Allows capital gains exemption despite delay in registration of new property

 The Hon’ble Hyderabad Income Tax Appellate Tribunal (‘Tribunal’) recently held that exemption under Section 54F of the Income-tax Act, 1961 (‘the Act’) is available even though the registration of the new residential house property occurs after the prescribed two-year period, as long as substantial investment is made in the purchase or construction of the new property within the stipulated time.

The taxpayer, a Non-Resident Individual (NRI), earned long-term capital gains from the sale of multiple plots during AY 2019-20 and invested the sale proceeds in a new residential house property. She entered into an agreement for purchase, made substantial payments, and obtained possession from the builder within the prescribed period, but the formal registration occurred after the two-year time limit due to unforeseen circumstances including COVID-19 travel restrictions. The Assessing Officer denied the exemption on grounds that the registration of the new property was delayed and claimed the taxpayer already owned more than one residential house at the time of transfer. On appeal, the CIT(A) allowed the taxpayer’s claim, recognizing that the key factor is substantial investment and intention to acquire residential property, not solely the timing of the registration. The revenue challenged this before the Tribunal.

The Tribunal upheld the decision of the CIT(A), making the following observations:

• The Tribunal emphasized that the word ‘purchase’ under Section 54F(2) is not confined to registered sale deed or even possession but has a wider connotation. Substantial investment with the intention to purchase qualifies for exemption, even if formal title transfer happens later.
• Reference was drawn to various precedents (including Supreme Court and High Court rulings) interpreting Section 54 and 54F in a liberal manner, in line with the legislative intent to encourage reinvestment of capital gains in residential property.
• The Tribunal also accepted that not all properties owned by the taxpayer at the time of transfer were “residential houses”—commercial properties do not count towards disqualification under Section 54F.
• The Tribunal directed proportionate exemption if investment in the new residential property was less than net consideration—exemption to be allowed in the same proportion as the cost of new house to the net sale consideration.

In view of the above, the Tribunal concluded that the exemption under Section 54F is allowable when substantial investment towards acquisition of the new residential property is made within the time specified by statute, even if legal registration is delayed.

This ruling reinforces the principle of liberal and purposive interpretation of exemption provisions and provides strong support for taxpayers who face technical delays beyond their control. However, eligibility for exemption should be evaluated considering actual investments and the nature of other properties held, on a case-by-case basis.