Redevelopment: Can a Builder’s Delay Cost You Your Capital Gains Exemption?

 

[Query 1]

We had given our old property for redevelopment to a builder. As per the agreement, part of the consideration was paid in cash, while the balance was to be given in the form of a flat.

It has now been more than three years, and the builder could not obtain sanction for two floors (i.e., 5+2 = 7 floors) due to road-width restrictions. While the 5 floors have been constructed and sold to other buyers, the two additional floors were never sanctioned. The flat allotted to us was on the 6th floor, which therefore could not be constructed.

The builder is now offering an alternative – either to purchase a flat in another project and adjust the agreed consideration value against it, or to compensate us by paying the consideration value of the promised flat.

At the time of the original agreement, the combined value of (a) cash received and (b) the flat’s agreed value was fully eligible for capital gains exemption under the prevailing provisions.

In this background, what would be the tax implications of:

1.  Accepting a flat in another building, or

2.  Accepting monetary compensation instead of the flat?

This issue is becoming common since many redevelopment projects are running into sanction-related problems. Guidance on this would help a large number of affected taxpayers. [2rahuld@gmail.com]

Reply:

Redevelopment always sounds glamorous – shiny brochures, taller towers, and promises of a brand-new flat. But in practice? It often feels like lending money to that one friend who swears “kal paisa lauta doonga”… except here, the stakes are higher than a borrowed ₹ 500 note-it’s your home. With builder delays, plan revisions, and half-done projects, the tax headache only gets bigger. Let’s look at the tax implication for your situation:

1.  Project delayed beyond 3 years:

a)    Tax law is rigid – Section 54/54F says buy within 2 years or build within 3 years from the date you hand over your property to the builder. Miss that, and exemption technically slips away.

b)    In redevelopment cases, the “transfer” is treated as having taken place on the date of handing over possession to the builder. That is the starting point of the 2/3-year period.

c)     If the builder delays completion beyond 3 years, strictly speaking, the exemption can be denied, since the law does not recognize the builder’s failure as a valid excuse. For the taxman, it’s simple: 3 years or bust! Builder delays? Not his problem.

d)    Thankfully, our courts have shown more common sense, saying a builder’s failure shouldn’t sink your tax ship. Judiciary has taken a lenient view in many cases, holding that if the taxpayer has done everything on his part (i.e., handed over possession and entered into agreement), the exemption should not be denied merely because the builder delayed construction.

e)     So yes, claim the exemption – but keep your file thicker than the builder’s excuses to justify the exemption benefit.

2.  Flat not constructed due to plan rejection – alternate flat offered:

In your case, the builder is offering two alternatives for the flat that couldn’t be constructed: a flat in a different building or cash compensation:

a)    If you accept another flat:
Courts have been kinder by holding that if the alternate flat is given in lieu of the promised flat, the exemption under section 54/54F continues to apply, provided the value remains within the overall consideration agreed. Of course, this also may be subject to litigation.

b)If you take cash:
If cash, the taxman enters with his calculator. That money is taxable as long-term capital gains unless you reinvest in another house within the permitted time.
In simple words: With flats, the law bends. With cash, the law bites. Fair deal? You decide.

 

Concluding Para:

While the Income Tax Act doesn’t explicitly provide for builder-related delays, the courts have shown a compassionate view, focusing on the taxpayer’s intention and actions. In all such cases, documentary support is key – redevelopment agreement, possession date, correspondence with builder, and any alternate flat/cash arrangement. Redevelopment often tests both, your patience and your paperwork. Tax law may sound rigid, but courts have thankfully acted with compassion. Remember, redevelopment may change the skyline, but it shouldn’t flatten your peace of mind—or your tax return

 

[Query 2]

I lost a huge amount (73 Lakh) to on-line fraudsters in the name of “Institutional Share Buying” in Dec 23, the case is investigated by the Cyber Police team and in court and chances of recovery seem to be very low. Can I claim such loss while filing ITR?

I am ex-servicemen having pension as my regular income and was having funds after sale of my rural agriculture land, same money my savings/retirement benefits and few money taken on loan from online portal, friends and relatives and given to fraudsters in different names (some individual names and some in companies names) provided by the fraudsters telling as there Agents/partners. ARK Invest App was provided through which they transferred the amount in their different mule accounts provided by them. [ravikolhe2011@gmail.com]

 

Opinion:

I understand your concern. Losing money to online fraudsters is a devastating experience. It’s like a modern-day robbery where the thief uses a fake app instead of a mask and vanishes quicker than your OTP.

Unfortunately, the Income Tax Act doesn’t offer sympathy. Losses from cheating, fraud, or embezzlement are deductible only if directly connected to your regular business or profession. Personal scams? The taxman simply shrugs: “Not my department.” Since your loss was through an online “institutional share buying” fraud, and not via a recognized stock exchange or SEBI-registered intermediary, it cannot be claimed as a capital loss or business loss. So, no tax relief here. But here’s a tiny consolation: if you ever recover even a single rupee, it will be yours tax-free – one rare occasion when the taxman looks the other way

[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com.  Other articles & response to queries are available at www.theTAXtalk.com]