Full Section 54 Exemption Allowed – Pre-Purchase Payments Also Count Towards Investment

Anil Mohanlal Thakker Vs Assessing Officer (ITAT Mumbai)

Full Section 54 Exemption Allowed – Pre-Purchase Payments Also Count Towards Investment

Mumbai ITAT held that entire capital gains exemption u/s 54 cannot be denied merely because part of the investment was made prior to the one-year window before sale.

The assessee sold a property on 06.09.2013 and earned LTCG of ₹52.84 lakh, claiming full exemption on purchase of a new residential flat costing ₹1.93 crore. The AO restricted exemption only to ₹32.97 lakh, considering only payments made within one year prior to transfer.

The Tribunal disagreed and held:

• The assessee had substantially complied with Section 54 conditions
• The entire cost of new asset (including VAT, stamp duty, etc.) must be considered
• Payments made prior to one year cannot be ignored when property is purchased within the prescribed period
• Section 54 should be interpreted liberally to promote investment in residential property

Accordingly, the ITAT allowed full exemption of capital gains, deleting the disallowance. The assessee’s appeal was allowed in full.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. This appeal by assesseeis directed against the order of Ld. CIT(A) / NFAC dated 13.08.2025 for A.Y. 2014-15. The assessee has raised following grounds of appeal;

i. The appellant, vide Deed of Sale dtd.06.09.13 sold Res. Flat No. 1601 in Manisha Heights, Mulund (W), [Long Term Assets] for Rs. 94,00,000/-, which was purchased vide Deed of Purchase dtd.07.02.08 for actual cost of Rs.24,15,000/- in respect of which deductible Cost Inflation Indexed Cost works out to Rs.41, 15,581/-, giving rise to LTCG Rs. 52,84,419/-.

ii. The appellant purchased, vide Deed dtd.25.09.12, Res. Flat No.B-1001 in Om Shivam, Mulund (W) [New Asset] for Rs.1,73,70,000/- and adding to the same VAT, Service Tax, Stamp Duty, Regn. Charges, etc., incurred total cost of Rs. 1,93,44,855/-, making him eligible for exemption in respect of the whole of LTCG Rs.52,84,419/-.

iii. The learned A.O. erred in restricting the exemption U/s.54, to Rs.32,97,135/- against Rs.52,84,419/-, ignoring the fact that all the conditions laid down in section 54 of the Act, have been satisfied, i.e. the New Asset has been purchased within one year BEFORE the date of Transfer and the amount invested in the same is more than the LTCG.

iv. The learned A.O. erred in not appreciating the cost incurred in purchase of New Asset, in right perspective, which has been laid out as under:

a. From 20.10.11 (the date of 1st installment) to 31.03.12 Rs.1,36,11,703/-.

b. From 01.04.12 to 05.09.12 Rs. 24,36,017/-

Total up to 05.09.12 i.e. prior to 1 year before the date of Transfer Rs.1,60,47,720/-

c. From 06.09.12 to 02.03.13 (i.e. the date of last payment)

Rs. 32,97,135/-

Total investment Rs. 1,93,44,855/-

v. The learned A.O. erred in misinterpreting the “Cost of Res. House” purchased within 1 year before transfer as “Amount actually appropriated or paid towards the cost of New Asset during the period of one year before the date of Transfer” and not including therein the amount actually paid prior to one year before the date of Transfer.

vi. The learned A.O. erred in resorting to sub-section (2) of section 54 (which is not attracted in the case of the appellant) to interpret the “Cost incurred” in purchase of New Asset, to compute LTCG eligible for exemption U/s.54, as he failed to appreciate that the Appellant acquired the RIGHTS and DOMAIN in the New Asset only on entering into Agreement to purchase the New Asset vide Deed dtd.25.09.12 and not prior to that date, in the absence of any Agreement or Arrangement or Possession prior to the said date of purchase and according to the other stipulations as mentioned in the said Agreement dtd.25.09.12.

2. Brief facts of the case are that during the assessment, the Assessing Officer (in short ‘AO’) noted that the assessee has purchased a residential flat No. B­1001, Om Shivam, Rajendra Prasad Road, Mulund (W) Mumbai vide agreement dated 25.09.2012 for consideration of Rs. 1.73 Crore. The assessee claimed exemption under Section 54 of Rs. 52,84,419/-. The assessee was asked to substantiate the claim of exemption under Section 54. In response to such notice, the assessee filed his reply and stated that he sold one residential property being Flat No. 1601, Manisha Heights, Bal Rajeshwar Road, Mulund for a consideration of Rs. 94,00,000/- which was purchased vide sale deed dated 07.02.2008 for a consideration of Rs. 24,15,000/-. On sale of such asset, the assessee earned capital gain of Rs. 52,84,419/- which is claimed as exemption while purchasing new residential house. The AO on perusal of detail furnished noted that the assessee has made payment of sale consideration in the month of July, 2012 aggregating of Rs. 32,97,135/- whereas the agreement was executed in Sept 2013. The assessee was again issued show cause notice as to why exemption under Section 54 should not be disallowed. The assessee again filed his reply dated 10.12.2016 and claimed that he satisfies all the condition for claiming exemption under Section 54. To support his submission, the assessee relied upon decision of Tribunal and High Courts. The reply of assessee was not accepted by AO. The AO held that the assessee sold his property on 11.09.2013 and earned capital gain of Rs. 52,84,419/-. The Capital gain should have been appropriated one year before i.e. in between 12.09.2012 to 11.09.2013. The assessee appropriated substantive amount of capital gain from 20.10.2011 to 27.07.2012 and not out of one year before the transfer of original asset. The AO, thereby, restricted the claim of exemption of of section 54 to the extent of Rs. 32,97,135/-, thereby disallowed Rs. 19,87,284/-. ( 52,84,419 minus 32,97,135 =19,87,284)

3. Aggrieved by the action of AO, the assessee filed appeal before Ld. CIT(A), wherein action of AO was upheld. Further aggrieved, the assessee has filed present appeal before Tribunal.

4. I have heard the submission of Ld. Authorised Representative (Ld. AR) of the assessee and Ld. Senior Departmental Representative (Sr. DR) for the revenue. The Ld. AR of the assessee submits that the assessee has purchased new residential property on 05.09.2012. As per agreement, the cost of new residential property is Rs. 1.73 Crore. On adding Value Added Tax (VAT), Service Tax, Stamp Duty and registration charges of aggregating Rs. 1974855/-, the total cost of new asset is Rs. 1.93 Crore. Such facts is not in dispute. The assessee sold original asset on 06.09.2013. The date of sale is not in dispute. On sale of original/old asset, the assessee earned long term capital gain of Rs. 5284419/-. The value of capital gain is also not dispute by AO. The AO allowed the exemption of capital gain to the extent of Rs. 3297135/- which were within the period of one year prior to sale of original asset and thereby disallowed remaining amount of Rs. 1987284/-. The assessee, in addition to sale value (purchase consideration), also incurred Rs. 1974855/- as a part of cost for acquisition of new residential property. Thus, the assessee substantially fulfils the condition for investment in new residential asset.

5. On the other hand, the Ld. Sr. DR for the revenue supported of lower authorities.

6. I have considered the rival submission of both the parties and have gone through the orders of lower authorities carefully. On considering the submission of both the parties, I find merit in the submission of Ld. AR of the assessee that assessee has substantially complied with the condition for exemption under Section 54 of the Act. I find that the assessee has purchased new residential property on 05.09.2012. The sale consideration, reflected on the sale deed of new residential property is Rs. 1.73 Crore. The assessee also paid VAT, Service Tax, Stamp Duty and registration charges, which are aggregating of Rs. 19,74,855/-, the total cost of acquisition of new asset has become Rs. 1.93 Crore. Such facts cannot be disputed. The assessee sold original asset on 06.09.2013. The date of sale is not in dispute. On sale of original/old asset, the assessee earned long term capital gain of Rs. 52,84,419/-. The value of capital gain is also not dispute by AO. The AO allowed the exemption of capital gain to the extent of Rs. 32,97,135/- which were within the period of one year prior to sale of original asset and thereby disallowed remaining amount of Rs. 19,87,284/-. The assessee, in addition to sale value (purchase consideration), also incurred Rs. 19,74,855/- as a part of cost for acquisition of new residential property. Hence, I found that the assessee has invested on the capital gain in purchase of new residential house one year prior to sale of original asset. In the result, grounds of appeal raised by assessee are allowed.

7. In the result, appeal is allowed.

Order was pronounced on 23/04/2026 in open Court.