Capital Gains Exemption u/s 54F Allowable for Purchase of Residential Property Using Sale Proceeds of Land, as Construction Agreement Was Signed Prior to Sale: ITAT [Read Order]
The bench noted that in construction situations, the date of registration is not the deciding issue; rather, it is important to determine if the construction is finished within three years of the original asset's sale date, which was properly followed in this instance.
![Capital Gains Exemption u/s 54F Allowable for Purchase of Residential Property Using Sale Proceeds of Land, as Construction Agreement Was Signed Prior to Sale: ITAT [Read Order]](https://images.taxscan.in/h-upload/2025/06/19/2050452-exemption-site-img.webp "Capital Gains Exemption u/s 54F Allowable for Purchase of Residential Property Using Sale Proceeds of Land, as Construction Agreement Was Signed Prior to Sale: ITAT [Read Order]")
The Delhi Bench of the Income Tax Appellate Tribunal ( ITAT ) has held that capital gains exemption under Section 54F of the Income-tax Act, 1961 is allowable when the assessee invests sale proceeds from a capital asset into a residential property, even if the construction agreement for the new property was entered into prior to the sale. The assessee, Avichal Kulshrestha had sold a...
The Delhi Bench of the Income Tax Appellate Tribunal ( ITAT ) has held that capital gains exemption under Section 54F of the Income-tax Act, 1961 is allowable when the assessee invests sale proceeds from a capital asset into a residential property, even if the construction agreement for the new property was entered into prior to the sale.
The assessee, Avichal Kulshrestha had sold a plot of land in Faridabad for ₹86 lakh on September 26, 2016, and claimed exemption under Section 54F for investment in a flat booked with Experion Developers Pvt. Ltd. in Gurgaon.
The assessee had initially filed his return declaring a total income of ₹64.15 lakh, which was later revised to ₹24.07 lakh. The revised return included a significantly higher claim of exemption under Section 54F, ₹61.41 lakh, as against ₹21.33 lakh in the original return.
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During scrutiny, the Assessing Officer observed that the residential flat, registered in the assessee's name only on 21.12.2018, whereas the land was sold on 26.09.2016. As per the AO, the assessee was required to acquire the new property within two years, i.e., by 25.09.2018, to be eligible for exemption. Consequently, the AO denied the Section 54F claim, treating it as non-compliant with the required timelines.
Additionally, the AO made an addition of ₹8.25 lakh under Section 69B for the difference in the value recorded in the sale deed (₹92.43 lakh) and the value shown in the revised ITR (₹1 crore+), treating it as unexplained investment.
Upon appeal, both the CIT(A) and the AO denied relief, relying on earlier case law and arguing that since the registration occurred after the two-year period, the exemption was not valid. However, the ITAT noted that the assessee had entered into a construction agreement with Experion Developers on 14.03.2013, much before the sale, and had paid substantial amounts toward construction using both loan and sale proceeds.
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The bench noted that “The law is, when the assessee sold the property the sale consideration should be invested on the new property, however, the relevant property may be under consideration. What is relevant is, the assessee should have invested in the new property out of the sale proceeds and the new property should be constructed within three years from the date of sale of the property under consideration.”
“In the given case, assessee has sold the property on 26.09.2016 and assessee should have invested and acquired the property on or before 25.09.2019, since the provisions of section 54F allows for construction of the property within a period of three years. Therefore, in this case, assessee has invested sale consideration in the above said property and also taken the possession as well as executed sale deed on 21.12.2018 before the statutory period allowed. Therefore, the claim of the assessee is proper as per law. The tax authorities disallowed the claim of the assessee on the basis of purchase instead of construction. Therefore, we are inclined to allow ground raised by the assessee”, observed the bench of Vikas Awasthy and S. Rifaur Rahman.
Accordingly, the exemption under Section 54F was allowed.
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