Section 54F Deduction Cannot Be Denied for Delay in Flat Handover if Compliances Are Met

DCIT Vs Kushal Singh (ITAT Delhi)

The Income Tax Appellate Tribunal (ITAT) Delhi upheld the assessee’s claim for deduction under Section 54F of the Income Tax Act, 1961, dismissing the appeal filed by the Revenue. The dispute arose from the assessment year 2014-15, where the assessee had invested capital gains from the sale of property into a new residential property. The Assessing Officer (AO) denied the deduction, citing non-receipt of possession within the statutory period, leading to an addition of Rs. 3.43 crore to the assessee’s income. However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the deduction, prompting the Revenue’s appeal before the ITAT.

The tribunal considered the fact that the delay in handing over possession was due to the builder’s failure to complete the project on time. The assessee had already invested an amount exceeding the capital gains in the new property within the prescribed period, meeting the primary condition of Section 54F. The ITAT observed that the provision aims to incentivize reinvestment of capital gains into residential property, and an assessee should not be penalized for factors beyond their control. The tribunal noted that real estate delays are common, and a strict interpretation of possession timelines would unfairly disqualify many eligible taxpayers.

Citing judicial precedents, the ITAT referred to the Supreme Court ruling in Sanjeev Lal vs. CIT (Civil Appeal Nos. 5899-5900 of 2014), which held that adverse inference should not be drawn when circumstances beyond the taxpayer’s control cause delays. The ITAT also relied on cases such as Satish Chandra Gupta v. AO (ITAT Delhi) and Raineet Sandhu v. DCIT (ITAT Chandigarh), both of which recognized that completion of construction is not a rigid requirement for claiming Section 54F benefits as long as substantial investment is made within the prescribed period. The tribunal emphasized that the thrust of Section 54F is on reinvestment rather than the physical receipt of possession.

Considering these precedents, the ITAT ruled in favor of the assessee, affirming the CIT(A)’s decision to allow the deduction and dismissing the Revenue’s appeal. The ruling reiterates that taxpayers who reinvest capital gains in compliance with Section 54F should not be denied benefits due to builder-related delays, setting a precedent for similar cases in the future.

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 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 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 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 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 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 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, 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

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 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 asset within 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 [Para 17]
  • In the instant case, the following three dates are not in 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, 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 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 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 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 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 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 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 lge the benefit 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 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, 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 [Para 25]
  • The appeal is therefore, The impugned judgments are quashed and set aside and the authorities are directed to re- assess the income of the assessee for the assessment year 2005- 2006, 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 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) 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) 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 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 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 Dilip Ranjrekar, [2019] 101 taxmann.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 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