Delay In Construction Due to ‘This’ Reason? ITAT Says Capital Gains Tax Benefit In Building New Home Cannot Be Denied

Chennai tribunal rules that genuine homebuyers should not lose capital gains exemption merely because construction was delayed by extraordinary circumstances beyond their control.

A taxpayer who sold a residential property and invested the capital gains in building a new home cannot be denied tax exemption under Section 54 of the Income Tax Act solely because construction was delayed beyond the prescribed three-year period due to the Covid-19 pandemic, the Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled.

The ruling came in favour of Rajan, a resident of Ambattur, Chennai, whose claim for tax exemption was initially rejected by the Income Tax Department despite having invested the sale proceeds in constructing a new residential house.

Rajan sold his residential property in Noida on July 9, 2019 for ₹48 lakh. After adjusting the indexed cost of acquisition, he calculated a long-term capital gain (LTCG) of ₹5.59 lakh. To claim exemption under Section 54, he purchased a 1,851 sq. ft. plot in Chennai for ₹94.38 lakh, partly financed through a housing loan, and began constructing a house.

However, construction was delayed after the Covid-19 pandemic disrupted labour availability, supply of building materials and government approvals during nationwide lockdowns. As the house was not completed within the statutory three-year period, the Assessing Officer rejected the Section 54 claim, stating that the taxpayer had merely purchased a vacant plot and failed to prove timely completion of construction. The officer also noted that the unutilised capital gains had not been deposited under the Capital Gains Account Scheme and disallowed the exemption.

Additionally, the tax department added ₹7.42 lakh to Rajan’s taxable income under Section 56(2)(x) because the stamp duty value of the property exceeded its purchase price by approximately 7.86%.

Rajan challenged the assessment before the ITAT, arguing that the investment in the residential project was genuine and that the delay resulted entirely from extraordinary circumstances caused by the pandemic.

The Chennai ITAT accepted the taxpayer’s arguments. The Tribunal observed that Section 54 is a beneficial provision intended to encourage investment in residential housing and should therefore receive a liberal interpretation. It held that the law primarily requires taxpayers to invest capital gains in purchasing or constructing a residential house within the prescribed period and does not make possession of a completion certificate a mandatory condition for claiming the exemption.

The Tribunal also took note of the unprecedented disruption caused by Covid-19, observing that lockdowns, labour shortages and delays in approvals were beyond the taxpayer’s control and should not be treated as ordinary commercial delays.

On the addition made under Section 56(2)(x), the Tribunal observed that the difference between the purchase price and the stamp duty value was only 7.86%, which falls within the 10% safe harbour tolerance introduced by the Finance Act, 2020. It directed the tax department to delete the addition of ₹7.42 lakh.

Accordingly, the Tribunal directed the Assessing Officer to allow the Section 54 exemption of ₹5.59 lakh and remove the additional tax demand under Section 56(2)(x), giving relief to the taxpayer.

Disclaimer: This judgment is based on the specific facts of the case. Tax treatment may differ depending on individual circumstances, and taxpayers should seek professional advice before making tax-related decisions.