A recent ruling by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has come as a major relief for taxpayers who invest their capital gains in a house but face delays in getting possession because of the builder.
The tribunal held that a taxpayer cannot be denied tax exemption under Section 54F of the Income Tax Act merely because possession of the residential property was delayed due to reasons beyond their control, provided the investment was made within the prescribed timelines.
The ruling is particularly relevant for homebuyers who have sold assets such as shares and invested the proceeds in a residential property to save capital gains tax.
Under Section 54F, taxpayers who earn long-term capital gains from selling assets other than a residential house can claim tax exemption by investing the sale proceeds in a residential property.
The investment must be made within two years for purchasing a ready home or within three years for constructing one.
The ITAT has now clarified that if possession is delayed because of a dispute or delay on the builder's part, the exemption should not be denied merely because the taxpayer did not physically occupy the property within the stipulated period.
"If a taxpayer has made a bona fide investment, acquired identifiable rights in the property and the delay in possession is beyond the taxpayer's control, exemption should not be denied merely on a technical possession test," said Riaz Thingna, Partner-Tax, Grant Thornton Bharat.
Tax experts caution that while the ruling favours genuine taxpayers, they should maintain a robust paper trail to establish that the delay was entirely attributable to the developer.
Documents that should be retained include:
Allotment letter and builder-buyer agreement.
Proof of payments such as bank statements, cheques and receipts.
Construction-linked demand letters and invoices.
Registered sale deed, wherever applicable.
Email, SMS or other communication with the builder regarding delayed possession.
Photographs showing construction progress.
Project status reports, RERA registration details, complaints filed with RERA, legal notices or regulatory orders, if any.
"The communication trail with the builder, including emails and messages, can help establish that the delay was beyond the buyer's control," said Nitin Mohan Kashyap, Director, Coopers Tax Consulting.
The tribunal also clarified another important issue involving the Capital Gains Account Scheme (CGAS).
If taxpayers park their capital gains in a CGAS account while awaiting investment, the amount cannot be taxed in the year the capital gains arise merely because it remains unutilised.
Under Section 54F(4), any tax consequence would arise only after the expiry of the prescribed three-year period if the funds remain unutilised.
According to Dipesh Jain, Partner, Tax Practice, Economic Laws Practice (ELP), the ITAT has treated the CGAS as a procedural safeguard rather than a rigid condition where the taxpayer has already invested the capital gains in a residential property within the statutory timelines.
However, experts warn that taxpayers who neither invest the money within the stipulated period nor deposit it in a CGAS account risk losing the exemption.