In a significant ruling that provides relief to homebuyers investing in under-construction and redevelopment projects, the Income Tax Appellate Tribunal (ITAT) has held that taxpayers can claim capital gains tax exemption under Section 54 of the Income-tax Act even if the final conveyance or sale deed for the new residential property is executed after the prescribed period. The tribunal clarified that what matters is whether the taxpayer acquired enforceable rights in an identifiable residential property and made the investment within the statutory timeline, rather than the date of formal registration.
The judgment is expected to benefit thousands of taxpayers who purchase homes in redevelopment schemes or under-construction projects, where delays in registration are common due to construction timelines, regulatory approvals, or administrative procedures.
The case involved a taxpayer who had claimed a deduction of ₹2 crore under Section 54 after selling a residential property during the financial year 2013-14. The taxpayer had entered into an agreement in January 2014 to purchase a flat in a redevelopment project and made the required investment within the prescribed period. However, the registered conveyance deed for the property was executed only in November 2016.
The Income Tax Department, along with the National Faceless Appeal Centre (NFAC), rejected the exemption claim, arguing that the taxpayer had merely acquired rights in a future property through an unregistered agreement and had not purchased a residential house within the timeline specified under the Income-tax Act.
Reversing the earlier decisions, the ITAT observed that the taxpayer had effectively purchased a specific residential flat once the agreement was executed and payment had been made. According to the tribunal, the subsequent registration of the sale deed merely formalized an already completed transaction. It emphasized that Section 54 is a beneficial provision enacted to encourage investment in residential housing and therefore deserves a liberal interpretation.
While delivering its verdict, the tribunal relied on several precedents laid down by the Supreme Court and various High Courts, which have consistently held that acquiring substantial and enforceable rights in an identifiable residential property constitutes a valid purchase for the purpose of claiming tax benefits under Section 54, even if the legal conveyance is completed later.
The tribunal also granted the taxpayer full deduction of ₹16.24 lakh incurred towards legal fees, brokerage, and consultancy charges associated with the sale of the original property. Tax authorities had attempted to restrict the deduction on the ground that the taxpayer owned only a 49% share in the property. However, the ITAT held that since the taxpayer had actually borne the entire expenditure, the complete amount was eligible for deduction.
Another important aspect of the ruling dealt with the application of the Income-tax Act’s clubbing provisions. The taxpayer had gifted a portion of the original property to his wife before its sale. Under the clubbing provisions, the capital gains arising from her share were taxed in the husband’s hands to prevent tax avoidance through transfers to close relatives without consideration.
The tribunal upheld the application of these provisions but also ruled that the tax department cannot selectively apply them. If the capital gains from the wife’s share are taxed in the husband’s hands, he must also receive the corresponding Section 54 exemption that would otherwise have been available to her. The tribunal observed that tax liability and associated tax benefits must be treated consistently and cannot be separated.
