Capital gains exemption for residential property where pre-sale acquisition and construction occurred; exemption allowed in part, incomplete construction within three years denied

Claim concerned capital gains exemption for investment in a new residential property where the assessee purchased and began construction before sale of the original house and kept sale proceeds in a bank account. Tribunal applied precedent rejecting any requirement that the identical sale proceeds must be the exact funds used for acquisition, reasoning that prior purchase or construction can qualify; outcome: exemption allowed to the extent supported by revised computation and documentary corroboration. Separately, the portion of claim tied to construction not completed within the statutory threeyear completion window was denied.

---

---

Issues: Whether the assessee is entitled to exemption under Section 54 of the Income-tax Act, 1961 for the amount claimed by him towards acquisition and construction of a new residential property, where construction was completed within three years though certain formal registration was delayed beyond the statutory period and payments/construction were evidenced by documents and bank statements.

Analysis: The Tribunal examined whether conditions of Section 54 were satisfied: (a) acquisition/ construction of new residential house within the statutory period (construction completed within three years from date of transfer), (b) cost of the new residential house to be adjusted against capital gains includes cost of land and construction-related expenditures, and (c) there is no requirement that the very sale proceeds must be separately retained or deposited in a capital gains account if the cost is incurred within the stipulated period and is substantiated. The record contains collaboration agreement copy, registered sale deed, construction bills, bank statements showing payments, and other corroborative documents. The Tribunal applied binding and persuasive precedents establishing that commencement of construction prior to transfer, delayed formal registration, or utilisation of funds intermixed with other bank receipts does not defeat the exemption if the new house is purchased or constructed within the statutory period and the cost is proved.

Conclusion: The Tribunal reversed the findings of the lower authorities and directed allowance of deduction under Section 54 as claimed by the assessee; the appeal is allowed in favour of the assessee.

Final Conclusion: The decision establishes that where the cost of acquisition/construction of the new residential house, including land and construction expenses, is incurred and substantiated within the statutory period prescribed by Section 54, the assessee is entitled to the exemption even if (i) construction commenced before the date of transfer, (ii) formal registration was delayed by a short period, or (iii) sale proceeds were not kept separately in a capital gains account, provided the expenditure is otherwise proved.

Ratio Decidendi: Under Section 54 of the Income-tax Act, 1961 the cost of the new residential house--inclusive of land and construction-related costs--may be set off against capital gains where acquisition or construction is completed within the statutory period; the statute does not mandate exclusive utilisation of the original sale proceeds and short procedural delays or mixed banking of funds do not defeat the exemption if the cost is duly incurred and evidenced within the prescribed period.

---