Failure of the builder to handover the possession of the property Vs. Capital Gain Exemption


Failure of the builder to handover the possession of the property Vs. Capital Gain Exemption


Any profit arising from transfer of land, building, gold, or any other capital assets is subject to income tax as “Capital Gain”. Taxpayers have options to save the tax arising from transfer of Long Term Capital Assets by claiming an exemption under various provisions of the Income Tax Act-1961. The most commonly used are section 54 & Section 54F. Both this section offers exemption on the condition that the taxpayers invest the amount for purchase or construction of another residential house property within a prescribed time frame, as under:
i] For purchase:
One year before or two years after the date of Sale/Transfer.

ii] For Constructions: 

Three years from the date of Sale/Transfer.

The time limit is very important for capital gain exemption & its violation often results in its denial. There are numerous instances of denial due to non adherence to the strict time limit for exemption. However, exceptions do exist and the judiciary has granted the exemption in some genuine cases though it is strictly not in accordance with the provision of the Income Tax Law. There are cases wherein the taxpayer makes the payment for purchase of the flat to the builder but the builder fails to complete the scheme due to legal disputes, non-sanctioning, liquidity crunch, etc. There are also cases where the possession is handed over by the builder to the customers but the sale deed could not be executed for some technical reasons. In such cases, though the claim of capital gain exemption was not accepted during the course of the assessment, the same is granted by the court at the appellate stage. Let us have a look at some of them.

  1. In CIT Vs. Dr. Laxmichand Narpal Nagda (1995) 211 ITR 804, Bombay HC has held that the meaning of the word “purchase” in section 54 has to be given as understood by a layman and that a liberal and wiser  interpretation must be given as against literal interpretation. Word ‘purchase’ in section 54 is not used in a strict sense of legal transfer and holding of legal title is not a condition precedent for attracting section 54. Where the whole amount of consideration was paid, possession was also obtained and the premises were actually put to use for dwelling within four months, the exemption was allowable, without the registration of the title, within the stipulated time limit, in the name of the owner. Similar view has been expressed in Dr. R.K. Bhatnagar Vs. ITO (1993) 45 ITD 45 (Delhi ITAT).
  2. The Bombay High Court in CIT Vs. Mrs. Hilla J.B. Wadia 216 ITR 376 hasheld that Capital Gain exemption is admissible if the taxpayers acquired substantial domain over the house property and has paid the entire cost.
  3. Karnataka High Court in the case of Pr. CIT v. Dilip Ranjrekar (2019) 260 Taxman 317 has held as under:
    “Since delay in construction of new property within a period of three years as prescribed in section 54 was beyond control of assessee because construction was put up by builder, deduction claimed by assessee under section 54 could not be denied. It was, however, undisputed that the assessee had invested an amount in construction of new property within the prescribed time period. Thus, the assessee’s claim of deduction could not be denied.”
  4. In CIT Vs. Sardarmal and Shanthilal KothariTax Case (Appeal) Nos.354 and 355 of 2008, Madras High Court has observed as under:
    “…in order to get the benefit under Section 54F, the assessee need not complete the construction of the house and occupy the same. It is enough if the assessee establishes that the assessee had invested the entire net consideration within the stipulated period.”
  5. Delhi ITAT in the case of Bal Kishan Atal vs. ACIT, New Delhi [2019] 104 , 432 has held as under:
    “Where assessee sold a residential property and invested sale consideration in new residential flat and made payment to developer within prescribed time, merely because assessee could not obtain possession and got purchase deed executed within period of three years as Consumer Redressal Commission had put stay on developer, assessee’s claim for exemption under section 54 could not be denied.”

In various precedents, tax Tribunals and High Courts have taken liberal view while granting the exemption u/s 54 and 54F by holding that the purpose of exemption is to promote purchase and construction of residential houses. Though the above judgement may help in understanding the judicial intent, one cannot construe that in all cases with a similar set of facts, the appellate authorities will rule in favour of the taxpayer. Taxpayers must try to stick to the timelines provided in the law. The judiciary normally allows the exemption under following circumstances:

  1. The taxpayers have done full or substantial part of the payment for purchase or construction & taken reasonable efforts to get the possession of the property within the stipulated period.
  2. The delay in getting the possession of the property is due to fault at the end of the builder /developer & it is beyond the control of the assessee.
  3. There is no failure or malafide intent on the part of the taxpayers so as to avail the capital gain exemption.

Precaution while investing in under-construction project:

If at the time of agreement with the builder, the time limit provided for handing over the possession of the property is beyond 2 years or 3 years then the taxpayers may not be able to get the exemption. Capital gain exemption can be granted only if there is a failure on the part of the builder to hand over the possession despite agreement with the taxpayers to do so within the prescribed time limit.

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CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
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