2025 (10) TMI 999 - AT - Income Tax

Section 54 exemption allowed after AO reconciles allotment, construction agreement, sale deed with bank statements and capital gain account

ITAT (Ahmedabad) set aside the issue to the AO with directions to verify the allotment letter, construction agreement and registered sale deed against ... Allowability of deduction claimed u/s 54 - sale of his residential house property - HELD THAT:-In the present case, the assessee has now placed on record copies of the allotment letter dated 20.10.2015, the construction agreement dated 13.12.2017, and the registered sale deed dated 15.12.2017, which were not before the AO or the Commissioner (Appeals). As these documents directly establish the contractual and legal rights of the assessee in the residential unit, a limited verification is necessary to reconcile the actual dates of execution with the corresponding payments reflected in the bank statements and the capital gain account. We are mindful that section 54 is a beneficial provision designed to encourage investment in residential housing and must be interpreted liberally in favour of the assessee, so long as there is substantial compliance with the statutory conditions. On the facts, the requirements of allotment, substantial payment, and possession stand demonstrated, while the registration aspect is now supported by documentary evidence. Only reconciliation of these documents with the payment trail remains to be undertaken. We set aside the impugned issue to the file of the AO with the limited direction to verify the dates and details of the construction agreement and sale deed in light of the bank statement and the capital gain account. Upon such verification, the AO shall allow the exemption u/s 54, treating the assessee’s investment as “construction” of a residential house within the extended period of three years, in accordance with law, after affording reasonable opportunity of hearing to the assessee. Appeal of the assessee is allowed for statistical purposes ISSUES PRESENTED AND CONSIDERED 1. Whether the deduction under section 54 of the Income-tax Act is allowable where the assessee paid instalments and obtained an allotment letter for a flat in an under-construction project, but the registered sale deed and construction agreement were executed after the statutory period for 'purchase' and within the three-year period applicable to 'construction'. 2. Whether payments made to a developer and a possession letter for limited purposes (furniture work) together with allotment and subsequent registered documents constitute 'construction' of a residential house for the purposes of section 54 (thus attracting the three-year period) rather than 'purchase' (two-year period). 3. Whether the Assessing Officer and the first appellate authority were justified in disallowing the section 54 deduction on the ground of absence of purchase deed or construction agreement on record at the time of assessment, without verifying or reconciling subsequently produced contractual documents and payment records. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of section 54 deduction where payments and allotment preceded execution/registration of sale deed and construction agreement Legal framework: Section 54 permits exemption of capital gains on transfer of a residential house if the assessee purchases a house within one year before or two years after the transfer, or constructs a house within three years after the transfer. Registration and execution are material to vesting of legal title; timing of acquisition/ construction is determinative. Precedent treatment: Reliance placed on CBDT Circular Nos. 471 and 672 which treat allotments in under-construction schemes as 'construction' for section 54 purposes. Judicial authorities have held that acquisition of flats in under-construction projects can be treated as construction where payments are linked to construction and contractual rights are created via allotment/booking. Interpretation and reasoning: The Tribunal construes the statutory distinction between 'purchase' and 'construction' purposively. Where an assessee participates in an ongoing project by way of allotment and staged payments, the transaction is of the nature of 'construction' rather than purchase of a ready-built house. The allotment letter (20.10.2015), staged payments beginning October 2015, limited possession for furniture works (05.01.2017) and the occupancy certificate (30.06.2017), together demonstrate substantial compliance with conditions for construction within three years. The subsequently executed construction agreement (13.12.2017) and registered sale deed (15.12.2017) establish binding contractual and legal rights which, when reconciled with the payment trail, support the claim. Ratio vs. Obiter: Ratio - An allotment with staged payments in an under-construction project constitutes 'construction' for section 54, provided contractual/legal rights and payment reconciliation support that construction is completed within three years. Obiter - Observations on liberal interpretation of beneficial provisions and general applicability of CBDT circulars to private builders are explanatory but consistent with settled practice. Conclusions: The facts prima facie satisfy requirements for treatment as 'construction' under section 54. The Tribunal directs verification and reconciliation of documents and payments; if verified, exemption should be allowed treating the investment as construction within three years. Issue 2 - Characterisation of allotment, staged payments and possession letter as meeting statutory conditions of section 54 Legal framework: Section 54 conditions turn on timing and nature of acquisition; evidence of allotment, agreements and possession are relevant to establish when acquisition/ construction is effected. Transfer of ownership requires execution and registration under Transfer of Property Act and Registration Act; however, contractual rights and payments evidencing participation in construction are germane to classification. Precedent treatment: CBDT Circular No. 672 (16.12.1993) and Circular No. 471 provide that allotment in under-construction schemes should be treated as construction for section 54; courts have applied this principle beyond statutory authorities to private builders where the essence of the transaction is participation in construction. Interpretation and reasoning: The Tribunal holds that allotment coupled with substantial staged payments links the assessee to construction activity. Limited physical possession for furniture does not confer ownership but is a fact relevant to completion and possession timelines. The absence of registered documents at assessment stage is material but not decisive where such documents are subsequently produced and reconcile with the payment trail. The proper approach is to verify dates and reconcile bank/capital gain account entries with executed documents to determine compliance with statutory periods. Ratio vs. Obiter: Ratio - Allotment plus staged payments in an under-construction project can satisfy the 'construction' limb of section 54, subject to reconciliation with executed and registered documents and payment records. Obiter - Limited possession for furniture is insufficient alone to establish ownership; it is a corroborative fact. Conclusions: The allotment letter and staged payments constitute substantial compliance indicative of construction; final determination requires verification of registered documents against payment records, after which section 54 relief may be allowed under the construction limb. Issue 3 - Duty of revenue authorities to verify subsequently produced documents and application of principles of natural justice Legal framework: Assessment under section 143(3) and appellate scrutiny require that material placed before the authority be considered; principles of natural justice and the proviso to fair adjudication demand that relevant documents be given due opportunity for verification. The Assessing Officer must reconcile documentary evidence with bank statements and other material before denying a statutory benefit. Precedent treatment: Administrative guidance and judicial pronouncements support liberal construction of beneficial provisions and require that when material evidencing compliance is produced, the revenue should verify rather than mechanically disallow relief for absence of documents at earlier stages. Interpretation and reasoning: The Tribunal finds that the Assessing Officer and CIT(A) did not consider the construction agreement and registered sale deed because they were not on record at assessment and first appeal. Given that these documents were later produced and materially affect entitlement, the Tribunal emphasizes the duty to verify through limited remand: reconcile dates of registration/agreement with bank statements and capital gain account entries and afford reasonable opportunity of hearing. The Tribunal frames a limited direction - verification and allowing exemption if reconciliation supports construction within three years - which aligns with natural justice. Ratio vs. Obiter: Ratio - Where material documents establishing contractual and legal rights are subsequently produced, the appropriate course is remand for verification and reconciliation rather than outright confirmation of disallowance solely for lack of documents at assessment. Obiter - Commentary on the administrative practices that led to non-consideration of later produced documents is explanatory. Conclusions: The Tribunal sets aside the issue to the Assessing Officer for limited verification of dates and reconciliation with payment records, directing that on satisfactory verification and after hearing the assessee, exemption under section 54 be allowed treating the investment as construction within three years. Cross-references See Issue 1 and Issue 2 for interaction between allotment/staged payments and construction classification; see Issue 3 for mandated procedural step of reconciliation and opportunity of hearing before final determination of section 54 entitlement.