Section 54 of the Income Tax Act allows for an exemption on long-term capital gains tax for individuals and HUF (Hindu Undivided Family) if the proceeds from the sale of a long-term capital asset, such as a residential property, are invested in the purchase or construction of another residential property within a specified time frame.
To claim the benefits under Section 54, the following conditions must be met:
The capital asset sold must be a residential property, and the new property must also be a residential property. The new property must be purchased either one year before or two years after the date of sale of the old property. In case the new property is constructed, it must be completed within three years from the date of sale of the old property.
The cost of the new property must be equal to or more than the net sale consideration of the old property. The individual must not own any other residential property on the date of transfer of the old property.
In some cases, like Sh. Vijay Sharma vs ACIT, Circle-II[2023 TAXSCAN (ITAT) 205], the builders may face some difficulties in completing or even starting the construction within the stipulated time, due to various reasons. In the case of Vijay Sharma, the tax authorities had found that the construction had not even begun after 3 years of making the purchase.
In the above case, it was observed that, there was no evidence of any construction activity or of the fact that assessee has invested the proceeds in statutory deposits and then spent any proceeds of the sales consideration of two properties he had sold, into the construction over the plot.
In ACIT-22(3) vs Vinay Girish Bajpai [2022 TAXSCAN (ITAT) 260] however, the Income Tax Appellate Tribunal bench at Mumbai had upheld Section 54 deduction as handing over of possession was delayed due to builder’s fault and assessee fulfilled all statutory requirements.
But, in a more recent case, Smt. Neelima Pravinkumar Khamkar vs Income Tax Officer[2022 TAXSCAN (ITAT) 1671], the Income Tax Appellate Tribunal (ITAT), Pune Bench, had held that if the construction of house couldn’t be completed within 3 years, the capital gain exemption under Section 54F, is liable to be denied.
In short, the assessee must be able to provide proof to the Income Tax Authorities that the construction of the house has begun and has been completed within the said time frame of 3 years, as per Section 54 of the Income Tax Act in order to avoid additional tax liabilities arising out of builder’s faults.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates.
