ITAT Mumbai Allows Section 54 Deduction as Allotment Letter & Payment Were Sufficient

ITO Vs Vaibhav Vijay Sawant (ITAT Mumbai)

Summary: The ITAT Mumbai dismissed the Revenue’s appeal and upheld the assessee’s claim for deduction under Section 54 of the Income Tax Act in respect of long-term capital gains arising from sale of a residential flat. The assessee had invested the entire capital gains amount of Rs.2.52 crore in under-construction flats in the “Millionist-14” project and received allotment letters from the developer, along with making substantial payments exceeding the claimed deduction. The Assessing Officer denied the deduction on the ground that possession had not been handed over, no registered purchase agreement existed, and the project was delayed. However, the Tribunal held that investment in an under-construction property, supported by allotment letters and proof of payment within the prescribed period, amounted to sufficient compliance under Section 54. Relying on CBDT Circulars and several judicial precedents, the Tribunal observed that delay in construction beyond the assessee’s control could not defeat the exemption claim. Accordingly, the order of the CIT(A) allowing the deduction was upheld.

Issue: Whether deduction under section 54 can be denied merely because the new residential flats were under construction, possession was not handed over, and the purchase agreement was not registered within the prescribed period, despite substantial investment and allotment of flats by the builder.

Facts: The assessee sold a residential flat and earned long-term capital gains of Rs. 2.52 crore, which were claimed as exempt under section 54 on investment in two under-construction residential flats in the project “Millionist-14” developed by M/s Aadinath Developers. The assessee received allotment letters, paid more than Rs. 2.60 crore within the stipulated period, and the builder assured possession within 30 months. However, due to delay in construction, approvals and disputes attributable to the developer, possession was not handed over and the purchase agreement could not be registered within the statutory period. The AO denied deduction under section 54 on the ground that only allotment letters existed and there was no completed purchase or possession of the flats.

AO and CIT(A) Findings: The AO held that mere allotment of flats without possession or registered purchase agreement did not amount to purchase or construction of residential property for purposes of section 54. The AO further observed that the assessee failed to establish extraordinary circumstances justifying delay in completion of the project and accordingly disallowed deduction of Rs. 2.52 crore claimed under section 54. The CIT(A), however, deleted the addition holding that receipt of allotment letters coupled with payment of the requisite amount within the prescribed period constituted sufficient compliance for claiming deduction under section 54 and that actual possession or registration was not mandatory.

ITAT Findings: The Tribunal upheld the order of the CIT(A) and held that booking of an under-construction flat with a builder amounts to investment in construction of a residential house for purposes of section 54. The Tribunal observed that section 54 requires substantial investment in purchase or construction within the prescribed period and does not mandate completion of construction or delivery of possession within that period. It was further held that delays attributable to the builder and beyond the control of the assessee cannot defeat a legitimate claim under section 54. Since the assessee had received allotment letters, invested an amount exceeding the capital gains within the stipulated time, and acquired substantial rights in the property, the conditions of section 54 stood satisfied notwithstanding non-delivery of possession or non-registration of the agreement. Accordingly, the Revenue’s appeal was dismissed.

Cases Relied Upon: The Tribunal relied upon PCIT vs. Vembu Vaidyanathan [2019 (1) TMI 1361 – Bombay High Court], CIT vs. Girish L. Ragha [2016 (5) TMI 589 – Bombay High Court], CIT vs. Smt. Bharati C. Kothari [2000 (3) TMI 39 – Calcutta High Court], Smt. Shashi Varma vs. CIT [1996 (3) TMI 65 – Madhya Pradesh High Court], and ACIT vs. Smt. Sunder Kaur Sujan Singh Gadh [2005 (4) TMI 518 – ITAT Mumbai].

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The Revenue has filed the present appeal against the impugned order dated 12.07.2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2017-18.

2. In this appeal, the Revenue has raised the following grounds: –

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.2,52,02,110/- on account of Income from other sources?

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not considering the reply of the notice u/s. 133(6) issued to the M/s. Aadinath Developers vide letter dated 23.12.2019 in which M/s. Aadinath Developers has accepted that the assessee had made advance booking of the flat No. 1301 & 1302 in ‘Millionist-14’?”

3. The solitary issue pertains to the claim of deduction under section 54 of the Act by the assessee.

4. The brief facts of the case pertaining to this issue as emanating from the record are: The assessee is an individual and for the year under consideration, filed its return of income on 27.03.2018, declaring a total income of Rs.19,59,750/-. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, from the perusal of the computation of income filed by the assessee along with the return of income, it was observed that the assessee has shown long-term capital gains on the sale of a residential flat at ‘Nil’, after claiming a deduction under section 54 of the Act. While doing so, the assessee had shown sale consideration of the residential flat at Rs. 6,51,23,500/-, against which the indexed cost of acquisition of Rs. 3,99,21,390/- was deducted. Thus, on the net consideration at Rs. 2,52,02,110/-, the assessee claimed a deduction under section 54 of the Act by claiming to have invested the entire amount of long-term capital gains in the new residential property. In response to the statutory notices issued during the assessment proceedings, the assessee furnished various details, including purchase documents and sale documents, regarding the whole property from which the long-term capital gains arose. Further, the assessee submitted that he has invested the long-term capital gains amounting to Rs. 2,52,02,110/- for purchasing a new flats, i.e., Flats No. 1901 and 1902 at 19^th Floor of the Millionist–14 building, which was constructed by M/s. Aadinath Developers. In support of its contention, the assessee submitted a letter of allotment. Since the assessee was never handed over the possession of the property and the purchase agreement was also not registered, the assessee was asked to show cause as to why the deduction claimed under section 54 of the Act should not be disallowed while working the capital gains in view of the fact that no actual purchase of property has been made. In response, the assessee submitted that the amount of Rs. 2,52,02,110/- earned by the assessee as long-term capital gains from the sale of the residential property has been invested in a new residential flat which is under construction, and thus a deduction under section 54 of the Act has been claimed. The assessee submitted that upon payment of Rs. 2,69,43,120/-, the builder has also issued an allotment letter and has confirmed that possession of the flat shall be handed over within 30 months. In support of its submission, the assessee also furnished a copy of the commencement certificate. It was further submitted that the construction could not be completed due to various reasons which are beyond the control of the assessee; and therefore, the purchase agreement could not be registered. In support of its contention, the assessee relied upon various judicial pronouncements.

5. The Assessing Officer (“AO”), vide order dated 25.12.2019 passed under section 143(3) of the Act, disagreed with the submissions of the assessee and held that in order to claim a deduction under section 54 of the Act, there should be a transfer of capital assets. However, in the present case, there is only an allotment letter, which is not proof of purchase of residential property. The AO further held that, in the present case, the possession of the property is still with the developer and thus, it cannot be established that the same has been rightfully transferred to the assessee, giving rise to the claim of deduction under section 54 of the Act. It was further held that neither the assessee nor the developer has been able to prove that there is an extraordinary situation which has resulted in the delay in the project due to some unavoidable reasons. The AO also took into consideration the response received from the Developer pursuant to notice issued under section 133(6) of the Act, whereby the Developer confirmed the receipt of Rs. 2,60,57,000/- from the assessee and also confirmed that in lieu of Flats No. 1901 and 1902, Flats No. 1301 and 1302 have been allotted to the assessee due to sanctions being granted only upto the 17^th floor. The Developer also confirmed that construction has been delayed by more than 2 years and that the flat will be handed over upon completion of the building. On the basis of the said reply received from the Developer, the AO arrived at the conclusion that, till date, no possession of the property has been given to the assessee. Accordingly, the deduction claimed by the assessee under section 54 to the tune of Rs. 2,52,02,110/- was disallowed and added to the total income.

6. The learned CIT(A), vide impugned order, allowed the appeal filed by the assessee by observing as follows: –

“5.12 In view of the judicial pronouncements and relevant provision mentioned above, it is clearly inferable that for the purpose of claiming exemption u/s 54/54F it is required to make investment of the requisite amount by way acquiring the right in the property concerned on or before the specified date (irrespective of the fact whether registration and for possession of the concerned property has been done or not) and it doesn’t requires registration and actual taking of possession of the new residential house by the assessee perse, but rather acquiring (purchase) of the ownership. rights in the said property and making the investment of the amount would suffice. Accordingly, receipt of the letter of allotment and making of the investment of the requisite amount is sufficient enough for the exemption u/s 54 of the Act. The CBDT circulars (471/1986 & Circular No. 672/1993) though floated with specific applicability, nad been followed by the appellate authorities in general parlance (w.r.t. the exemption u/s 54 when letter of allotment has been received within stipulated time period) across the country. Considering the same, I hold that the letter of allot in the present case along with proof of payment within the stipulated period, as required u/s 54 of the Act, is sufficient to get the benefit of deduction of section 54 of the Act. Since the appellant has fulfilled both the conditions therefore the deduction u/s 54 of the Act of Rs. 2,52,02, 110/- is allowed. The grounds of appeal taken on issue are allowed.”

7. We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee sold his residential flat on 21.07.2016 for a total consideration of Rs. 5,50,00,000/-and after considering the indexed cost of acquisition, computed long-term capital gains of Rs. 2,52,02,110/-. In the very same year, i.e., in the year under consideration, the assessee invested the entire amount of long-term capital gains for the purchase of Flats No. 1901 and 1902 on the 19^th floor of a building to be constructed in the building known as “Millionist–14”. In respect of  these flats,  the Developer, M/s. Aadinath Developers, issued a letter of allotment to the assessee on 02.06.2016, which forms part of the paper book from pages 1-12. The total consideration for the purchase of each flat was Rs. 2,69,43,120/-. Out of the said amount, the assessee paid the total sum of Rs. 2,60,57,000/- in respect of the aforementioned two flats, which were allotted in his name by the Developer, i.e., M/s. Aadinath Developers. From the bank statement, forming part of the paper book at page 26, we find that the said amount was paid by the assessee in two tranches, i.e., on 24.06.2016 and 30.06.2016.

Subsequently, as the developer received approval for construction only up to the 17th floor, the assessee was allotted Flats No. 1301 and 1302 on the 13^th floor of the very same building. As the assessee invested the entire amount of long-term capital gains amounting to Rs. 2,52,02,110/- and made a payment of Rs. 2,60,57,000/- to the builder in respect of two flats, which were under construction, the assessee claimed a deduction under section 54 of the Act. The AO denied the deduction claimed by the assessee under section 54 of the Act on the basis that only an allotment letter has been issued to the assessee and no possession of the aforementioned flats has been handed over to the assessee, and there was no purchase agreement entered amongst the parties even after the period prescribed under section 54 of the Act for the purchase of claiming the benefit of deduction. On the other hand, it is the plea of the assessee that he invested the entire amount of long-term capital gains for the purchase of the residential property and payment was made to the developer, which was more than the amount of deduction claimed by the assessee. As per the assessee, the builder, vide allotment letters, assured that the possession of the flats would be handed over within 30 months. However, despite multiple follow-ups, the construction of the building is not completed due to reasons beyond the control of the assessee, and therefore, the agreement could not be registered between the parties. In support of its contention that the assessee invested in an under-construction property, reliance has been placed on the commencement certificate issued by the Municipal Corporation of Greater Mumbai on 20.12.2016 to the Developer, which forms part of the paper book on pages 24-25. Further, the assessee has also placed on record the allotment letters issued by the Developer.

8. In order to decide this issue at hand, it is pertinent to note the provisions of section 54(1) of the Act, which are reproduced as follows: –

“54. (1) Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “Income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date [constructed, one residential house in India], then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,—

i. if the amount of the capital gain is greater than the cost of the residential house so purchased or constructed (hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or

ii. if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain.”

9. Upon perusal of section 54 of the Act, it is evident that the assessee is entitled to claim the relief in the respect of Long-Term Capital Gain arising from the transfer of the original asset, only if a residential house is either purchased within one year before or within two years after the date on which the transfer took place, or the assessee has within the period of three years after that date constructed a residential house.

10. We find that in ACIT v/s Smt. Sunder Kaur Sujan Singh Gadh, reported in [2005] 3 SOT 206 (Mum.), the Coordinate Bench of the Tribunal, after considering CBDT’s Circular No.471 dated 15/10/1986 and Circular No.672 dated 16/12/1993, held that booking of a flat with a builder is to be considered as construction of the residential flat and not a purchase of a residential flat. Further, in CIT v/s Smt. Bharati C. Kothari, reported in [2000] 244 ITR 352 (Cal.), the Hon’ble Calcutta High Court, after analysing the provisions of section 54 of the Act, observed as follows: –

“The purpose behind the exemption under section 54(1) is that if any assessee sells his residential house and purchases a new house against those sale considerations, then capital gain tax arising out of the sale of the earlier house should not be taxed. Whether assessee himself constructs the house or he gets it constructed by a contractor or 3rd party that does not make any difference. The basic requirement for purpose of relief under section 54(1) is that the assessee should invest the sale proceeds in the construction of residential house, which has been constructed for assessee.”

11. At this stage, it is needless to mention that the plight of the house buyer is not hidden from anyone, and in the recent past, due to one or the other reason, various housing projects by well-known builders across the country were delayed for no fault of the purchaser, who continues to await the delivery and possession of his or her flat. Even in these circumstances, the house buyer, who intends to take the benefit of section 54 of the Act, cannot be blamed if the construction of the flat is not completed within the period of three years from the sale of the original asset.

12. We find that the Hon’ble Jurisdictional High Court in CIT vs. Girish L. Ragha, reported in (2016) 69 com 95 (Bom.) held that where the assessee sold residential property and entered into an agreement with a buyer for purchasing flat for which he invested sale proceeds within the prescribed period as per section 54 of the Act, mere because there is a delay which is beyond the control of the assessee, the claim for deduction under section 54 cannot be disallowed.

13. However, in the present case, the AO has denied the claim of deduction on the basis that the building has not yet been constructed and the possession of the residential flats booked by the assessee has still not been transferred to the assessee even after the expiry of three years from the date of the original asset. As noted in the foregoing paragraphs, the AO also observed that the assessee has no proof that, due to extraordinary circumstances, the project was delayed due to unavoidable reasons. On the other hand, as per the assessee, the delay in the construction of the property is beyond his control. In this regard, the assessee placed on record copies of the orders in respect of proceedings initiated before the Maharashtra Real Estate Regulatory Authority in respect of the project, and the complaint filed with the police against the builder. During the hearing, the learned Authorised Representative (“learned AR”) also placed on record a copy of the news bulletin regarding the arrest of the proprietor to M/s. Aadinath Developers, on account of duping the buyer.

14. Thus, in view of the aforesaid judicial pronouncements, we are of the considered view that the purchase of an under-construction flat by the assessee will tantamount to investing the money in the construction of a residential house for the purpose of section 54 of the Act.

15. We find that the Hon’ble Jurisdictional High Court in PCIT vs. Vembu Vaidyanathan, reported in (2019) 413 ITR 248 (Bom.), after taking into consideration the CBDT Circular No.471 dated 15.10.1986 and Circular No.672 dated 16.12.1993 held that the date of allotment would be the date on which the purchaser of a residential unit cannot be said to have acquired the property.

16. We find that the Hon’ble Madhya Pradesh High Court in Smt. Shashi Varma vs. CIT, reported in [1997] 224 ITR 106 (MP), wherein the Hon’ble High Court held that completion of construction and handing over of possession within the time prescribed under section 54 of the Act is impossible and unworkable. The Hon’ble High Court further held that if a substantial investment is made in the construction of the house, then it should be deemed that sufficient steps have been taken, and this satisfies the requirement of section 54 of the Act. The relevant findings of the Hon’ble High Court, in the aforesaid decision, are reproduced as follows: –

“This clinches the matter and it was not proper for the Tribunal to have ignored the circular because it has a persuasive value and it was in the nature of granting relief. Therefore, the Tribunal should have considered the circular sympathetically and granted the relief. More so, section 54 of the Act of 1961 only says that within two years, the assessee should have constructed the house but that does not mean that the construction of house should necessarily be complete within two years. What it means is that the construction of house should be completed as far as possible within two years. In the modern days, it is not easy to construct a house within the time-limit of two years and under the Government schemes, construction takes years and years. Therefore, confining to two years’ period for construction and handing over possession thereof is impossible and unworkable under section 54 of the Act. If substantial investment is made in the construction of house, then it should be deemed that sufficient steps have been taken and this satisfies the requirements of section 54. Therefore, the view taken by the Tribunal is not correct. Hence, we answer the question in favour of the assessee and against the Revenue.”

17. We find that after taking into consideration various judicial pronouncements, the learned CIT(A) arrived at the conclusion that for the purpose of claiming deduction under section 54 of the Act, the assessee is required to make an investment of the requisite amount by way of acquiring the right in the property concerned on or before the specified date. We find that the learned CIT(A)’s findings are in line with the judicial pronouncement as noted above. Therefore, respectfully following the decisions cited supra, we do not find any infirmity in the findings of the learned CIT(A) that the letter of allotment, along with proof of payment, which in the present case is over and above the long-term capital gains earned by the assessee within the stipulated period, is sufficient compliance to avail the benefit of deduction under section 54 of the Act. Accordingly, the order passed by the learned CIT(A) is upheld, and the grounds raised by the Revenue are dismissed.

18. In the result, the appeal by the Revenue is dismissed.

Order pronounced in the open Court on 20/05/2026