MUMBAI: A recent ruling by the Income Tax Appellate Tribunal (ITAT) may prove beneficial for taxpayers engaged in under-construction or redevelopment projects. The ITAT determined that tax relief on capital gains cannot be denied solely because the final conveyance deed is executed after the stipulated period, provided the taxpayer has established enforceable rights in a specific residential property and made the investment within the required timeframe.
According to Section 54 of the Income-tax (I-T) Act, taxpayers can receive capital gains relief if they reinvest funds from the sale of a house into another residential property.
The ITAT has approved a ₹2 crore deduction for the taxpayer related to capital gains from the sale of a residential property during the 2013-14 financial year. The taxpayer, represented by a legal heir, argued that he invested in a redevelopment project by signing an agreement in January 2014, although the registered transfer deed was executed in November 2016.
Both the I-T officer and the National Faceless Appeal Centre (NFAC) denied the tax benefit, arguing that the taxpayer had merely acquired rights in a “future property” through an unregistered agreement, rather than actually purchasing a residential house within the statutory period.
Reversing this decision, the ITAT observed that the taxpayer had effectively purchased a specific flat by making a payment under the January 2014 agreement, with the later registered sale deed only formalizing that purchase.
The ITAT emphasized that Section 54 is intended as a supportive measure to stimulate investment in residential housing and should be interpreted liberally. They referenced previous rulings from the Supreme Court and various high courts, affirming that acquiring substantial rights in a specific flat can count as a purchase, even prior to formal conveyance.
Additionally, the ITAT permitted the taxpayer to claim the entire ₹16.24 lakh spent on legal, brokerage, and consultancy fees incurred during the sale of his old house. Since he had paid the full amount, the deduction could not be limited merely because he owned only a 49% share of the old property.
In this instance, the tax tribunal also upheld the tax department’s choice to apply clubbing provisions to the taxpayer. Essentially, clubbing provisions prevent taxpayers from minimizing their tax liabilities by transferring assets to relatives (such as spouses) without consideration. Since the taxpayer had gifted a portion of the old property to his wife prior to its sale, the capital gains from her share were taxable under his name. However, the ITAT stated that if those gains are taxed as the husband’s income, he should also receive the Section 54 tax exemption to which the wife would have been eligible. The tax department cannot shift only the tax liability while denying the associated tax benefit.
