Exemption from Long Term Capital Gains Tax (Section 54F) can’t be denied in case of delays in construction

When a Long Term Capital Asset is sold, it attracts tax. At present, the gains are taxed at 20% + 3% Cess. Because the gains are usually very large, the tax amount is also considerably very large. The government, however, offers a way around to avoid paying high taxes under section Section 54 and 54F.

However, the exemption under section 54F was denied to a Mumbai-based buyer Mr. Rajeev B. Shah (assessee), who invested the proceeds from the sale of land in the purchase of an apartment. The Tax Commissioner denied the deduction u/s 54F of the Act for the reason that the assessee has not registered the document for his claim for a purchase of property even after three years of the said investment of capital gains in a property.

The apartment Mr. Shah purchased was delayed and could not be delivered. He has even filed a case against the developer for the same. Before discussing the case further, let’s first understand what is Section 54 and 54F.

Section 54F

Any Gain arising to an individual or HUF from the sale of any Long Term Asset other than Residential Property shall be exempt in full if the entire net sales consideration is invested in:

  • Purchase of one residential house within 1 year before or 2 years after  the date of transfer of such an asset or in
  • Construction of 1 Residential House within 3 years after the date of such transfer

In case the whole sale consideration is not invested and only a part of the sale consideration is invested, an exemption shall be allowed proportionately. Section 54 offers similar exemption but for the Residential Properties.

Case Study

In the case of Mr.  Rajeev B. Shah vs The Income Tax Officer, the Income Tax Appellate Tribunal “SMC” Bench, Mumbai clarified that exemption under section 54F can’t be denied if the possession of apartment is delayed.

Briefly stated facts of the case are that the assessee sold one plot of land for a consideration of Rs.19,35,325/- and claimed a deduction of investment made in under construction flat in the month of March 2010 amounting to Rs.18,60,000/- under the provisions of Section 54F of the Act. This investment was made by two co-owners viz. Mitesh K. Patel 60% and the assessee Rajeev B. Shah 40%. They made an investment to the tune of Rs.43.10 lacs and assessee’s share was Rs.18,60,000/-.

The Assessing Officer (AO) disallowed the claim of the assessee for deduction u/s 54F of the Act for the reason that the assessee has not registered the document for his claim for purchase of property even after three years of the said investment of capital gains in property. He also made a passing reference that the genuineness of the investment in question is not proved. The AO says:

There is no doubt that an assessee would be eligible for the benefit u/s.54F if he invests in an under construction building but it is his bounden duty to first inquire whether the so-called under construction building was eligible to be constructed. Merely because a so-called letter of allotment was issued in a building which was never given permission for construction beyond two floors, it cannot be said that for the purpose of section 54F, the appellant’s obligation ended as soon as he issued the cheque”.

Buyer’s Submissions (assessee)

also explained that he has fulfilled the conditions laid down u/s 54F of the Act by investing a sum of Rs.18,60,000/- in the above flat within the stipulated period in a residential house property under construction. We find that so far as the facts in question are not disputed, the only issue is that when the assessee is not able to get the title of the flat registered in his name or unable to get the possession of the flat, which is under construction, due to fault of the Builder, the assessee cannot be denied deduction u/s 54F of the Act. It is a fact that the assessee has invested this amount of Rs.18,60,000/- in purchase of residential house within the stipulated period prescribed u/s 54F of the Act. But, it is not in the assessee’s hand to get the flat completed or to get the flat registered in his name, because it was incomplete. The intention of the assessee is very clear that he has invested almost the entire sale consideration of land in purchase of this residential flat. It is another issue that the flat could not be completed and the matter is pending before the Hon’ble Bombay High Court seeking relief by the assessee by filing suit for direction to the Builder to complete the flat. It is impossible for the assessee to complete other formalities i.e. taking over possession for getting the flat registered in his name and this cannot be the reason for denying the claim of the assessee for deduction u/s 54 of the Act.

Tribunal’s Observations

The AO rejected the claim of deduction u/s 54F of the Act only on the ground that the property is incomplete and a registered document was not filed by the assessee in respect to the claim of deduction u/s 54F of the Act. As per buyers, this happened due to the fact that the builder was avoiding the customers due to disputes and the project was also stalled and there was no further progress in construction of the project. To prove his point, the assessee filed civil suit before the Hon’ble Bombay High Court in Suit No.162 of 2016.

In view of the above facts of the case, we are of the view that the assessee is entitled to deduction u/s. 54F of the Act, because the assessee has already invested a sum of Rs.18.60 lakhs in the residential property under construction within the time limit prescribed u/s. 54F of the Act. Accordingly, this issue of assessee’s appeal is allowed.

Reference: Rajeev_B._Shah_SMC_MVS – ITA No.262/Mum/2015 (A.Y.:2010-11)

4 thoughts on “Exemption from Long Term Capital Gains Tax (Section 54F) can’t be denied in case of delays in construction

  • September 13, 2016 at 6:51 pm
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    I purchased a flat in NRI RESIDENCY SECTOR 45 NOIDA and the super area was 1450 sft.In june 2016 the builder demanded final installment and in that he has increased the super are by 10% and increased it to 1450+10%=1595.Thus demanded Rs 5 lakh extra for the increased super area.. ultimately i paid for increased super are as I was told if i dont pay it i will nt be given possession.Stizen and retired defence officero I hav paid all their dues.No reason has been mentioned for the increased super area charges.Kindly advise me ,as to can i go to consumer form for redressal of my grievances.Due to increased super are my registeration charges and subsequently maintenance charges will go very high.
    kindly advise as I am a senior ci

  • September 14, 2016 at 12:05 pm
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    Yes, you can approach Consumer forum. It is advised to form a group of buyers having similar grievances and approach the NCDRC.

  • December 28, 2016 at 5:30 pm
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    What exactly do you mean by “In case the whole sale consideration is not invested and only a part of the sale consideration is invested, an exemption shall be allowed proportionately..Section 54 offers similar exemption but for the Residential Properties”
    How do you calculate “Proportionately”:. What if I want to pay the Capital gain tax on the “Uninvested amount” i,e, the balance portion of the sale consideration after investing in a new residential property.

  • December 9, 2017 at 1:34 pm
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    assessee started construction before selling the original asset and completed after sale of asset. what is the position of 54f

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