PALANI VEL RAJAN,CHENNAI vs. ITO, INTL TAXN WARD 2(1), CHENNAI, CHENNAI

The brief facts of the case are that the assessee is an individual. For the A.Y.2020-21, the assessee had not filed his return of income u/s.139 of the Act. Based on information available on record indicating that income chargeable to tax had escaped assessment, the AO initiated reassessment proceedings u/s.147 of the Act by issuing a notice u/s.148 of the Act. In response thereto, the assessee filed his return of income on 08.05.2024. Thereafter, statutory notices u/s.143(2) and 142(1) of the Act were issued and duly served upon the assessee.

In compliance with the notice issued u/s.142(1) of the Act, the assessee furnished a reply dated 23.01.2025 along with copies of the sale deed relating to the property sold and the purchase deed pertaining to the property acquired by him. Upon examination of the documents so furnished, the AO observed that while computing long-term capital gains arising from the sale of an immovable property, the assessee had claimed exemption of Rs.5,59,239/- u/s.54 of the Act. According to the AO, the assessee had invested the sale proceeds in a vacant plot of land, which by itself did not qualify for exemption u/s.54 of the Act. The AO further noted that the assessee had not deposited the unutilised capital gains in the Capital Gains Account Scheme as prescribed under the Act. Consequently, the AO proposed to disallow the exemption claimed u/s.54 of the Act.

In response, the assessee contended that the vacant land had been acquired for the purpose of constructing a residential house and that the construction of the residential property had been completed during the year 2022, which was within the period of three years prescribed/s.54 of the Act. However, the AO was not persuaded by the explanation and held that the assessee had failed to furnish documentary evidence substantiating completion of construction within the stipulated period. Accordingly, the AO proposed to disallow the exemption claimed u/s.54 of the Act amounting to Rs.5,59,239/-.

The assessee submitted before the AO that the Finance Act, 2020 had enhanced the permissible tolerance band u/s.56(2)(x) of the Act from 5% to 10%, effective from AY 2021-22, and that the variation in the present case was only about 7.9%, which would fall within the enhanced tolerance limit. The AO, however, rejected the contention on the ground that the amendment enhancing the tolerance limit to 10% was specifically applicable only from AY 2021-22 onwards and therefore had no application to the assessment year under consideration, namely AY 2020-21.

Pursuant thereto, the AO passed a Draft Assessment Order u/s.147 r.w.s 144C(1) of the Act proposing disallowance of exemption u/s.54 of the Act amounting to Rs.5,59,239/- and addition of Rs.7,42,251/- u/s.56(2)(x) of the Act, aggregating to a total addition of Rs.13,01,490/-. Consequently, in accordance with the provisions of section 144C(3) of the Act, the AO finalized the draft assessment order without any modification and passed the Final Assessment Order dated 22.04.2025 u/s.144C(3) r.w.s 147 of the Act, determining the total income of the assessee at Rs.21,04,320/- as against the returned income of Rs.8,02,830/-. The assessed income comprised the returned income of Rs.8,02,830/-, disallowance of exemption u/s.54 of the Act amounting to Rs.5,59,239/-, and addition u/s.56(2)(x) of the Act amounting to Rs.7,42,251/-.

Aggrieved by the above assessment order, the assessee preferred an appeal before the Ld.CIT(A). The Ld.CIT(A) vide the impugned appellate order

With regard to the disallowance of exemption u/s.54 of the Act amounting to Rs.5,59,239/-. The Ld.CIT(A) observed that the assessee had sold a property situated at NOIDA on 09.07.2019 for a consideration of Rs.48,00,000/-. After claiming indexed cost of acquisition of Rs.42,40,761/-, the resultant long-term capital gain was computed at Rs.5,59,239/-. Subsequently, the assessee purchased a plot of land measuring 1,851 sq.ft. situated in the layout known as VGN Victoria Park, Ambattur Village, Chennai, on 21.06.2019 for a consideration of Rs.94,38,249/-. The purchase was partly financed through a loan amounting to Rs.49,85,876/-.

Before the Ld.CIT(A), the assessee contended that the said plot had been acquired for the purpose of construction of a residential house and that due to the unprecedented COVID-19 pandemic and the consequential lockdown restrictions, construction activities could not commence earlier. It was submitted that mobilisation of resources commenced during May 2022 upon easing of the lockdown restrictions and that construction of the residential house was completed in August 2023. The assessee therefore pleaded that the period affected by the COVID-19 pandemic ought to be excluded while computing the time limit prescribed u/s.54 of the Act.

The Ld.CIT(A), however, rejected the contention of the assessee. The Ld.CIT(A) referred to CBDT Notification No.35/2020 dated 24.06.2020 extending the time limit for certain compliances u/s.54 to 54G of the Act upto 30.09.2020 in specified cases where the prescribed period expired between 20.03.2020 and 29.06.2020. According to the Ld.CIT(A), the assessee’s case did not fall within the ambit of the said relaxation. The Ld.CIT(A) further observed that the assessee had produced evidence showing payment of charges for building plan approval on 27.05.2022, grant of planning permission on 21.07.2022 and receipt of building permit by the end of July 2022. Since the

With regard to the second issue pertained to the addition of Rs.7,42,251/- made u/s.56(2)(x) of the Act. The assessee contended before the Ld.CIT(A) that the AO had erred in making the addition without referring the valuation of the property to the Departmental Valuation Officer in terms of the third proviso to section 56(2)(x) r.w.s 50C(2) of the Act. The Ld.CIT(A) rejected the aforesaid contention on the ground that there was no material available on record to demonstrate that any such request had been made by the assessee before the AO during the course of assessment proceedings. The Ld.CIT(A) further concurred with the AO that the enhanced tolerance band of 10% introduced by the Finance Act, 2020 was applicable only from AY 2021-22 and therefore could not be extended to AY 2020-21. Consequently, the addition u/s.56(2)(x) of the Act was sustained.

The assessee challenged the validity of the reassessment proceedings initiated u/s.147 and 148 of the Act before the Ld.CIT(A). Upon examination of the assessment records, the Ld.CIT(A) held that the AO had valid reasons to believe that income chargeable to tax had escaped assessment, particularly in view of the fact that the assessee had not filed a return of income for the relevant assessment year. The Ld.CIT(A) further recorded a finding that the statutory requirements prescribed u/s.147, 148 and 144C of the Act had been duly complied with. Accordingly, the challenge to the validity of the reassessment proceedings was rejected.

The Ld.AR, appearing on behalf of the assessee submitted that the AO and the Ld.CIT(A) erred in denying exemption u/s.54 of the Act amounting to Rs.5,59,239/- despite the fact that the assessee had invested the capital gains in acquisition of a plot of land for the purpose of construction of a residential house and the residential house was ultimately constructed thereon.

The Ld.AR argued that the authorities below failed to appreciate that section 54 of the Act is a beneficial provision enacted with the object of promoting investment in residential housing and therefore deserves liberal interpretation. It is well settled by various judicial precedents that purchase of a plot followed by construction of a residential house thereon constitutes compliance with the requirements of section 54 of the Act.

According to the Ld.AR, the Ld.CIT(A) erred in holding that the construction was not completed within three years from the date of transfer. The provision merely requires investment in construction of a residential house within the stipulated period and does not prescribe completion of construction as a mandatory condition. Courts have consistently held that substantial investment towards construction within the prescribed period is sufficient compliance and that completion certificate or occupation certificate is not a statutory requirement u/s.54 of the Act.

The Ld.AR contended that the assessee had purchased the plot on 21.06.2019 and the same was intended exclusively for construction of a residential house. Documentary evidence relating to planning approval, building permit and subsequent construction was furnished. The authorities below have not disputed the factum of construction of the residential house but have denied

The Ld.AR submitted that the Ld.CIT(A) further failed to appreciate the extraordinary circumstances arising out of the COVID-19 pandemic. The period commencing from March 2020 witnessed nationwide lockdowns, severe restrictions on movement of labour, disruption of supply chains, closure of government offices and suspension of construction activities. The delay in commencement and completion of construction was entirely beyond the control of the assessee.

The Ld.AR submitted that the Hon’ble Supreme Court in Suo Moto Writ Petition (Civil) No.3 of 2020 extended limitation periods across judicial and quasi-judicial proceedings on account of the pandemic. The principle underlying such extensions is that no person should suffer adverse legal consequences due to circumstances beyond his control caused by COVID-19. The same beneficial principle deserves to be applied while interpreting the time limits prescribed u/s.54 of the Act.

The Ld.AR further submitted that the Ld.CIT(A) erroneously restricted the benefit only to CBDT Notification No.35/2020. The said notification was intended to provide minimum statutory relief and cannot curtail the wider equitable and beneficial interpretation available u/s.54 of the Act. According to the Ld.AR that once the assessee demonstrates bona fide intention and actual construction of a residential house, exemption cannot be denied merely because the construction was completed after a marginal delay attributable to unprecedented pandemic conditions. The Ld.AR therefore submitted that the exemption u/s.54 of the Act amounting to Rs.5,59,239/- ought to be allowed in full.

With regard to the addition of Rs.7,42,251/- made u/s.56(2)(x) of the Act. The Ld.AR submitted that the assessee purchased the property for a

The Ld.AR submitted that the authorities below failed to appreciate that the Finance Act, 2020 enhanced the safe harbour tolerance limit from 5% to 10% in order to remove genuine hardships arising from minor valuation differences. The amendment is curative and remedial in nature and therefore deserves retrospective application.

The Ld.AR argued that various judicial authorities, while dealing with similar amendments u/s.50C, 43CA and 56, have consistently held that enhancement of tolerance limits is intended to remove unintended hardship and consequently has retrospective operation. The variation in the present case being only 7.86%, the transaction falls well within the subsequently recognised permissible range and therefore no addition is warranted.

Without prejudice, the Ld.AR argued that the AO failed to comply with the mandate of the third proviso to section 56(2)(x) r.w.s 50C(2). Once the assessee disputes the stamp duty valuation and contends that the adopted value exceeds the fair market value of the property, the matter ought to have been referred to the Departmental Valuation Officer for determination of the fair market value. The failure to make a reference to the DVO has resulted in denial of a valuable statutory safeguard available to the assessee and vitiates the addition made u/s.56(2)(x) of the Act. The Ld.AR submitted that the Ld.CIT(A) rejected this contention merely on the ground that no specific request was made before the AO. The statutory obligation to determine the correct fair market value cannot be defeated on technical considerations, particularly when the assessee had consistently disputed the adoption of the stamp duty valuation. Accordingly, the Ld.AR prayed for deletion of the addition of Rs.7,42,251/- made u/s.56(2)(x) of the Act.

We have heard the rival submissions, perused the orders of the lower authorities and carefully examined the material placed on record. The assessee has challenged, inter alia, the disallowance of exemption claimed u/s.54 of the Act amounting to Rs.5,59,239/- and the addition of Rs.7,42,251/- made u/s.56(2)(x) of the Act.

We shall first deal with the issue relating to the denial of exemption u/s.54 of the Act. The undisputed facts emerging from the record are that the assessee sold a residential property situated at Noida on 09.07.2019 and earned long- term capital gains of Rs.5,59,239/-. Prior to the transfer of the original asset, the assessee had purchased a plot of land on 21.06.2019 at Ambattur, Chennai, with the intention of constructing a residential house thereon. The assessee has consistently maintained before the authorities below that the said plot was acquired exclusively for the purpose of construction of a residential house and that the construction was ultimately completed during the year 2023. The authorities below have not disputed either the purchase of the plot or the eventual construction of the residential house. The exemption has been denied solely on the ground that the construction was not completed within a period of three years from the date of transfer of the original asset.

At this stage, it would be relevant to note that section 54 of the Act is a beneficial provision intended to encourage investment in residential housing and therefore deserves a liberal and purposive interpretation. It is well settled through a catena of judicial pronouncements that the expression “constructed a residential house” occurring in section 54 of the Act should not be interpreted in a narrow or pedantic manner so as to defeat the object of the provision. The provision essentially requires that the capital gains should be invested towards acquisition or construction of a residential house within the prescribed period.

In the present case, the material available on record clearly demonstrates that the assessee had purchased the plot for construction of a residential house and had thereafter obtained planning approval and building permit from the competent authorities. The subsequent construction of the residential house has also not been disputed by the Revenue. Thus, the intention of the assessee to invest the capital gains in a residential house and the actual utilization of the investment for such purpose stand established from the documentary evidence placed on record.

We further find considerable force in the contention of the assessee that the period relevant to the present case substantially overlapped with the unprecedented COVID-19 pandemic. The years 2020, 2021 and part of 2022 witnessed nationwide lockdowns, severe restrictions on movement of labour, disruption in availability of construction materials, closure or restricted functioning of government departments and widespread interruption of construction activities across the country. These circumstances were entirely beyond the control of individual taxpayers. The delay attributed to such extraordinary events cannot be equated with an ordinary commercial delay attributable to inaction or negligence on the part of the assessee.

The Ld.CIT(A) has rejected the assessee's claim by placing reliance upon CBDT Notification No.35/2020 and by observing that the assessee's case does not fall within the specific period covered by the said notification. In our considered view, such an approach is unduly restrictive. The notification merely grants a statutory extension in specified situations and cannot be interpreted so as to curtail the scope of the beneficial provision contained in section 54 of the Act. Once the assessee establishes bona fide investment in a residential project and demonstrates that the delay in completion was occasioned by extraordinary

We also find merit in the contention of the assessee that substantial compliance with the requirements of section 54 of the Act is sufficient. The assessee had acquired the plot, obtained statutory approvals and ultimately constructed the residential house thereon. The investment in the residential project is thus not in dispute. In such circumstances, denying exemption merely because the construction stood completed beyond the stipulated period, particularly when such delay substantially coincided with the COVID-19 disruptions, would defeat the very object underlying section 54 of the Act.

Having regard to the totality of facts and circumstances of the case, the beneficial nature of the provision, the undisputed investment made by the assessee towards construction of a residential house and the extraordinary circumstances arising from the COVID-19 pandemic, we are of the considered opinion that the assessee is entitled to exemption u/s.54 of the Act. Accordingly, the authorities below were not justified in disallowing the exemption claimed by the assessee. We therefore direct the AO to allow the exemption u/s.54 of the Act amounting to Rs.5,59,239/-. The grounds raised by the assessee on this issue are allowed.

We shall now advert to the addition of Rs.7,42,251/- made u/s.56(2)(x) of the Act. The facts in brief are that the assessee purchased an immovable property for a consideration of Rs.94,38,249/- whereas the value adopted by the Stamp Valuation Authority was Rs.1,01,80,500/-. The difference between the two values amounted to Rs.7,42,251/-, representing approximately 7.86% of the actual consideration. The AO brought the differential amount to tax u/s.56(2)(x) of the Act and the same has been sustained by the Ld.CIT(A).

The Courts and various Benches of the Tribunal, while considering analogous amendments u/s.50C, 43CA and 56 of the Act, have consistently taken the view that such safe harbour provisions are curative in nature and therefore deserve liberal application. The rationale behind introducing the enhanced tolerance limit is that minor variations between actual consideration and stamp duty valuation are inevitable in real estate transactions and should not automatically result in adverse tax consequences.

In the present case, the difference between the actual consideration and the stamp duty valuation works out to only about 7.86%, which falls within the tolerance limit subsequently recognized by the legislature as reasonable and acceptable. In our considered opinion, once the legislature itself has acknowledged that variations up to 10% should not invite tax consequences, the benefit of such curative amendment cannot be denied in a case where the variation is admittedly below the said threshold. Therefore, even on merits, the addition made u/s.56(2)(x) of the Act does not survive.

Considering the totality of facts, particularly the fact that the variation between the actual consideration and the stamp duty value is only 7.86%, which falls within the tolerance band of 10% recognized by the legislature to remove genuine hardship, we hold that the addition made u/s.56(2)(x) of the Act is unsustainable. Accordingly, the addition of Rs.7,42,251/- is directed to be deleted.

Since the appeal of the assessee has been allowed on merits and the substantive additions/disallowances under challenge have been deleted, the adjudication of the additional grounds raised by the assessee assailing the validity of the assumption of jurisdiction and the consequent proceedings does not survive for consideration at this stage. The said grounds have thus become merely academic in nature and any finding thereon would be of no practical consequence insofar as the present appeal is concerned. Accordingly, without expressing any opinion on the merits of the jurisdictional challenge, the additional grounds are left open to be urged and adjudicated in an appropriate case, if so warranted. Consequently, the same are not being adjudicated upon in the present proceedings.

In the result, the appeal of the assessee stands allowed.