Liberal construction of residential house exemption and 10% valuation safe harbour delete tax additions

Section 54 relief is described as a beneficial provision to be construed liberally where a taxpayer buys land for a residential house, secures approvals and completes construction after the usual period because COVID-19 disruptions delayed works; on that reasoning, the exemption remains available and the disallowance is not sustained. On section 56(2)(x), a stamp duty value difference of about 7.86% falls within the 10% tolerance band recognised as a curative safe harbour, so the minor valuation gap in a bona fide transaction is not taxable. The combined effect is that both additions are deleted.

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Issues: (i) Whether exemption under section 54 of the Income-tax Act, 1961 could be denied where the assessee purchased a plot with the intention of constructing a residential house and the construction was completed after the prescribed period due to COVID-19 related disruptions; (ii) Whether the difference between the stamp duty value and the purchase consideration, being below 10%, was exigible to tax under section 56(2)(x) of the Income-tax Act, 1961.

Issue (i): Whether exemption under section 54 of the Income-tax Act, 1961 could be denied where the assessee purchased a plot with the intention of constructing a residential house and the construction was completed after the prescribed period due to COVID-19 related disruptions.

Analysis: Section 54 is a beneficial provision intended to encourage investment in residential housing and calls for a liberal and purposive interpretation. The assessee had purchased a plot for construction of a residential house, obtained the necessary approvals, and ultimately constructed the house. The delay in completion substantially coincided with the COVID-19 pandemic and the attendant lockdowns and disruption in construction activity. The provision does not require denial of exemption on a hyper-technical view merely because completion was delayed beyond the period relied upon by the lower authorities, particularly where the investment in the residential project and the bona fide intention stand established.

Conclusion: The exemption under section 54 of the Income-tax Act, 1961 is allowable and the disallowance is deleted.

Issue (ii): Whether the difference between the stamp duty value and the purchase consideration, being below 10%, was exigible to tax under section 56(2)(x) of the Income-tax Act, 1961.

Analysis: The difference between the actual consideration and the stamp duty value was about 7.86%, which is within the 10% tolerance band recognized by the Finance Act, 2020. The enhanced tolerance limit is a remedial and curative measure intended to remove hardship arising from minor valuation variations in bona fide transactions. In these circumstances, the differential amount does not warrant addition under section 56(2)(x) of the Income-tax Act, 1961.

Conclusion: The addition under section 56(2)(x) of the Income-tax Act, 1961 is unsustainable and is deleted.

Final Conclusion: The assessee succeeds on both substantive issues, and the impugned additions are set aside in full.

Ratio Decidendi: A beneficial exemption provision must be construed liberally to advance its object, and a curative safe-harbour amendment addressing minor valuation differences applies where the transaction falls within the legislatively accepted tolerance range.

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