In Part A, key judicial rulings on Sections 54 and 54F were examined to simplify the tax implications of property transactions. In this continuation, the focus shifts to more nuanced and frequently litigated issues—ranging from under-construction properties and procedural compliances to redevelopment arrangements and Joint Development Agreements (JDAs). These rulings collectively highlight a consistent judicial approach: prioritising substance over technicalities where genuine reinvestment is established.
Read Part 1 of this Article: Taxation of Property Transactions: Key Section 54/4F Judicial Pronouncements – Part 1
9. Does Investment in an Under-Construction Property Qualify as Construction under Section 54F?
Brief Facts:
The assessee sold an immovable property on 19.08.2014 for approximately ₹85.04 lakhs, resulting in a long-term capital gain of about ₹71.33 lakhs. He booked an under-construction villa in 2014 and paid ₹93.39 lakhs before filing the return of income on 24.08.2015. The purchase deed was executed in April 2017.
The Assessing Officer disallowed the deduction under Section 54F on the grounds that the assessee had merely purchased property and not constructed a residential house.
Ruling:
The Tribunal clarified that investment in an under-construction property constitutes “construction” for the purposes of Section 54F. Accordingly, deduction cannot be denied solely on the ground that payments commenced before the date of transfer or that possession was obtained later, provided the investment is completed within the prescribed period.
Key Takeaway:
For Section 54F, construction need not commence after the date of transfer—investment in an under-construction property qualifies, provided it is completed within the prescribed timeline.
Case Reference:
While the timing of investment is one aspect, identifying the relevant date in under-construction properties is another frequent area of dispute.
10. For Under-Construction Property, Is the Possession Date Relevant for Section 54?
Brief Facts:
The assessee sold a residential flat on 28.10.2013 and earned a capital gain of ₹62 lakhs. He had earlier booked an under-construction flat on 23.05.2012, with payments linked to construction stages.
Construction was completed on 26.12.2014, and possession was handed over on 07.01.2015—within two years from the date of transfer. The Assessing Officer treated the agreement date as the purchase date and denied the exemption.
Ruling:
The Tribunal held that in cases of under-construction properties, the asset cannot be regarded as fully acquired at the time of booking or execution of the agreement. The property becomes a complete residential unit only upon completion and possession.
Since possession was obtained within the prescribed period, the assessee was held to be eligible for the exemption.
Key Takeaway:
In under-construction cases, the date of possession (upon completion), not the booking or agreement date, is crucial for determining eligibility under Section 54.
Case Reference:
Beyond timing issues, procedural compliance—particularly regarding the Capital Gains Account Scheme—often becomes a point of litigation.
11. Is a deposit in the Capital Gains Account Scheme Mandatory for claiming the Section 54 Exemption?
Brief Facts:
The assessee invested part of the capital gains in a residential property after the due date of filing the return without depositing the unutilized amount in the Capital Gains Account Scheme (CGAS).
The Assessing Officer restricted the exemption only to the amount invested up to the due date.
Ruling:
The Tribunal held that the exemption under Section 54 cannot be denied merely because the capital gains are not deposited in the CGAS, provided the assessee ultimately invests the capital gains within the prescribed time limit.
Key Takeaway:
Substance prevails over procedure—actual investment within the prescribed time frame is more important than interim compliance with CGAS.
Case Reference:
Moving beyond purchase and construction, redevelopment cases raise unique questions regarding the computation of the holding period.
12. In Case of Redevelopment, From Which Date is Holding Period Computed?
Brief Facts:
The assessee originally acquired a flat in 1988. Under a redevelopment agreement dated 02.02.2006, she became entitled to a new flat with an additional area. Possession was received on 22.11.2010, and the flat was sold on 31.12.2013.
The Assessing Officer treated the gains as short-term, considering the completion and payment dates.
Ruling:
The Tribunal held that redevelopment is a continuation of original ownership and does not constitute a fresh acquisition. The allotment under redevelopment crystallises the rights, and the holding period is computed from the original ownership.
Key Takeaway:
In redevelopment cases, the holding period is computed from the original ownership/allotment, not from completion, possession, or final payment.
Case Reference:
Joint Development Agreements (JDAs) introduce further complexity, particularly in determining the timing of “transfer” under tax law.
13. When Does Transfer Occur in a Joint Development Agreement (JDA)?
Brief Facts:
The assessee inherited property rights and was linked to a JDA executed in 1994. The property was demolished for redevelopment, and a sale deed transferring rights was executed in 1999. Exemption under Section 54 was claimed.
The exemption was denied on the grounds that the transfer occurred at the time of the JDA.
Ruling:
The High Court held that mere execution of a JDA does not, by itself, trigger a “transfer” under Section 2(47). Transfer occurs only when rights are effectively conveyed—such as through the execution of a sale deed.
Demolition for redevelopment does not alter the property’s nature.
Key Takeaway:
Execution of a JDA does not automatically result in transfer—transfer is triggered only when rights are actually conveyed.
Case Reference:
Another important question in JDAs is whether the consideration received in kind can qualify as investment for exemption.
14. Can Share in Constructed Property Received Under a JDA Qualify as Investment for Exemption?
Brief Facts:
The assessee entered into a development agreement under which consideration was to be received in the form of constructed residential units.
The Assessing Officer treated the value of such share as consideration and denied the exemption.
Ruling:
The Tribunal held that allotment of residential units under a development agreement qualifies as investment in construction for the purposes of Section 54F.
Key Takeaway:
Under a JDA, receipt of constructed residential units can be treated as a valid form of investment, making the assessee eligible for exemption under Section 54F.
Case Reference:
Finally, a recurring practical issue is whether direct linkage between sale proceeds and reinvestment is necessary.
15. Is Direct Utilisation of Sale Proceeds Mandatory for Section 54F Exemption?
Brief Facts:
The assessee sold shares on 13.07.2020 and earned long-term capital gains of ₹26 crores. He claimed an exemption under Section 54F on an investment in a residential house.
Construction had commenced prior to the sale and was completed within the prescribed period. The Assessing Officer denied the exemption on the grounds that the sale proceeds were not directly utilised.
Ruling:
The Tribunal held that Section 54F does not mandate direct utilisation of sale proceeds. Further, commencement of construction prior to transfer does not disentitle the assessee, provided the construction is completed within the prescribed period.
Key Takeaway:
Direct utilisation of sale proceeds is not mandatory—what matters is the timely completion of the investment within the statutory timeline.
Case Reference:
Conclusion:
These rulings reaffirm a consistent judicial philosophy: tax benefits under Sections 54 and 54F should not be denied when the taxpayer demonstrates genuine intent to reinvest in residential property.
Courts have repeatedly adopted a purposive interpretation—placing substance over procedural lapses, timing mismatches, or technical objections. Whether the issue concerns the timing of construction, procedural compliance, redevelopment, or JDAs, the emphasis remains on the underlying objective of promoting housing investment.
As litigation continues to evolve, Part III of this series will explore emerging controversies and unresolved issues, offering greater clarity for taxpayers and professionals navigating capital gains taxation.
Disclaimer: This article is intended for educational purposes only and should not be construed as professional advice.
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