A Bengaluru ITAT bench has granted complete relief to a landowner who faced a long-term capital gains tax demand exceeding ₹8 crore after entering into a joint development agreement (JDA) with a builder. The tribunal allowed capital gains exemption on 23 flats received under the redevelopment project, treating all units as a single residential house despite the tax department's argument that each flat should be treated separately. The ruling, based on the law as it stood before amendments introduced by the Finance (No. 2) Act, 2014 and Section 45(5A), is largely confined to older redevelopment agreements executed before these changes.
The ITAT Bangalore has issued a landmark ruling in Pavan Kumar Agarwal v. DCIT, Central Circle-2(3), Bengaluru that clarifies Section 54 exemption for taxpayers selling multiple residential houses in one financial year. The key question before the Tribunal was whether exemption under Section 54 should be computed separately for each residential house transferred, or whether the capital gains from all residential houses sold during the year should be clubbed together and restricted to investment in only one residential house. The Tribunal held in favour of the assessee, establishing that capital gains under Sections 45 and 48 must be computed separately for each capital asset transferred, with every residential house sold being a separate capital asset and every transfer constituting a separate source of capital gain. The ruling is particularly useful for property sellers, landowners receiving flats under Joint Development Agreements, families selling inherited residential units, and taxpayers facing capital gains scrutiny.
The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that taxpayers cannot be denied Section 54 exemption merely because construction of a new residential house was delayed beyond the prescribed three-year period due to the Covid-19 pandemic. According to an ET Wealth report, the Tribunal held that pandemic-related delays cannot be treated as negligence and allowed the capital gains exemption claim. The ruling establishes that extraordinary circumstances during the pandemic, including nationwide lockdowns, labour shortages, and construction material supply disruptions, should not disqualify genuine investment efforts. The Tribunal observed that Section 54 is a beneficial provision intended to encourage investment in residential housing and should therefore receive a liberal interpretation, noting that the law primarily requires reinvestment of 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 case involved Rajan from Ambattur, Chennai, who sold his residential property in Noida on 9 July 2019 for ₹48 lakh. After claiming the indexed cost of acquisition, he computed long-term capital gains of ₹5.59 lakh. Rajan purchased a 1,851 sq. ft. plot in Ambattur, Chennai, for ₹94.38 lakh with the intention of constructing a residential house and availed a loan of ₹49.85 lakh to finance the purchase. However, Covid-19 pandemic and nationwide lockdown disrupted construction activity, leading to labour shortages and delays that prevented completion within the statutory three-year period. The Tribunal noted that the delay resulted entirely from extraordinary circumstances caused by the pandemic, which were beyond the taxpayer's control and should not be treated as ordinary commercial delays.
The Assessing Officer denied the exemption claim, holding that the taxpayer had only invested in a vacant plot and failed to establish that construction was completed within the prescribed three years under Section 54. The officer also noted that unutilised capital gains had not been deposited under the Capital Gains Account Scheme. Additionally, ₹7.42 lakh was added to the taxpayer's income under Section 56(2)(x) as the stamp duty valuation of the property purchased in Chennai exceeded the actual purchase price by around 7.86%. The Commissioner of Income Tax (Appeals) upheld the assessment, prompting the taxpayer to challenge the decision before the ITAT. However, 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, and directed the tax department to delete the addition.
The Chennai ITAT held that Section 54 is a beneficial provision intended to encourage investment in residential housing and should therefore be interpreted liberally. The Tribunal observed that exemption should not be denied merely because certain finishing works extended beyond the three-year limit, particularly when the taxpayer had already purchased the land, obtained necessary approvals and substantially completed construction. The ruling establishes that genuine homebuyers should not lose capital gains exemption merely because construction was delayed by extraordinary circumstances beyond their control, even if the house was not completed within the statutory three-year period. The Bangalore ruling further clarifies that the 2014 amendment restricting investment to "one residential house in India" applies with reference to the capital gain arising from each transferred residential house, not all gains from multiple houses sold during the year must be clubbed together. The latest ruling on JDA cases provides additional clarity that multiple flats received under a single redevelopment project can be treated as one residential house for exemption purposes, though this applies only to pre-2015 legal regime cases.
