Section 54F Deduction Allowed Despite Builder’s Delay in Possession: ITAT Delhi

DCIT Vs Kushal Singh (ITAT Delhi)

The appeal before the Income Tax Appellate Tribunal, Delhi was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) dated 23 January 2023, which had deleted an addition made under Section 54F of the Income Tax Act, 1961 for Assessment Year 2014–15. The assessment had been framed under Section 153A following which the Assessing Officer disallowed the assessee’s claim of deduction of ₹3,43,44,059 on long-term capital gains arising from the sale of a plot of land for ₹4.17 crore.

The assessee had invested ₹3,53,50,000, including tax deducted at source, towards the purchase of a residential house from two builder entities. The amount invested exceeded the capital gains earned. The Assessing Officer disallowed the deduction on the ground that the assessee failed to furnish possession-related documents such as a possession certificate and electricity bills to establish that possession of the new residential property had been taken within the prescribed time. Consequently, the entire capital gain was added to the assessee’s income.

Before the first appellate authority, the assessee contended that all statutory conditions for claiming deduction under Section 54F had been complied with, as the entire capital gain had been invested within the stipulated period. It was submitted that the delay in handing over possession was solely attributable to the builder and was beyond the assessee’s control. The project was subject to multiple litigations and a stay on construction by the High Court, and construction had remained incomplete since March 2013 due to these disputes. The assessee argued that Section 54F is a beneficial provision and that it was never the legislative intent to deny exemption in bona fide cases where the assessee had fulfilled all investment-related requirements.

The CIT(A) accepted the assessee’s submissions and deleted the addition. In doing so, reliance was placed on various judicial precedents, including the Supreme Court judgment in Sanjeev Lal v. CIT, which held that adverse inference cannot be drawn against an assessee where delay occurs due to circumstances beyond the assessee’s control. The CIT(A) noted that Section 54F emphasises investment of capital gains rather than completion of construction or obtaining possession within the prescribed period. It was observed that the assessee had made full payment to the builder within time and had even deducted and deposited TDS, and therefore could not be penalised for delays caused by the builder’s inability to complete construction due to litigation.

The appellate authority also relied on several Tribunal and High Court decisions holding that completion of construction or transfer of legal title within the stipulated period is not mandatory for availing exemption under Section 54 or 54F, provided substantial investment has been made and the assessee has acquired substantial domain over the new asset. Judicial precedents cited included cases where relief was granted despite delays in construction or possession, as long as the delay was not attributable to the assessee.

On further appeal, the Tribunal examined the record and the reasoning adopted by the CIT(A). The Tribunal noted that the assessee had invested more than the amount of capital gains within the prescribed period and that there was no delay or default on the assessee’s part. It accepted the finding that the delay in handing over possession was due to builder-related issues and ongoing litigation. The Tribunal reiterated that Sections 54 and 54F are beneficial provisions intended to grant relief from capital gains tax where the assessee reinvests the gains in a residential property within the stipulated time.

The Tribunal held that denial of exemption merely because possession was not handed over within the prescribed period would defeat the purpose of the provision, especially in cases where the assessee had fully complied with the investment conditions. It found no infirmity in the order of the CIT(A) deleting the addition and concluded that the Revenue’s appeal was devoid of merit. Accordingly, the appeal filed by the Revenue was dismissed, and the order was pronounced in open court on 15 January 2025.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal filed by the revenue is directed against the order dated 23.01.2023 passed by the CIT(A)-23, New Delhi, arising out of the Assessment Order dated 13.08.2021 passed by the DCIT, CC-3 Delhi under Section 153A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for A.Y. 2014-15.

2. The assessee acquired a plot of land measuring about 450 sq. mtr. lying and situated at plot no. 16, Block A, Sector 50, Noida, from one Ms. Kushal Singh on 18.03.2006. Subsequently, in assessment year 2014-15 the assessee claimed deduction under Section 54F of the Act to the tune of Rs.3,43,44,059/- against the sale consideration of Rs.417,00,000/- of the said property. The appellant, thereafter, invested Rs.3,53,50,000/-including the capital gain earned for acquisition of the residential property of M/s Om Sai Infravision Pvt. Ltd. and M/s Om Sai Infrapromoters Pvt. Ltd. for purchase of residential house property. In fact, the same was more than the amount of capital gain earned by the assessee to the tune of Rs.343,44, 059/-. The Ld.AO disallowed the claim made by the assessee under Section 54F of the Act as the assessee failed to furnish the possession certificate, electricity bill etc. in order to establish the fact of possession being taken within the prescribed statutory time limit. The Ld. AO, therefore, added the entire capital gain of Rs.343,44,059/- in the hands of the assessee which was in turn deleted by the First Appellate Authority. Hence, the instant appeal before us.

3. Heard the parties and perused the materials available on record. The case of the assessee is this that during the Assessment Year 2014-15 he has earned long term capital gain of Rs.343,44,059/-. The assessee claimed deduction under Section 54F by making payment of Rs.353,50,000/- including TDS deduction of Rs.2,30,000/- for the purchase of the new property. In fact, the assessee made payment to the builders for the purchase of the new property even more than the capital gain earned. There was no delay on the part of the assessee who deposited the full amount of capital gain but the possession was not handed over by the builder which is an admitted delay on the part of the builder and because of such default of the builder in not completing the construction and handing over possession to the assessee within the time prescribed benefit of Section 54 to 54F cannot be attributed to the assessee particularly when the assessee has complied with all the statutory conditions in order to claim benefit under Section 54F of the Act. Further that most of the builders generally failed to complete their purchase in stipulated period and hardly any builder could complete their project within the promised time. In the event, if the builders are not able to deliver the flats within the target period, and if, the assessee invested the requisite amounts in such projects within the prescribed time, benefit of Section 54/54F cannot be denied to thousands of such cases.

4. It is also the case of the assessee that Section 54 is a beneficial provision and it could never be the intention of the legislature to deny the benefit of such deduction in such bonafide deserving cases. Before the First Appellate Authority, the assessee in support of his case made out, relied upon several judicial pronouncements including the judgment passed by the Hon’ble Apex Court in the case of Sanjeev Lal Vs. CIT in Civil Appeal Nos. 5899 – 5900 of 2014 wherein it has been held that adverse inference against the assessee cannot be made in this regard. The CIT(A) considering the entire aspect of the matter granted relief by deleting the addition made by the AO with the following observations:

“Finding & Discussion

8. The AR submitted that assessee has complied with all the requirements of claiming exemption/deduction under section 54 of the IT Act. The AR submitted that assessee has made the payment to the builder within the stipulated time. TDS on such payments to the builder was also deducted and paid to the Government account. However, there was delay on the part of the builder in construction and handling over the possession. The project by the builder company was undergoing litigation and there was stay on construction project by the Hon’ble High Court. There were about 14-15 litigations on the project. The appellant has stated that since March 2013, the developers have not been able to complete the project owning to litigation.

9. The AR submitted that this cannot be a reason to deny the exemption of section 54 as the circumstances were beyond the control of the appellant. The appellant could not get possession of the house within a reasonable time because of various litigations on the project despite the fact that the project was awarded to the builder by the Government body.

10. The appellant relied upon various decisions of the courts in support of the contentions that the deduction cannot be denied because there was delay on the part of the builder to hand over the possession.

11. The Hon’ble Supreme Court in the case of Sanjeev lal vs CIT in Civil Appeal Nos. 5899-5900 of 2014 ha held that adverse inference against the assessee cannot be made in this regard. In this case, the following was the fact of the case;-

• • The assessee acquired a residential house property in year 1993 in terms of will executed by his grandfather.
  • The assessee entered into an agreement to sell in respect of said property on 27-12-2002 and received certain amount by way of earnest money.
  • As the assessee had decided to sell the house in question, they had also decided to purchase another residential house.
  • Accordingly, a new residential house was purchased on 30-4-2003 i.e. well within one year from the date on which the agreement to sell had been entered into by the assessee.
  • In the meantime the validity of the will had been questioned by another legal heir of assessee’s grandfather.
  • The suit filed by him was finally dismissed in May, 2004.
  • Due to the interim relief granted in the above stated suit, the assessee could not execute the sale deed till the suit came to be dismissed and the validity of the will was upheld. Thus, the assessee executed the sale deed in 2004 and the same was registered on 24-9-2004.
  • In the assessment proceedings, the Assessing Officer was of the view that the assessee was not entitled to any benefit under section 54 for the reason that the transfer of the original asset, i.e. the residential house, had been effected on 24-9-2004 whereas the assessee had purchased another residential house on 30-4-2013 i.e. more than one year prior to the transfer of the asset.
  • Accordingly, the assessee was made liable to pay income-tax on the capital gain under section 45.
  • The Tribunal as well as the High Court confirmed the order of Assessing Officer.

12. Based on the above facts, in further appeal, the Hon’ble Supreme Court has held as under:-

• • Upon perusal of section 54(1), it is very clear that relief under section 54 of the Act in respect of the long term capital gain can be availed only if a residential house i.e. a new asset is purchased within one year before or within two years after the date on which the transfer of the residential house/original asset takes place. In the instant case, the residential house had been transferred by the assessee on 24-9-2004 whereas they had purchased another house on 30-4-2003. Thus, the new asset was purchased more than one year prior to the date on which the transfer in respect of the residential house had been effected. [Para 9]
  • Upon plain reading of section 54 of the Act, it is very clear that so as to avail the benefit under section 54 of the Act, one must purchase a residential house/new assetwithin one year prior or two years after the date on which transfer of the residential house in respect of which the long term capital gain had arisen, has taken place.[Para 17]
  • In the instant case, the following three dates are not in dispute. The residential house was transferred by the appellants and the sale deed had been registered on 24-9-2004. The sale deed had been executed in pursuance of an agreement to sell which had been executed on 27-12-2002 and out of the total consideration of Rs. 1.32 crores, Rs. 15 lakhs had been received by the assessee by way of earnest money when the agreement to sell had been executed and a new residential house/new asset had been purchased by the appellants on 30-4-2003. It is also not in dispute that there was a litigation wherein the will had been challenged and the assessee had been restrained from dealing with the house in question by a judicial order and the said judicial order had been vacated only in the month of May, 2004 and therefore, the sale deed could not be executed before the said order was vacated though the agreement to sell had been executed on 27-9-2002. [Para 18]
  • If one considers the date on which it was decided to sell the property, i.e. 27-12-2002 as the date of transfer or sale, it cannot be disputed that the assessee would be entitled to the benefit under the provisions of section 54 because long term capital gain earned by the assessees had been used for purchase of a new asset/residential house on 30-4-2003 i.e. well within one year from the date of transfer of the house which resulted into long term capital gain. [Para 19]
  • The question to be considered by this Court is whether the agreement to sell which had been executed on 27-12-2002 can be considered as a date on which the property i.e. the residential house had been transferred. In normal circumstances by executing an agreement to sell in respect of an immovable property, a right in personam is created in favour of the transferee/vendee. When such a right is created in favour of the vendee, the vendor is restrained from selling the said property to someone else because the vendee, in whose favour the right in personam is created, has a legitimate right to enforce specific performance of the agreement, if the vendor, for some reason is not executing the sale deed. Thus, by virtue of the agreement to sell some right is given by the vendor to the vendee. The question is whether the entire property can be said to have been sold at the time when an agreement to sell is entered into. In normal circumstances, the aforestated question has to be answered in the negative. However, looking at the provisions of section 2(47) of the Act, which defines the word “transfer” in relation to a capital asset, one can say that if a right in the property is extinguished by execution of an agreement to sell, the capital asset can be deemed to have been transferred. [Para 20]
  • Now in the light of definition of “transfer” as defined under section 2(47), it is clear that when any right in respect of any capital asset is extinguished and that right is transferred to someone, it would amount to transfer of a capital asset. In the light of the aforestated definition, if one looks at the facts of the present case where an agreement to sell in respect of a capital asset had been executed on 27-12-2002 for transferring the residential house/original asset in question and a sum of Rs. 15 lakhs had been received by way of earnest money.
  • It is also not in dispute that the sale deed could not be executed because of pendency of the litigation wherein the validity of the will under which the property had devolved upon the assessee has been challenged. By virtue of an order passed in the suit, the assessees were restrained from dealing with the said residential house and a law-abiding citizen cannot be expected to violate the direction of a court by executing a sale deed in favour of a third party while being restrained from doing SO.
  • In the circumstances, for a justifiable reason, which was not within the control of the assessee, he could not execute the sale deed and the sale deed had been registered only on 24-9-2004, after the suit filed challenging the validity of the will, had been dismissed. In the light of the aforestated facts and in view of the definition of the term “transfer”, one can come to a conclusion that some right in respect of the capital asset in question had been transferred in favour of the vendee and therefore, some right which the assessee had, in respect of the capital asset in question, had been extinguished because after execution of the agreement to sell it was not open to the assessee to sell the property to someone else in accordance with law.
  • A right in personam had been created in favour of the vendee, in whose favour the agreement to sell had been executed and who had also paid Rs. 15 lakhs by way of earnest money. No doubt, such contractual right can be surrendered or neutralized by the parties through subsequent contract or conduct leading to no transfer of the property to the proposed vendee but that is not the case at hand. [Para 21]
  • In addition to the fact that the term “transfer” has been defined under section 2(47), even if looked at the provisions of section 54 of the Act which give relief to a person who has transferred his one residential house and is purchasing another residential house either before one year of the transfer or even two years after the transfer, the intention of the Legislature is to give him relief in the matter of payment of tax on the long term capital gain.
  • If a person, who gets some excess amount upon transfer of his old residential premises and thereafter purchases or constructs a new premises within the time stipulated under section 54 of the Act, the Legislature does not want him to be burdened with tax on the long term capital gain and therefore, relief has been given to him in respect of paying income tax on the long term capital gain.
  • The intention of the Legislature or the purpose with which the said provision has been incorporated in the Act, is also very clear that the assessee should be given some relief. Though it has been very often said that common sense is a stranger and an incompatible partner to the Income-tax Act and it is also said that equity and tax are strangers to each other, still this Court has often observed that purposive interpretation should be given to the provisions of the Act.
  • It has also been said that harmonious construction of the provisions which subserve the object and purpose should also be made while construing any of the provisions of the Act and more particularly when one is concerned with exemption from payment of tax. Considering the aforestated observations and the principles with regard to the interpretation of statute pertaining to the tax laws, one can very well “ranger” which vould enable the assesse lo ge the beneft under section 54 of the Act. [Para 22]

• • Consequences of execution of the agreement to sell are also very clear and they are to the effect that the assessees could not have sold the property to someone else. In practical life, there are events when a person, even after executing an agreement to sell an immovable property in favour of one person, tries to sell the property to another such an act would not be in accordance with law because once an agreement to sell is executed in favour of one person, the said person gets a right to get the property transferred in his favour by filing a suit for specific performance and therefore, without hesitation one can say that some right, in respect of the said property, belonging to the assessee had been extinguished and some right had been created in favour of the vendee/transferee, when the agreement to sell had been executed. [Para 23]
  • Thus, a right in respect of the capital asset, viz. the property in question had been transferred by the assessees in favour of the vendee/transferee on 27-12-2002. The sale deed could not be executed for the reason that the assessees had been prevented from dealing with the residential house by an order of a competent court, which they could not have violated. [Para 24]
  • In view of the aforesaid peculiar facts of the case and looking at the definition of the term ‘transfer’ as defined under section 2(47), it is opined that the assessee was entitled to relief under section 54 in respect of the long term capital gain which they had earned in pursuance of transfer of their residential property and used for purchase of a new asset/residential house. [Para 25]
  • The appeal is therefore, allowed. The impugned judgments are quashed and set aside and the authorities are directed to re­assess the income of the assessee for the assessment year 2005­2006, after taking into account the fact that the assessee was entitled to the relief, subject to fulfilment of other conditions. [Para 26]

13. The appellant had brought before the notice of the Assessing Officer the following decisions according to which the claim of deduction u/s 54 could not be disallowed.

i) Satish Chandra Gupta vs. Assessing Officer 54 ITD 508 (ITAT, Delhi Bench): The facts of this case were, the assessee had purchased a site and could not complete the construction of the house within the prescribed period of three years. However, the house was constructed and completed subsequently. Relief was given on the ground that the delay had occurred on account of reasons beyond the control of the assessee.

ii. Smt. Raineet Sandhu vs. DCIT (2010) 133 TTJ 0064 (Chandigarh): In this case the construction of the house was not completed within the prescribed period. It was held that section 54F does not prescribe that the residential house should be completed within the prescribed period and benefit under s. 54F was allowed. It was held that thrust was on investment and not on completion.

iii. Smt. Shashi Varma vs. CIT 224 ITR 106 (MP): It was held that 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, 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.

14. Apart from the above referred decisions, there are numerous decisions of Hon’ble Tribunals and Hon’ble high Courts wherein it has been held that the provisions of section 54 are beneficial sections and therefore, it is to be interpreted liberally. If the assessee has completed his part of the job, in that case he is entitled to the deduction if the other part has not been completed because of the situation beyond the control of the assessee. Thus, For claiming exemption u/s 54, it is not necessary that the Assessee should obtain possession of the new asset or become the owner of such new asset by way of registration of document within the time limit as specified therein as long as the Assessee has acquired substantial domain over the new asset and paid substantial amount of its cost within such specified time limits.

15. The jurisdictional High Court in the case of CIT vs. Kuldeep Singh (Delhi H.C.) 270 CTR 561 has held as under:

“It is accepted position and it is not disputed by the revenue that amount had been invested by the assessee for purchase of flat. However, legal title in the said property was not passed or transferred to the assessee within a period of two years from the date of sale of residential property. The flat was still under construction though the builder had entered into and executed the flat buyers agreement with the assessee. The said agreement mentions the apartment number and gives specific detail of the property. The payments were linked to stage of construction and that amount was payable within 21 months of booking. The consideration being paid by the assessee was nearly 9 times income by way of capital gains which was earned by the assessee. [Para 7), The basic purpose behind section 54 is to ensure that the assessee is not taxed on the capital gains, if he replaces his house with another house and spends money earned on the capital gains within the stipulated period. [Para 12].”

16. The Hon’ble Karnataka High Court in the case of Principal Commissioner of Income-tax, Bengaluru vs. Dilip Ranjrekar, [2018] 101 com 114 (Karnataka) has held as under:-

In the instant case, the investment is made in a new property. The construction was not completed within a period of three years as narrated in Section54 of the Act. The delay was not because of the assessee, but beyond his control, since the construction was put up by the builder. He has invested the amount of Rs.2,26,82,097/-. Therefore, following the aforesaid judgment, the Tribunal rightly held that the said investment is made towards construction of the property. Therefore, it requires to be exempted. Under these circumstances, we do not find any error in arriving at such a conclusion. Therefore, we are of the view that the said substantial question of law would not arise for consideration in this appeal.”

17. Going through the above observations made, I am of the considered opinion that deduction claimed by appellant u/s 54 should be allowed as all the necessary compliances related to investment of capital gain had been completed in time. The appellant cannot be denied the benefit of exemption just because the flats were not handed over to the appellant within the due time.”

5. Thus, having regard to the compliance made by the assessee in respect of the claim under Section 54F of the Act, the order of deletion of addition made by the Ld. CIT(A) is found to be just and proper so as not to warrant inference. Thus, this appeal filed by the revenue is found to be devoid of any merit and thus, dismissed.

6. The appeal of the revenue is dismissed.

Order pronounced in the open court on 15.01.2025