CA Rajesh Bhimrajka & CA Suchi Kothari

Allowability of exemption u/s. 54F if builder does not complete construction of house within three Years?

Realty has been one of the major investment options during the last decade. The investments in realty have grown by leaps and bounds during the last 10 years. This high trading in realty has lured lot of landlords and owners of huge properties to sell their existing assets and invest the same in a residential property. Here’s where the monster capital gains creeps in.

Mr. Sanghai had sold a commercial property, which was a long term asset and invested the same in purchase and construction of a flat in a apartment in Mumbai, within the one year of sale of asset and claimed deduction u/s 54F of income tax act, but later the builder has not completed the possession of the apartment within 3 years and the apartment remained under construction even after 3 years. The period of 3 years is lapsed without any mistake of Mr. Sanghai Now?

? Will Mr. Sanghai be levied tax on the capital gains derived from the sale of the commercial property (or)

? Will Mr. Sanghai be freed from the capital gains tax?

The exemption u/s 54F is for those assesses who gets long term gains on any asset other than house property and who uses all the sales consideration within a specified period for purchase or constructing a residential house. The specified period in case of house purchase is one year before or two years after the date of transfer of asset on which gains were made. However, for construction, section 54 provides, time limit of three years. Therefore, the case explained above gains all popularity here. What would be the plight of the assessee when the construction gets delayed for no fault of his?

While the plain reading and strict application of the provision u/s 54F compel one to think that exemption is not allowable in case of any delay beyond 3 years, higher judicial authorities have rescued taxpayers by giving relief in those cases where they found that most of the sales consideration have been spent for construction of house, still some portions were not complete for various reasons. The appellate authorities have taken the view that section 54F being relief provision, should be viewed in a bit of relaxed manner. We have given below few judgments in this regard which provides that exemption can be claimed even if construction is not completed within 3 years. However, remember the court needs to be satisfied that either full amount or most of the amount of sales consideration was already used. The decision has elaborated on the reasons why the CBDT issued circulars for such relief and that the word “institution ‘in the circular will include “builder”.

We will here discuss  few case laws decided by various court to substantiate our view that exemption u/s. 54F can be claimed even if construction is not completed within 3 years but when substantial payment been made.

1. Assistant Commissioner of Income-tax, Circle 25(3) v. Smt. Sunder Kaur Sujan Singh Gadh. Brief facts of the case are, that the assessee had sold a residential flat No. 4 in Vasant Vihar, 14th Khar Road, Mumbai-52, for a total consideration of Rs. 41 lakhs as per agreement dated 13-1-1997. The said flat had been purchased by the assessee for a sum of Rs. 7.75 lakhs on 10-7-1992. As against the sale proceeds of Rs. 41 lakhs the assessee had invested a sum of Rs. 11,47,500 towards purchase of another residential house property at Ahmedabad. The builder M/s. Radhe Developers (India) Ltd., of Ahmedabad, Gujarat had, issued an allotment letter dated 26-2-1996 to the assessee allotting flat No. B-62 in the building names as Thirthdham and Rs. 11, 47, 500 were paid by the assessee to the developers in two instalments, i.e., Rs. 10 lakhs were paid on 5-1- 1996 and Rs. 1, 47,500 were paid on 12-1-1996 out of her capital account with M/s. Harmohan Singh Sujan Singh. Subsequently, the builder had not constructed the ‘B’-Block in Thirthdham in respect of which the allotment letter was issued by them to the assessee and as an alternative the membership of the assessee was shifted to flat No. C-32 in the same building. The possession of the said flat No. C-32 was handed over to the assessee before 4-1-2000 as is evident from the builder’s letters dated 19-11-1999 and 4-1-2000.

The decision of Tribunal was

To qualify investment for construction under section 54F the crucial date is the date of allotment of flat by DDA and payment of installments was only a follow-up action and taking possession of the flat is only a formality, of course, installments have to be paid by the allottee as per the schedule fixed by the DDA. The Board after referring to the above mentioned Circular extended the facility of exemption under sections 54 and 54F in respect of allotment of flats/house by co-operative societies and other institutions, and the allotment and construction of the flat by co-operative societies and other institutions are to be considered in similar manner for the purpose of allowing exemption under section 54. The above circulars are binding on the revenue authorities under section 119 of the Act. Since the flat has been allotted to the assessee by the builder who would fall in the category of other institutions mentioned in the circulars, it has to be taken as a case of construction of the residential flat and not as a purchase of a residential flat.

2. Mrs. Seetha Subramanian. vs Assistant Commissioner Of Income-Tax. [59 ITD 94] ITAT , Madras :- CIT , after enquiry by an Inspector found that the house is not completed and passed order u/s 263 by which he disallowed the claim of assessee u/s 54F ruled as under. Before the Tribunal, the contention of the assessee was that the provisions of section 54F is a beneficial provision for promoting the construction of residential houses. Therefore, the said provision has to be construed liberally and for achieving the purpose for which it was incorporated in the statute. In support of the said contention the assessee relied upon the decision in the case of Bajaj Tempo Ltd. The assessee also relied upon certain circulars issued by the CBDT. One of the circulars was Circular No. 471, dated 15th October, 1986. This was issued by the CBDT clarifying the position that where an assessee acquires a flat by an allotment under the self-financing scheme of the Delhi Development Authority, the allotment itself is sufficient compliance for getting the benefit under section 54F, even though the assessee has not paid all the instalments due under the said scheme. Later by another Circular No. 672, dated 16th December, 1993, the CBDT has issued clarification extending the same benefits for acquisition of houses or flats on allotment under similar schemes. Therefore it was contended that the intention of the Legislature was to invest in the acquisition of a residential house and completion of construction or occupation is not required. We find force in the argument of the learned counsel for the assessee. The said intention is very clear from the two circulars issued by the CBDT, where it was held that an assessee is entitled to the benefit of sections 54 and 54F, if an assessee gets an allotment under the self financing scheme and pays the first instalment of the cost of construction. From that it is clear that in order to get the benefit under section 54F the assessee need not complete the construction of the house and occupy the same. Admittedly in the present case, the assessee had invested the entire net consideration within the stipulated period and in fact has even constructed the entire residential property, except some finishing to make it fit for occupation. As the assessee has substantially completed all the work of construction and has invested the entire net consideration, it has to be inferred that the assessee has complied with the conditions provided under section 54F.

3. A similar THIRD case was considered by the Delhi Bench of this Tribunal in the case of Satish Chandra Gupta v. Assessing Officer [1995] 54 ITD 508 and this Tribunal after considering the provisions of section 54 as well as section 55 held that the claim cannot be denied on the ground that the construction the house started by the assessee was not completed within the stipulated period of three years and some work was carried out thereafter. The said decision also supports the assessee’s contention. Under the above circumstances, especially in the light of the circulars issued by the Central Board of Direct Taxes, we hold that the Commissioner of Income-tax was not justified in revising the assessment of the Assessing Officer. Hence we set aside the order of the CIT and restore that of the Assessing Officer.

4. If assessee has acquired substantial domain over new house and has made substantial payment towards cost of construction within a period specified u/s. 54, then assessee can be said to have complied with requirements for claiming exemption u/s 54 even if construction of building is not completed within a specified period. (CIT vs. Hilla J.B. Wadia [1995] 216 ITR 376 (Bom)).

5. For qualifying exemption under section 54F, assessee’s ownership and domain over the asset is a must right from the sale of original asset till the purchase and/or construction of the residential house i.e., the “new asset. (Prakash v. ITO, ITA NO. 15 of 2002 Dated : September 12, 2008).

6. Section 54 nowhere requires that to avail exemption sale consideration itself should be utilised for purchase of new house [ITO vs. K. C. Gopalan – [1999] 107 Taxman 591 (Ker)].

7. Expression “a residential house” should not be understood to indicate a singular number. Assessee having purchased two residential flats, exemption under section 54 was available, more so as these flats are situated side by side and the builder as effected modification of the flats to make it as one unit. – (CIT v D. Ananda Basappa ( 2009 ) 20 DTR 266 (Kar)).

8. Board Cir. No. 471 dtd. 15.10.1986 (162 ITR (St) 41) has clarified that cases of allotment of flats under the self financing scheme of the Delhi Development Authority (DDA) should be treated as cases of ‘construction’ for the purposes of Ss. 54 and 54F.

9. Similarly, the Board Cir. No. 672 dtd. 16.12.1993 (205 ITR (St) 47) has clarified that allotment of flats/houses by co-op. societies and other institutions, whose schemes of allotment and construction are similar to those of DDA (as mentioned in para 2 of aforesaid Cir. No. 471), would be treated as ‘construction’ for the purposes of Ss. 54 and 54F.

10. Board Cir. No. 667 dt. 18.10.1993 (204 ITR (St) 103) has clarified that for the purpose of computing exemption u/s. 54 or 54F, the cost of the plot together with cost of the building will be considered as cost of new asset, provided the acquisition of the plot and also the construction thereon are completed within the period specified in these sections.

However in case of Commissioner of Income-tax v. Sardarmal Kothari [2008] 302 ITR 286 (Mad) 17.06.08 it was held that “Circular No. 667, dated October 18, 1993 does not in any way mean that  in order to have the benefit under section 54F of the Income-tax Act, the construction should have been completed.”

11. Commissioner of Income-tax v. Ajitsingh Khajanchi [2008] 297 ITR 95 (MP) 25.04.07 : The judgment relied on by the assessee, was of the view that there was effective transfer of the flat in favour of the assessee, the same having been actually possessed by him. Therefore, merely on account of the absence of registered sale deed, the assessee was not disentitled to exemption under section 54F of the Act. It was not necessary that the assessee should have become the owner of the property. Section 54F spoke of purchase and registration was not imperative.

12. Commissioner Of Income Tax v. Mrs. Shahzada Begum :- The expression “purchased ” would undoubtedly connote the domain and control of the property given into the assessee’s hands. There might have been some procedural delay in obtaining formal registration of the sale deed. But, that, in our opinion, is immaterial.

13. Commissioner of Income-tax v. Sardarmal Kothari [2008] 302 ITR 286 (Mad) 17.06.08 :- Circular No. 667, dated October 18, 1993 does not in any way mean that  in order to have the benefit under section 54F of the Income-tax Act, the construction should have been completed.

14. Commissioner of Income-tax v. R.L. Sood :- The assessee had paid a  sum of Rs. 2,39,850 out of the total sale consideration of Rs. 2,75,000 for  the purchase of the flat within the period of one year from the date of sale  of his old residential house. Thus, on payment of a substantial amount in  terms of the agreement of purchase dated September 25, 1981, i.e., within  four days of the sale of his old property, the assessee acquired substantial  domain over the new residential flat within the specified period of one  year and complied with the requirements of section 54 of the Act. Merely  because the builder failed to hand over possession of the flat to the asses  see within the period of one year, the assessee cannot be denied the benefit of the said benevolent provision.

15. Balraj v. Commissioner of Income-Tax [2002] 254 ITR 22(Del) :- For the purpose of attracting the provisions of  section 54 of the Income-tax Act, it is not necessary that the assessee should  become the owner of the property. Section 54 of the said Act speaks of purchase.

16. Smt. Shashi Varma. v. Commissioner Of Income Tax: 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.

The article is written by: CA Rajesh Bhimrajka & CA Suchi Kothari

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25 responses to “S. 54F Exemption if house construction not completed within 3 Years?”

  1. Pavithran R says:

    if the assessee solds a residential house and invest the sale proceeds to a contractor and the contractor refunds that money and the assessee engage another contractor , in that case is he entitled for the capital gains tax exemptions u/s. 54F

  2. srs says:

    i have sold my land invested in an appartment with in six months.the entire sale proceeds. the new appartment costing more than the new investment made. for the remaining amount on the new investment one of my daughter agreed to invest in the same new property and the source of fund from the sale proceeds of appartment sold. her appartment was origially bought by her husband that also joint name her husband and her name..

    the questions are

    will my eligible to get 54F capital gain exemptions and also my daughter jointly get the same 54F gain exemptions.

    in the daughter’s case out of sale proceed she invest only 50% of the cost and the remaining 50% deposited in capital gain account open in nationalized bank.

    after three years how the capital gain tax would be computed for my wife and daughter respectively since both had sold their respective property individually and pooled in to an investment on new single property jointly .and the balance fund in capital gain account with nationalized bank.

    would appreciate if you give some formula for tax computations on capital gain/loss based on capital index slab notified by the govt., yearly wise.

  3. paras says:

    hello tax guru

    i have purchased a flat in the joint name of myself and my wife
    date of agreement was 20th april 2012 when we had paid initial amount
    construction got completed in 4th august 2014 and in september we paid off the remaining dues . this payment was made from the proceeds of sale of our tenancy rights. while claiming 54f what will be the relevant date of acquisition / construction. no allotment letter was provided to us by our builder.

    moreover in april 2015 i sold my wife’s jewellery to pay the registration charges .
    registration is still pending. will i get 54f exemption in that??
    kindly revert as soon as possible.
    thank you.

  4. paras says:

    hello taxguru
    i purchased a flat in joint name of myself and wife
    date of agreement was 20/4/2012
    in september 2012 we paid initial amount
    construction was completed in 4/8/2014
    we got a hefty compensation as sale of tenancy in sep 2014 and invested all proceeds in paying off the dues of flat. will i be available for 54f. what will be the relevant date for claiming 54f.

    q2)in april 2015 i sold off my wife’s jewellery to pay for registration…but till date registration is pending. when i register will i be eligible for 54f.
    kindly reply as soon as possible.

  5. Santhosh says:

    Sir,
    I have availed benefit under 54f by utilising sale proceed of gold jewellery towards buying of flat under construction in the year FY2012-13,2013-14 & 2014-15.But now i am cancelling the purchase of flat.What will be the tax implication.whether i will be liable to pay LTCG with interest along with taxable amount?

  6. Naresh says:

    Hi,

    I have a specific query. I bought a house in joint name along with my wife in March-2014. I gave her soft loan to buy 50% in this house. I have also reinvested LTCG from proceeds of another house which I sold in Oct-2013. This is all fine.

    I also own a another plot since last 10 years and wants to sell this now. I want to know if I can use LTCG from this plot proceeds to buy my wife’s share in above residential house and claim exemption under section 54f for LTCG from plot. This is provided I do not have any other residential unit in my name.

    Any help in clarifying this will be great.

    Regards,
    –Naresh

  7. vipin says:

    dear tax guru

    kindly advice when we availed of this sec 54 expemtion & booked a new apartment & paid immediatly the entire amount of the last sale of house, then till how much time we cannot purchase a third residential plot /house/apartment, so the exemption is not withdrawn.

    kinldy advice

  8. Anuj says:

    Need a small help – clarification.

    Please refer to point no.2. Can land be purchased after 2 years and the construction completed before 3 years. Or does one have to buy land within 2 years and the extra 1 year is for construction.

    Section 54: Old Asset: Residential Property, New Asset: Residential Property

    Under Section 54 – Any Long Term Capital Gain, arising to an Individual or HUF, from the Sale of a Residential Property (whether Self-Occupied or on Rent) shall be exempt to the extent such capital gains is invested in the
    1.Purchase of another Residential Property within 1 year before or 2 years after the due date of transfer of the Property sold and/or
    2.Construction of Residential house Property within a period of 3 years from the date of acquisition

    Provided that the new Residential House Property purchased or constructed is not transferred within a period of 3 years from the date of acquisition

  9. R K JINDAL says:

    the article is informative.

  10. R K JINDAL says:

    if the new property is purchased or constructed within the period as prescribed in the act. the condition is fulfilled. it is not necessary that whole capital gain should be utilised. if the funs is borrowed or purchased on instalment in my opinion the deduction is available.

  11. Lokesh Tiwari says:

    Thanks for this platform. I have a query. I have a flat which was registered and possesed in March 2008 and now I am going to sale it in 2013. In parallel I booked a flat in March 2010 and got it financed from a bank loan. Possession and registration of new flat will be in 2013 only. My question is, can I claim the tax deduction for LTCG from my first property, if I repay my home loan which was taken for my new property.

  12. D K BOSE says:

    I HAVE A QUERY.

    Suppose, a shop is sold by Mr X giving rise to capital gain of Rs. 20 lakh. He invests the whole amount of Rs. 20 Lakh within 6 months to purchase a flat under construction to avail benefit of section 54F of the Income Tax Act. After 1 and a half year Mr. X felt that the flat he had invested in was not the best choice. So, he receives/takes back the amount of Rs. 20 Lakh from the builder ( the flat is still under construction and not ready for possession) and invests in another flat in some other scheme in a different city. The investment in the new flat is made within 2 years. Whether Mr. X is eligible for deduction u/s 54F in view of the fact that the new asset acquired earlier is changed to some other asset. Note: the earlier new asset was not sold back as the construction was still in progress. The builder had taken advance of Rs. 20 L which was returned back to Mr. X on his request. Hence my query is :- 
     Whether 54F is restricted to residential property first chosen for availing the benefit or one has a choice to change the new asset and shift to another residential property (without any purchase/sale transaction) within the prescribed time frame.

  13. Joel says:

    I have sold a flat in March 2012. If I invest the capital gain amount to buy another flat do I have to buy a ready flat and take possesion within 6 months. In case I buy an under constrcution flat, what is the time period available within which I have to take possesion.

  14. Vimlesh says:

    Can anyone suggest me as to whether purchase of house property by way of allotment letter without any purchase agreement can be considered as date of acquisition for purpose of calculation of capital gain under income tax act, 1961and also provide me supporting case laws…..

  15. Ashish says:

    Hi,

    I had bought a house in Noida in 2008 with a home loan of 25 lakhs
    spread over a period of 20 years. The amount of the loan was disbursed
    by the bank in March 2008 while I took the possession of the house in
    Feb 2012 after a delay of more than 1 year from the builder’s side.

    Can I claim the IT rebate for the interest component of 1.5 lakhs
    considering that there is a difference of more than 3 years between
    the time the loan was disbursed and the possession of the house was
    undertaken OR i can take only 30 thousand rupees benefit for the
    interest component ?

  16. Anish Bansal says:

    Hi Gurus,

    I have booked one flat with full payment in January 2010 and posession is not got till yet and builder says he will provide the posession in another 1 year. i have sold one ommercial property which i hold since far long in Dec’2011. Value of purchase i made in 2010 and sale in 2011 is same. Can i take benefit of section 54 for this investment.
    if not then whatif i book a new flat for which payment will be made in form of installments of every 3 months. Can i keep the money in my normal saving account till the full payment is made or i have to open capital gain account.

    thanks in advance.

  17. C.T.SRIDHAR says:

    I am one of the tax consultant, based at chennai. One of my client had sold her residential property and invested the capital gain in Capital Gain Scheme Account with Bank of India for a term of 3years. Since she is already 65yrs old, she is not going to buy any new property. Her income is only interest on such deposit. As per section 54 if any money invested in Capital Gain scheme account with the bank should be utilised on or before 3 years from the date of transfer of such residential property. Can you please inform me, if she will not utilise such amount then what will be the position under Income-tax Act, when 3years time elapse.

  18. Maheswaran says:

    Sir,

    It gives good in-sight of many scenarios faced w.r.to the sec54 exemption.Please clarify for my scenario as under:

    In July’11 I sold (executed sale deed)of my commercial office space which I was holding for more than 3 years.Before the said sale,I already booked an under construction flat in Nov’09 (date of allotment letter) which was registered in Jan’2010 (on which date about 50% of the total amount was already paid to the builder)and the flat is still in under construction stage in Nov’11 which is expected to get OC and delivered for actual posession in Mar’12.

    Under the above circumstances, am I eligigible to get 54F exemption, as wthin 3 years from Nov’09,I have got the OC & posession of the fully constructed house.Will the booking date of Nov’09 of the residential flat, which is actually **prior and not after ** the sale deed of commercial office prohibits me from getting the 54F exemption??

    Many thanks once again

    Maheswaran
    27 Nov’11

  19. veer singh says:

    we had sold the house property in the AY 2011-12 and amount of capital gain on house property invested to purchase a land but construction not completed with on this land in 3 year. so in this case what will be tax treatment.

  20. Natasha Mehra says:

    I was allotted a pre-construction property in India in 2006. I paid monthly installments for about a year. It got completed and I got the possession only towards the end of 2009. Seems like from your article, one can argue that the date of 2006 should be considered to determine whether it is a LT or ST capital gains scenario.
    Can you please clarify? Great article !!

  21. Krishna says:

    Excellent article. can I have your contact information. I have a similar case and I am going for appeal. want to seek your guidance.

    regards,
    Krishna

  22. SHARAD MOHAN says:

    i have a query. i had sold my flat on 10 march 2009 and am NOW (2nd feb 2011) going ahead for buying an under construction property which is expected to be completed by end 2011.

    will i be entitled to the tax benefit under 54.

    rgds..sharad

    • Nihit Dalmia says:

      You have sold flat on 10 March 2009. You want to Purchase Flat on 2 Feb 2011. You can purchase a ready flat upto 10 March 2011. You can purchase a flat under construction upto 10 March 2012.

      Now, since the expected date of construction is Dec 2011, you are very well covered under 3 years of construction.

      Please take care of following things –

      1. Get Allotment letter immediately on purchase of an under construction property.
      2. Check that you have invested maximum amount of your sale consideration(i.e. the amount you received on sale of your old flat) into your new flat before 10 March 2012.

      Now, in case, the builder is unable to provide the possession on or before 10 March 2012, you will still be eligible for section 54F exemption under capital gains.

      Concl: You are eligible for 54F exemption

  23. Sumit says:

    Thanks for such wonderful information.

    I have a question on Section 54F exemption. In case where the assessee buys a residential property by taking a loan, will such purchase qualify for exemption under section 54f. for example, there is Rs. 15 lakhs received as consideration for sale of shares (long term capital gain). Assume capital gains is also Rs. 15 lakhs. The assessee buys a new property for Rs. 20 lakhs, taking Rs. 16 lakhs as loan and paying 20% from his pocket, will the exemption be available under section 54F.

    • Nihit Dalmia says:

      Hello Sumit, even if cost of shares is nil, then also capital gains cannot amount to Rs.15 lakhs, it is not possible to assume such situation. If you will invest the sale consideration received from sale of shares into purchase/construction of house property, there will be no capital gains tax under exemption from section 54F. So, how can we assume that you have capital gains tax of Rs.15 lakhs, it is absurd.

      Now, you need to invest entire 15 lakhs into purchase 1 year before or 2 years after date of transfer of asset(i.e. date on which your asset was sold) or 3 years in case of construction.

      Since you have paid only 4 lakhs out of your sale consideration, you will get exemption proportionately under section 54F. You will not be entitled to full exemption.

      Reason: Loan amount does not satisfy condition of payment from sale consideration. But suppose, you pay off the loan within 3 years from date of transfer(i.e. when you sold your asset), then you will be eligible, as you have ultimately paid your sale consideration received towards loan disbursement.

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