2025 (9) TMI 1310 - AT - Income Tax

Assessee entitled to Section 54F exemption despite construction delay caused by builder failure and reinvestment

ITAT Delhi allowed the appeal, holding the assessee entitled to exemption under section 54F. The tribunal found the entire sale proceeds were invested in ... Denial of claim u/s 54F calculation of LTCG - delay in possession of residential site and further construction is delayed beyond three years due to the complete fault of the tricky and nefarious Builder As per AO Assessee has sold the property and invested the whole sale consideration in purchase of a plot for the purpose of construction of residential plot, however due to beyond control of the assessee the same plot was never handed over to the assessee even beyond the period of limitation allowed u/s 54/54F of the Act i.e. 3 years from the sale of original asset. HELD THAT:- As per the records available on record, the assessee had invested all the sale consideration in purchase of the abovesaid plot and due to the reasons beyond the control of the assessee, the assessee could not commence the construction of the residential house. It is also brought to our notice that the assessee had finally gave up the rights on the abovesaid plot and purchased the residential property beyond the period of limitation. From the above facts available on record, it is beyond the control of the assessee to construct the residential property within the period allowed u/s 54F of the Act. In the similar situation in case of CIT vs. Sambandam Udaykumar [2012 (3) TMI 80 - KARNATAKA HIGH COURT] held that section 54F is a beneficial provision for promoting construction of residential house and in the given case also, assessee has utilized the funds for the purpose of construction of residential house and all the funds were utilized within the period of three years. Merely because the approval and construction of the property was completed beyond the period of three years, the same is not disentitled the assessee from the benefit of exemption u/s 54F of the Act. Similar views were expressed in the case of CIT vs. Sardarmal Kothari [2008 (6) TMI 15 - MADRAS HIGH COURT], Subramanian Swaminathan[2023 (5) TMI 580 - ITAT DELHI] and Sharda Mohan Shetty [2023 (3) TMI 1551 - ITAT BANGALORE] Provisions of section 54F are beneficial provision and the same has to be applied as per the peculiar situation of each case. In the given case, the assessee was intended to construct a residential house and accordingly, invested the whole purchase consideration in plot of land and it is fact on record that it is beyond the control of the assessee to get the plot of land to initiate the construction of the plot on time due to various reasons as discussed above and finally assessee has to forego the rights of the plot of land and finally invested the recovered amount from M/s. Chintel in the new property. In this peculiar situation and condition beyond the control of the assessee, in our considered view, assessee is eligible to claim the deduction u/s 54F of the Act. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessee is entitled to deduction/exemption under section 54/54F of the Income-tax Act where long-term capital gains were reinvested by payment/part-payment and provisional allotment for a residential plot, but possession and completion of construction were not achieved within the statutory period because of delay attributable to the developer and matters beyond the assessee's control. 2. Whether payment of substantial part of sale consideration to a developer, issuance of provisional allotment and execution (or dating) of an agreement (even if final formal agreement was handed over later) satisfy the statutory requirement of 'purchase' or 'construction' for claiming exemption under section 54/54F. 3. Whether the AO's denial of deduction (and the Commissioner's invoking of section 263 to set aside an earlier assessment) for failing to examine/verify before allowing exemption was justified in the facts where the assessee had documentary evidence of investment/ payments but had no possession due to third-party/default causes. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Entitlement to exemption under section 54/54F where possession/construction not completed within statutory period due to developer/default/force majeure reasons Legal framework: Sections 54 and 54F provide exemption from long-term capital gains tax where the assessee purchases or constructs a new residential house within specified time limits (one year before/two years after for purchase; three years for construction). The statute uses terms 'purchased' or 'constructed' and ties exemption to investment of capital gains in acquisition/construction within time. Precedent treatment: The Tribunal followed a consistent line of authorities treating sections 54/54F as beneficial provisions to be construed liberally; earlier decisions hold that (i) substantial payment/allotment/part payment and issuance of allotment letter may constitute investment for purposes of the section; (ii) delay caused by litigation, developer failure or governmental/administrative impediments, being beyond the assessee's control, will not disentitle the assessee where the assessee has in fact invested the sale proceeds in acquiring a plot/flat; and (iii) the thrust of the provision is on application of sale proceeds to acquisition/construction rather than formal completion/possession within the statutory period. Interpretation and reasoning: The Tribunal applied a purposive interpretation of the statute. It emphasized that the assessee here (a) sold original property and declared capital gain; (b) secured provisional allotment from the developer; (c) made payments in three instalments amounting to an aggregate sum exceeding the capital gain; and (d) took preparatory steps (engaged an architect, advanced non-refundable fees) demonstrating intention and concrete steps to construct. The Tribunal found that the delay in possession and failure to complete construction within three years resulted from project delays, governmental infrastructure disputes, environmental restrictions, and alleged developer malfeasance - factors beyond the assessee's control. In that factual matrix, to insist on strict possession/completion would thwart the legislative purpose to encourage reinvestment of sale proceeds in residential housing and would penalize honest taxpayers who had parted with the sale consideration toward acquisition/construction. Ratio vs. Obiter: Ratio - Where the assessee has utilised sale proceeds by making substantial payments to a developer, obtained provisional allotment and taken concrete steps to construct, and further delay/possession failure is due to reasons beyond the assessee's control, the statutory condition of investment under sections 54/54F is satisfied and exemption cannot be denied merely for non-completion/possession within the prescribed period. Obiter - Observations on broader policy and extended list of supporting precedents are persuasive but ancillary to the holding. Conclusion: The Tribunal held that the assessee is entitled to the exemption under section 54F because the conditions of investment were met in substance and the delay was beyond the assessee's control; the denial of deduction on ground of non-possession/non-completion was not warranted on facts. Issue 2 - Whether payment/allotment/agreement execution timing satisfies the statutory requirement of 'purchase' or 'construction' Legal framework: The statutory test hinges on investment of the capital gains in acquiring or constructing a residential house within specified timeframes. The form of investment may include payment and contractual commitment; the law does not prescribe that registration/possession/occupancy certificate is the sole determinative act of purchase. Precedent treatment: The Tribunal relied on authoritative lines of decisions which treat execution of a binding agreement, issuance of allotment letter upon payment of first instalment, substantial payment to developer and commencement of construction by builder as constituting 'purchase' for section 54/54F. These decisions have held that part payment and allotment letters constitute the necessary investment and that completion/possession being delayed by the developer does not defeat the assessee's claim. Interpretation and reasoning: The Tribunal examined documentary evidence - provisional allotment, demand letters, bank payment records and Form 26AS entries - and accepted that payments aggregating more than the claimed amount were made within the statutory period. It noted that the instrument on which agreement was executed bore a date within the relevant statutory period even if the assessee physically received final executed copies later, and that the use of non-judicial stamp papers dated earlier corroborated the agreement date. The court reasoned that where consideration has been parted and contractual obligations have been undertaken to acquire the plot/house, the statutory requirement is met in substance; formal delays in handing over documentation do not nullify the investment. Ratio vs. Obiter: Ratio - Substantial payment, provisional allotment and an agreement dated within the statutory period constitute investment/purchase for the purpose of sections 54/54F even if formal possession/registration occurs later. Obiter - Factual emphasis on particularities of document receipt timing (e.g., handed-over copy dates) is case-specific. Conclusion: The Tribunal concluded that the assessee satisfied the investment requirement because payments and allotment occurred within the prescribed period and the execution/dated agreement corroborated the transaction; thus exemption qualifies despite delayed physical possession. Issue 3 - Validity of setting aside assessment under section 263 and AO's fresh assessment denying section 54/54F deduction without adequate appreciation of facts Legal framework: Section 263 permits the Commissioner to revise an assessment if it is erroneous and prejudicial to the interests of revenue. However, the exercise of revisional power must be justified by material showing error of law or fact and prejudice, and the subsequent action of the AO must examine facts and law appropriately. Precedent treatment: The Tribunal noted that the revisional direction and consequent assessment must be consistent with the factual record and legal principles; it stressed that denial of exemption without considering documentary proof of investment and the realities of developer delays would be inappropriate. Interpretation and reasoning: On the record, the Tribunal found that the assessee had placed documentary evidence of payments, allotment and preparatory steps before the AO and CIT(A). The AO's denial rested on absence of possession rather than a full appraisal of the substantive investment and reasons for delay. The Tribunal treated the CIT's action under section 263 as not resulting in a correct outcome on merits because the denial overlooked applicable judicial precedents and the factual demonstration that payments were made within the statutory period and delays were beyond the assessee's control. Ratio vs. Obiter: Ratio - Revisional action under section 263 cannot be used to substitute a detailed merits re-appraisal that ignores documentary proof and binding principles favouring liberal interpretation of beneficial exemptions; where the assessee has invested sale proceeds and inability to complete is beyond his control, denial is erroneous and prejudicial. Obiter - Comments on administrative delay in handing over documents by the developer are illustrative. Conclusion: The Tribunal found the confirmation of disallowance by lower authorities to be unsustainable and directed deletion of the disallowance, thereby restoring the exemption claim in favour of the assessee. Overall Conclusion The Tribunal allowed the appeal: on the facts it held that the assessee had invested the entire sale proceeds by making substantial payments and obtaining provisional allotment within the prescribed time; delays in possession and construction were attributable to factors beyond the assessee's control (developer failure, government/project delays, regulatory constraints); sections 54/54F are beneficial and to be construed purposively; therefore exemption under section 54F must be allowed and the disallowance deleted.