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Facts
The assessee sold a residential property for Rs. 83,00,000 and claimed deduction under Section 54 for investment in a new residential flat. The Assessing Officer (AO) and CIT(A) disallowed the claim, noting the absence of a registered sale deed or construction agreement within the statutory period and questioning the validity of the investment as 'purchase' versus 'construction'. Payments were made to Arcadia Developers, and funds were deposited in a capital gain account, but the AO found some payments fell outside the prescribed two-year period for 'purchase'.
Held
The tribunal, upon reviewing additional documents like the allotment letter, construction agreement, and registered sale deed, held that the investment in an under-construction project should be treated as 'construction', allowing for an extended three-year period for compliance under Section 54. It emphasized the beneficial nature of Section 54 and substantial compliance, but remanded the issue back to the AO for verification and reconciliation of the payment trail with the newly submitted documents to ensure accuracy.
Key Issues
Whether the assessee is eligible for deduction under Section 54 for investment in an under-construction residential property, considering the classification of the investment as 'purchase' or 'construction' and the timelines for compliance, given the submission of new documentary evidence.
Sections Cited
143(3), 143(2), 142(1), 129, 271(1)(b), 54, 133(6)
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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
This appeal by the assessee is directed against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”], dated 26.03.2025, , arising from the assessment framed by the Deputy Commissioner of Income-tax, Circle-1(3), Vadodara [hereinafter referred to as “Assessing Officer or AO”] under section 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “the Act”], vide order dated 13.12.2017 for Assessment Year 2015-16.
Facts of the Case 2.1 The assessee, an individual, filed his return of income on 31.10.2015 declaring total income of Rs.21,21,040/-. The case was selected for limited scrutiny under CASS. A notice under section 2 143(2) was issued on 19.09.2016 to which the assessee sought adjournment on 26.09.2016. Thereafter, notice under section 142(1) along with a detailed questionnaire was issued on 11.01.2017 fixing the hearing on 23.01.2017. Subsequently, another notice under section 142(1) read with section 129 dated 19.06.2017 was issued fixing the hearing on 29.06.2017. The Assessing Officer recorded that neither the assessee nor his authorised representative attended or furnished submissions in response. A further notice under section 142(1) dated 27.10.2017, along with show cause for initiation of penalty under section 271(1)(b), fixed the hearing on 07.11.2017. On that occasion, the authorised representative attended, and the matter was discussed. The Assessing Officer required the assessee to produce the purchase deed of the new residential house for which deduction under section 54 was claimed, but no submission was filed on the date fixed.
2.2 The Assessing Officer noted that during the year the assessee had sold a residential house property for Rs. 83,00,000/- on 27.02.2015 and claimed deduction under section 54 of an equal amount, by treating the entire consideration as capital gain without claiming any cost of acquisition. It was the case of the assessee that Rs.11,00,000/- was paid in advance to Arcadia Developers and the balance amount of Rs.72,00,000/- was deposited in Capital Gain Account No. 29970100009516 with Bank of Baroda, New Sama Road, Vadodara.
2.3 To verify the claim, notice under section 133(6) was issued to Bank of Baroda on 30.11.2017 for the statement of the capital gain account. On perusal of the bank statement, the Assessing Officer found that a payment of Rs.15,00,000/- had been made on 31.03.2017, which according to him fell beyond the prescribed period 3 of two years from the date of transfer for purchase under section 54. Notice under section 133(6) was also issued to Arcadia Developers on 23.11.2017 calling for, inter alia, the sale deed or construction agreement in respect of Flat No. B-602, Nilamber Bellissimo, and the ledger of the assessee. In reply dated 30.11.2017 Arcadia Developers confirmed that no sale deed or construction agreement had been executed till date. A further notice under section 133(6) sought the committed date of possession and a complete ledger, in response to which Arcadia Developers, vide reply dated 06.12.2017, furnished the ledger of the assessee and a possession letter.
2.4 From the ledger maintained by Arcadia Developers, the Assessing Officer tabulated the payments as follows: Rs.11,00,000/- on 16.10.2015, Rs.40,00,000/- on 20.10.2015, Rs.12,00,000/- on 18.05.2016, Rs.5,00,000/- on 28.10.2016, Rs.15,00,000/- on 31.03.2017, Rs. 8,41,800/- on 27.06.2017 and Rs. 1,37,800/- on 27.06.2017, aggregating to Rs.92,79,600/-. On examining the possession letter, the Assessing Officer observed that possession was stated to have been handed over on 05.01.2017 only for carrying out furniture work, and that the sale deed or construction agreement was to be executed after full payment. It was further noted that the Vadodara Urban Development Authority issued the occupancy or completion certificate to Arcadia Developers on 30.06.2017. The Assessing Officer therefore doubted how the assessee could have occupied or possessed the flat on 05.01.2017 when the entire project of towers A to D was certified complete only on 30.06.2017.
2.5 A final show cause was issued stating that despite opportunity given vide order-sheet entry dated 20.11.2017, no purchase deed or construction agreement had been produced. Based on information under section 133(6) from Arcadia Developers that no such agreement 4 existed and that Arcadia Developers had not carried out any construction on behalf of the assessee, the assessee was required to show cause why the deduction under section 54 should not be disallowed.
2.6 The Assessing Officer concluded that in the absence of a purchase deed or construction agreement, the ownership of the house could not be established and the payments were not shown to be relatable to the purchase of a residential house. Referring to the statutory conditions of section 54, the Assessing Officer held that the assessee had neither purchased a house within one year before or two years after the transfer nor constructed a house within three years after the transfer. The deduction of Rs.83,00,000/- claimed under section 54 was therefore disallowed.
2.7 The assessee preferred an appeal before CIT(A). The CIT(A) recapitulated the Assessing Officer’s findings that there was no sale deed or construction agreement with Arcadia Developers, that only a possession letter dated 05.01.2017 had been issued for furniture work, and that the occupancy or completion certificate by VUDA was dated 30.06.2017. The CIT(A) held that the assessee had neither purchased a new house nor constructed one within the prescribed time and that no documentary evidence of purchase or construction had been produced despite opportunity. The deduction claimed under section 54 of Rs.83,00,000 was therefore disallowed and the action of the Assessing Officer was confirmed. The appeal of the assessee was dismissed.
2.8 The assessee, being aggrieved, is in further appeal before us and has raised the following grounds:
5 1. The Learned Commissioner of Income Tax (Appeals) erred in disregarding the submissions furnished during the course of appellate proceedings vide various responses filed on following dates: 1) 06.08.2018 2) 16.01.2023 3) 19.05.2023 4) 18.12.2023 2. The Learned Commissioner of Income Tax (Appeals) erred in confirming the disallowances of deduction u/s 54 of Rs.83,00,000/- .
The Learned Commissioner of Income Tax (Appeals) erred in not considering the detailed submissions as well as case laws cited in the submissions filed during the course of appellate proceedings.
4. The appellant craves the right to add to or alter, amend, substitute, delete or modify all or any of the above grounds of appeal
3. During the course of hearing before us, the Authorised Representative of the assessee reiterated the sequence of facts and submitted that the Assessing Officer, though issued notices under section 133(6) of the Act to both the Bank of Baroda as well as to Arcadia Developers, failed to appreciate the evidences furnished in response. It was pointed out that the ledger account of the assessee as maintained by Arcadia Developers clearly reflected substantial payments aggregating Rs.92,79,600/-. The Authorised Representative contended that without examining the matter in its correct legal perspective and without considering the substantive compliance of the statutory conditions, the Assessing Officer proceeded to disallow the entire claim of deduction under section 54 of the Act. The Authorised Representative further pointed out that the assessee had made substantial payments towards acquisition of the new residential property well within the prescribed period of two years from the date of transfer of the original asset. It was emphasised that the consideration was paid in stages commencing from October 2015 onwards, which fell squarely within the statutory window, and that the aggregate payments clearly demonstrated substantial compliance with the conditions laid down under section 54.
6 3.1 In reply, the Departmental Representative placed strong reliance on the order of the Assessing Officer. It was submitted that the Assessing Officer had correctly applied the provisions of section 54 of the Act, which specifically require either the purchase of a residential house within one year before or two years after the date of transfer of the original asset, or the construction of a residential house within three years from such date. The Departmental Representative emphasised that in the present case, no registered sale deed or construction agreement had been executed in favour of the assessee within the statutory period, and that the possession letter produced was only for limited purposes of carrying out furniture work and could not confer ownership. It was thus contended that the assessee failed to fulfil the clear statutory mandate of section 54, and therefore the Assessing Officer was justified in disallowing the claim of deduction.
3.2 The matter was earlier put up for clarification on 18.09.2025 for want of agreements, as the absence of such documents had weighed with the lower authorities while disallowing the claim. In response, the assessee placed on record copies of the Sale Deed dated 15.12.2017, the Construction Agreement dated 13.12.2017, and the Allotment Letter dated 20.10.2015, along with CBDT Circular No. 471 dated 15.10.1986 and Circular No. 672 dated 16.12.1993. The appeal was thereafter heard on 07.10.2025, when the AR explained the contents and relevance of these documents. These papers, which form part of the paper book, were not duly considered by the Assessing Officer or by the Commissioner (Appeals), but they are material for determining the assessee’s eligibility for deduction under section 54.
We have carefully considered the rival submissions, the orders of the lower authorities, and the material available on record. The limited controversy before us revolves around the allowability of 4.1 On an appraisal of the rival contentions and after considering the additional documents placed on record, it emerges that the assessee had invested in a residential unit in the project of Arcadia Developers, which, at the relevant point of time, was under construction. The allotment letter dated 20.10.2015 evidences the initial right created in favour of the assessee, while the construction agreement dated 13.12.2017 for the amount of Rs. 62,16,000/- and the registered sale deed dated 15.12.2017 Rs. 26,64,000/- establish that the assessee had in fact entered into binding contractual arrangements with the developer for acquisition of the flat. In such circumstances, the applicable statutory provision has to be construed in the light of the distinction recognised by section 54 of the Act between “purchase” of a ready-built residential house and “construction” of a residential house through participation in an ongoing project. For a case of purchase, the statute prescribes a period of two years from the date of transfer, whereas in cases of construction, the time limit extends to three years from the date of transfer. Judicial authorities as well as CBDT Circular Nos. 471 and 672 have clarified that allotment of flats in under-construction projects falls within the ambit of “construction” for the purposes of section 54, and not mere “purchase.”
4.2 In this regard, guidance is available from Circular No. 672 dated 16.12.1993 issued by the CBDT, which, though rendered in the context of allotments by the Delhi Development Authority, lays down a principle of general application. The circular clarifies that where an assessee acquires a flat in an under-construction scheme and makes payments linked to construction, such investment is to be treated as 8 “construction” of a residential house for the purposes of section 54 and not as a “purchase.” This rationale applies equally to cases of private builders and cooperative societies, as the essence of the transaction remains participation in the construction of the property rather than acquisition of a ready-built house.
Judicial precedents have consistently held that where the assessee acquires a flat in an under-construction project from a builder, the investment is to be treated as “construction” and not “purchase. Turning to the facts, the assessee has placed material to show that payments to the builder commenced in October 2015 and possession, though limited, was handed over in January 2017. Further, the builder obtained an occupancy certificate on 30.06.2017. These facts prima facie indicate that the assessee has made substantial investment within the statutory period and construction of the residential unit has been completed within three years.
4.3 However, an important aspect remains to be verified. It is well settled that ownership in immovable property is not perfected merely by payment of consideration or symbolic possession; execution and registration of a conveyance deed or construction agreement, together with reconciliation of payments, is indispensable under the Transfer of Property Act and the Registration Act. In the present case, the assessee has now placed on record copies of the allotment letter dated 20.10.2015, the construction agreement dated 13.12.2017, and the registered sale deed dated 15.12.2017, which were not before the Assessing Officer or the Commissioner (Appeals). As these documents directly establish the contractual and legal rights of the assessee in the residential unit, a limited verification is necessary to reconcile the actual dates of execution with the corresponding payments reflected in the bank statements and the capital gain account.
9 4.4 We are mindful that section 54 is a beneficial provision designed to encourage investment in residential housing and must be interpreted liberally in favour of the assessee, so long as there is substantial compliance with the statutory conditions. On the facts, the requirements of allotment, substantial payment, and possession stand demonstrated, while the registration aspect is now supported by documentary evidence. Only reconciliation of these documents with the payment trail remains to be undertaken.
4.5 In view of the above, and in the interest of natural justice, we set aside the impugned issue to the file of the Assessing Officer with the limited direction to verify the dates and details of the construction agreement and sale deed in light of the bank statement and the capital gain account. Upon such verification, the Assessing Officer shall allow the exemption under section 54, treating the assessee’s investment as “construction” of a residential house within the extended period of three years, in accordance with law, after affording reasonable opportunity of hearing to the assessee.
In the result, the appeal of the assessee is allowed for statistical purposes with the above directions.
Order pronounced in the Court on 9th October, 2025 at Ahmedabad.