Capital Gain Exemption: What if the transaction is not completed within the specified time period


Capital Gain Exemption: What if the transaction is not completed within the specified time period


Any capital gain arising from sale of the house property or any other capital assets can be saved by the taxpayers by investing the amount for purchase of another house property within a specified time frame. The specified time frame under section 54 and 54F are as under:

a] For purchase:
One year before or two years after the date of sale.


b] For Constructions: 
Three years from the date of sale.

Taxpayers need to complete the transaction within the specified time limit as above for being eligible to claim the capital gain exemption.

There are instances where the taxpayers have made the payment for purchase of the house property but the builders fail to deliver the possession. In some cases, even if the possession is handed over, the builders fail to execute the sale deed of the property for various technical reasons. There are instances wherein the taxpayers have started the construction of the house property but fail to complete the construction of the house property within the specified time frame due to financial crunch or other technical / legal issues.

The question arises as to whether the capital gain exemption would be admissible in such a case? Though the plain reading and strict application of the law, exemption is not allowable but the judiciary has come to the rescue of the taxpayers. Courts have given relief in those cases wherein it is found that the taxpayers have made the full payment to the builder or major part of the amount has been spent for construction of the house or the transaction could not be completed within the specified time frame due to a situation beyond the control of the taxpayers. Courts have taken the view that section 54 & 54F are beneficial provisions & so it should be viewed in a bit of a relaxed manner.

Here are some of the cases which may enable readers to understand the logic & views adopted by the courts in such cases:

  1. Chennai ITAT in the case of Muthu Daniel Rajan v/s ACIT, Chennai [ITA No. 1675/Chny/2019] has observed as under:
    “When it comes to the beneficial provisions of Sec.54F of the Act, what is required to be seen is whether the assessee has invested consideration for purchase of property or not? In case, the assessee has satisfied conditions prescribed therein and invested sale consideration for purchase of residential house property, then even if some technical lapses like non-registration of agreement to sale, etc., does not disentitle assessee to claim benefit u/s.54F of the Act, in case, the assessee proves with evidences that finally he had registered the property in his favour.”
  2. In the case of CIT Vs. Dilip Ranjerkar (2019) 260 Taxman 317 (Kar), it has been held that the exemption cannot be denied to the taxpayers even if the construction of the house property is not completed due to situation beyond the control of the taxpayer as the construction was done by the builder.
  3. Bombay High Court in the case of CIT vs. Hilla J.B. Wadia [1995] 216 ITR 376 (Bom) has observed that if the taxpayers have acquired substantial domain over new house and have made substantial payment towards cost of construction within a period specified u/s. 54, then it can be said to have complied with requirements for claiming exemption u/s 54 even if construction of building is not completed within a specified period.
  4. MP High Court in the case of CIT Vs Ajitsingh Khajanchi [2008] 297 ITR 95 (MP) has held that the taxpayers cannot be disentitled to capital gain exemption merely on account of the absence of registered sale deed.
  5. Another interesting observation was there in the case of CIT v. Mrs. Shahzada Begum (1988) 173 ITR 397 (AP) wherein it has been held that the expression “purchased” would undoubtedly connote the domain and control of the property given into the taxpayer’s hands. From the facts on record, it is clear that, apart from the payment of substantial purchase consideration, the taxpayers secured possession of the property which is within the specified period. Though, there might have been some procedural delay in obtaining formal registration of the sale deed, but that is immaterial. With this observation, the court allowed the capital gain exemption to the taxpayers.
  6. Delhi ITAT in the case of Abodh Borar Vs ITO [ITA No. 5114/DEL/2016] has observed as under:
    As per the agreement the developer was supposed to hand over the possession of the plot within 18 months from the date of allotment letter. However, the developer did not deliver the possession. Hence, the assessee could not complete the construction within the prescribed period of 3 years. This delay in construction was not attributable to the assessee. Thus, the AO and the CIT (A) have denied the exemption in view of the provision of section 54 and 54F of the Act. Further, the AO and the CIT (A) both have ignored the fact that the assessee has made a full payment to the developer and such payment was more than the amount of the deduction claimed by the assessee. Since, the delay was not on the part of the assessee but on the part of the developer and thus it was beyond the control of the assessee. In such circumstances, we are of the view that the benefit of deduction cannot be denied to the assessee.
  7. ITAT Delhi in the case of Satish Chandra Gupta v. AO [1995] 54 ITD 508 has held that the capital gain exemption cannot be denied on the ground that the construction the house started by the Taxpayer was not completed within the stipulated period of three years and some work was carried out thereafter.
  8. In the case of ITO Vs. Saroj Rani Gupta (2019) 104 132 (Kol) & Usha Vaid Vs. ITO (2012) 53 SOT 385 (Asr), it has been held exemption u/s 54F cannot be denied where investment in residential house is made within the time limit but construction is completed after the expiry of the time limit.

Taxpayers should try to stick to the prescribed time frame for claiming an exemption as the benefit may not be granted by the Income Tax Officer during the course of the assessment proceeding. Though the judiciary has taken the liberal view, the issue would be the part of litigation and appeal proceedings. Above cases may come to the rescue of the taxpayers in case the situation is beyond the control of the taxpayers

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CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
10, Laxmi Vyankatesh Apartment
Telephone Exchange Square
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