Taxpayer still eligible for capital gains exemption when delay in house construction is beyond taxpayer's control - ITAT Delhi allows Sec. 54F deduction

 In an era marked by heightened tax scrutiny, compliance with capital gains provisions requires not just timely action but also proactive risk management. A recent ruling by the Delhi Income Tax Appellate Tribunal (ITAT) in the case of Rajni Kumar offers valuable insight into the application of Section 54F of the Income Tax Act, 1961 towards capital gains exemption, where unforeseen hurdles left the assessee unable to complete the construction of a new residential property.

In the present matter, the assessee sold a capital asset on 18 May 2016 and invested the capital gains in a residential plot with Ms. Chintels India Ltd., with the bona fide intent of constructing a house within the prescribed three-year period. Despite making full payment towards the plot, persistent delays, including unresolved governmental issues over Dwarka Expressway construction, environmental restrictions, and the developer’s own defaults, the plot was never handed over to the assessee. Ultimately, the assessee was forced to surrender the rights in the original plot and reinvested the sale proceeds in another residential property.

Denying the deduction under Section 54F, the Assessing Officer and the Commissioner (Appeals) treated the transaction as non-compliant, citing lack of possession and delayed execution of agreements. However, the ITAT, after reviewing substantial documentary evidence and several judicial precedents, found that the delays and consequent impossibility of construction within the stipulated time were completely outside the assessee’s control. The ITAT emphasized that Section 54F is a beneficial provision and should be interpreted liberally in light of the scheme and intent of the law. It also acknowledged that where the assessee’s actions demonstrated clear intention to construct the residential house and substantial investment were made, merely failing to take possession or complete the construction within the prescribed time due to factors beyond the assessee’s control should not impinge upon the availability of the exemption.

Referring to Karnataka HC’s decision in Sambandam Uday Kumar and several similar judgments, the ITAT reaffirmed that bona fide investment and intention are central for securing relief under Section 54F, even if external circumstances prevent strict compliance with timelines.

This case stands as a significant benchmark for taxpayers facing project delays not attributable to their own conduct. It reiterates the need to document bona fide intent and efforts when making such investments and offers valuable comfort to those who, despite genuine compliance efforts, are prevented by uncontrollable events from meeting prescribed completion milestones. As regulatory expectations continue to tighten, the ability to demonstrate both substantial investment and diligent intent will remain critical for availing capital gains exemptions in similar cases.