2025 (12) TMI 1338 - AT - Income Tax

Ongoing construction of new home after land purchase: s.54 capital gains exemption cannot be denied before 3-year limit expires

The dominant issue was whether exemption under s.54 could be denied and capital gains added in the relevant AY when construction of the new residential ... Capital gain computation - relevant assessment year - Disallowing the claim of exemption u/s 54 in respect of capital gain earned out of sale of property during the relevant assessment year - time limit for construction of three years, which ends in February, 2025 and therefore, in the financial year 2020-21 relevant to the assessment year 2021-22, there is no question of any addition to the capital gain - HELD THAT:- We noted that the assessee has purchased plot of land at Survey No.484/2/2, Karnavati Road, Makarba, Village Makarba, Taluka Ahmedabad City, and District Ahmedabad and constructed the residential house with a total built up area of approximately 11,240 sq.ft. and, as per certificate of some Advisory Consultant, the construction on the property has been completed as per plan as on date i.e., 2nd January, 2025. We noted that whatever may be the situation, the capital gain cannot be assessed in this year i.e., assessment year 2022-23 because the assessee is carrying out construction and making investment in the new residential house after purchase of land, which is not in dispute. We find no infirmity in the findings of CIT(A) and hence, the order of learned CIT(A) is affirmed and the appeal of the Revenue is dismissed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether exemption claimed on capital gains on transfer of the original property could be denied in the relevant assessment year merely because construction of the new residential house on the purchased plot was not completed and a completion certificate was not furnished by the assessment date, despite the statutory three-year period for construction not having expired. (ii) Whether, on the facts found, the assessee's investment in purchase of land and ongoing construction for a new residential house was sufficient to sustain the exemption, and consequently whether the addition made by disallowing the exemption was warranted in the relevant assessment year. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Denial of exemption for non-completion of construction/completion certificate before expiry of three-year period Legal framework (as discussed by the Court): The Court proceeded on the basis that the statute allows a period of three years from the date of transfer of the original asset for completion of construction of the new residential house, and evaluated the disallowance in light of this time window. Interpretation and reasoning: The Court accepted the appellate finding that the original asset was transferred on 07.02.2022 and, therefore, the period available for construction extended up to 06.02.2025. It endorsed the view that denying exemption 'almost one year before' the expiry of the permitted period, solely because a construction completion certificate was not produced at that stage, was unwarranted. The Court noted that construction activity and investment after purchase of land were ongoing and not disputed, and further recorded that a certificate evidenced completion as on 02.01.2025. Conclusion: The Court held that exemption could not be denied in the relevant assessment year on the ground of non-completion/non-production of completion certificate when the three-year construction period had not expired; the disallowance on that basis was unsustainable. Issue (ii): Sufficiency of investment in land purchase and construction for sustaining exemption; correctness of addition in the relevant assessment year Interpretation and reasoning: The Court proceeded on the factual footing that the assessee purchased a plot and commenced construction of a residential house, incurred substantial construction-related expenditure, and continued to make investment towards the new residential house. The Court emphasized that, 'whatever may be the situation,' the capital gain could not be assessed in the relevant year because the assessee was carrying out construction and making investment in the new residential house after purchase of land, which was not in dispute. It also recorded that the revenue could not controvert the appellate findings. Conclusion: The Court found no infirmity in the deletion of the addition and affirmed the appellate order allowing the exemption; consequently, the revenue's appeal was dismissed.