capital asset and claimed exemption under Section 54F.

• The AO denied the claim stating that the assessee owned two residential houses, one of which was gifted to his daughter in 2015 without a registered gift deed.

• Hence, AO held that the assessee was ineligible for Section 54F relief.

⚖️ Assessee’s Stand:

• The property had been orally gifted to the daughter.

• Oral gifts are valid under Indian customs, especially in Hindu personal law, if:

  • The donor has the capacity to gift.

  • There is delivery of possession.

  • The donee accepts the gift.

    
    

🧑‍⚖️ Tribunal’s Decision:

The ITAT Hyderabad ruled in favour of the assessee:

• ✅ Oral gift is a valid mode of transfer under Hindu Law.

• ✅ The absence of a registered deed does not invalidate the gift.

• ✅ The property was not held by the assessee on the date of transfer, hence Section 54F exemption was allowable.

🏛️ Key Precedents Referred:

🔹 Sanjeev Lal v. CIT & Anr. [2014] 365 ITR 389 (SC)

• Supreme Court acknowledged family arrangements and oral agreements as valid.

• A property transfer through agreement to sell was accepted as a valid intent for claiming capital gain exemption under Section 54.

🔹 CIT v. Gita Duggal [2013] 357 ITR 153 (Delhi HC)

• Owning multiple units in the same building was not a bar to Section 54F if they functioned as one house.

🔹 Navin Jolly v. ITO [2020] 117 taxmann.com 324 (Karnataka HC)

• Clarified that ownership of multiple houses doesn’t disqualify if only one is residential and in use, and the others are commercial or let out.

🔍 Key Learnings:

✅ Oral gifts, if proved by intention, possession, and acceptance, are valid under Indian law and can exclude a property from ownership count.

✅ The purpose and use of a property (residential vs. commercial) matters in interpreting ownership for Section 54F.

✅ Taxpayer-friendly precedents allow flexibility in interpreting “owning more than one house” if the taxpayer acts in good faith and complies with the essence of the law.

✅ Checklist to Claim Section 54F Exemption:

Condition	Requirement
Capital Gain	Must arise from long-term non-residential asset
Investment	In one residential house within 1 year before or 2 years after transfer (or within 3 years if constructing)
Ownership	Should not own more than one residential house (excluding the new one) on the date of transfer
Holding Period	New house must be held for at least 3 years
Payment Mode	Not mandatory to invest only from capital gains; but sale proceeds must be traceable to investment

📌 Conclusion:

Section 54F remains a crucial relief provision for taxpayers reinvesting in residential property. However, minor deviations in documentation—like absence of a gift deed—should not deny a genuine claim. As long as substance is proven over form, courts and tribunals have consistently protected taxpayers' rights.