10 January 2022
Residential property is sold in Dec 2021. The entire capital gain (say Rs. 1cr) is proposed to be invested in an apartment in a new residential multi-story building that is under construction by a commercial builder. Say the apartment price is Rs. 3cr.
Under construction linked plan, Rs. 1cr has to be paid immediately. The remaining payment follows the construction schedule. Actual possession is after 3 years, although builders are known to delay projects.
The question is - since the entire capital gain of Rs. 1cr has been invested in an under construction property within the allowable time of 3 years, but the remaining payments and possession is likely to take place beyond 3 years from the sale of the old property, does this qualify for exemption under section 54?
10 January 2022
You may have to go for appeal, as AO may not allow the deduction.
In the case the Commissioner of Income Tax vs. Sardarmal and Shanthilal Kothari, 2008, the respondents Sardarmal and Shanthilal Kothari had invested their long-term capital gains in a residential property and claimed deduction under Section 54F. However, when the Assessing Officer (AO) visited the property 3 years later, the construction of the house had not been completed. Based on this the AO denied benefits under Section 54F to the Kotharis. The case went up to the Income Tax Appellate Tribunal in Chennai, where the judges ruled the case in favour of the Kotharis. The Tribunal Bench said that “…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 establish that the assessee had invested the entire net consideration within the stipulated period.”
Another case, Rajneet Sandhu vs. DCIT in 2010 in Chandigarh, also faced the same problem and the Tribunal said it was more important that the entire capital gains were invested in the house within 3 years than the fact that the house is not ready to live in. Even in Pradeep Kumar Chowdhry vs. DCIT, the Tribunal ruled that if the money was invested in the building on time, it was not the assessee’s fault if the builders did not complete the construction on time.
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