Firstly, your mother is eligible for exemption under section 54 and not under section 54F.

Under section 54, You does not   need to invest the entire sales.

She may choose to invest only capital gain amount.

Further, she  can buy the property in joint name.

Its important she  clearly mention the proportion of ownership in the ration of investment made by each co owner.

Each co-owner is responsible for paying taxes on their respective share of the capital gains arising from the sale. 

Exemption under section 54/ 54F will be available to the co-owners in the ratio in which they have contributed towards the cost of the property. Capital gains exemption will not be limited to the share of ownership.

If the co-owned property is sold, each co-owner has to offer the capital gain as applicable on his share of the building. It may be noted that the apportionment shall be made at the 'sale consideration' and 'cost of acquisition' level and not at the 'net taxable capital gains'

The Delhi High Court observed that section 54F does not require that the new residential property should be purchased in the name of the tax payer; it merely says that the tax payer should have purchased / constructed a ‘residential house’.

2)

Section 54F of the Act provides that if a tax payer invests the sale proceeds received from the sale of any capital asset for buying a residential property; the long-term capital gains on sale of the property would be exempt.

3)section 54F being a beneficial provision, enacted for encouraging investment in residential houses should be liberally interpreted to include investment done in the joint  name too.

4) Hyper-technical ground should not impede the object of the provision which is to be provide impetus to housing construction.

Holding of the new asset in the name of a close relative will not take away the exemption

Dear client,

Under Section 54 of the Income Tax Act in India, if an individual or HUF (Hindu Undivided Family) sells a residential property and reinvests the capital gains in purchasing or constructing another residential property, they can claim an exemption on the capital gains tax. The exemption is available if the property sold and the property purchased are residential houses. The new property must be purchased either one year before the sale of the property or within two years after the sale. In the case of construction, the property should be completed within three years after the sale.  The entire capital gains amount needs to be reinvested to claim 100% exemption. If only a portion of the gains is reinvested, the exemption is restricted to the proportionate amount.

From your description, it appears that the tax authorities have reduced the benefit because the property was jointly purchased by your mother, yourself, and your sister, while the initial property was solely owned by your mother. The capital gain benefit might have been adjusted to reflect the proportionate ownership in the new property. You can reach out to us for further assistance

Yes you can exempt yourself if you invest in new house

the penalty that is levied is illegal

there are many judgments that have held that the assessee can buy the new house by investing the capital gains and such new house can be bought in joint names also

what is important is the investment of the capital gains to buy the new house

as part of family arrangement it is many a times desirable to buy a property in joint names

you will have to submit your objections and challenge the levy of penalty 

the law is very clear on this

s.54 of the income tax nowhere says that the new house cannot be purchased in joint names of assessee and his relative