The Learned Mumbai Tribunal has held that payment to builder / developer for under construction property comes under the purview of construction under section 54 of Income Tax Act for exemption from Capital Gains. Therefore, the time limit for investment is 3 years and if the amount is paid then possession of flat is also not a consideration for granting exemption. The brief details of the case is given below:

Kishore H. Galaiya v. ITO

[2012] 24 11 (Mumbai – Trib.)

Facts of the Case

The assessee along with his wife was joint and equal owner of the property being a residential flat at Mumbai which had been purchased by them in April 2002 for a consideration of Rs.21 lac. The flat was sold by them on 7-3-2006 for a consideration of Rs.45 lac in which the share of the assessee was Rs.22 lac. The assessee computed the long term capital gain from sale of the flat after deducting the indexed cost of acquisition at Rs.9.98 lac. The assessee purchased another flat jointly along with his wife for a total consideration of Rs.35 lac. The assessee had made total payment of Rs.14.62 lac till 16-2-2009. The assessee, therefore, claimed that he was entitled to claim exemption u/s.54 of the Act as the capital gain had been invested in the new residential flat. The claim for exemption was denied by the AO because the assessee:

  1. Failed to deposit the balance amount in the account in any of the specified bank as required u/s.54 and utilise the same in accordance with the scheme framed by the Government; and
  2. Could not produce evidence regarding taking possession of the new flat.

On appeal, the CIT(A) confirmed the disallowance made by the AO. Before the Tribunal, the Revenue strongly supported the orders of the authorities below.


The Tribunal noted that the assessee had booked the new flat with the builder and as per agreement, the assessee was to make payment in instalments and the builder was to hand over the possession of the flat after construction. Based on the clarification of the CBDT vide its Circular No. 472, dated 16-12-1993 read with Circular No. 471 dated, 15-10-1986 and the decision of the Mumbai Bench of the Tribunal in the case of ACIT v. Smt. Sunder Kaur Sujan Singh Gadh, (3 SOT 206), the Tribunal noted that the case of the assessee was to be considered as construction of new residential house and not purchase of a flat. Thus, the Tribunal held that in case the assessee had invested the capital gains in construction of a new residential house within a period of three years, this should be treated as sufficient compliance of the provisions of section 54. According to it, it was not necessary that the possession of the flat should also be taken within the period of three years. For the purpose, it relied on the decision of the Bombay High Court in the case of CIT v. Mrs. Hilla J. B. Wadia, (216 ITR 376).

As regards the default pointed out by the authorities below regarding non-deposit of unutilised amount of capital gain in the Capital Gain Account Scheme, the Tribunal noted the submission of the assessee that it was only due to ignorance of law and intention of the assessee was always to utilise the amount for construction of flat and the assessee had kept the amount in the savings bank account which was utilised towards the construction of flat. According to the Tribunal, this was only a technical default and on this ground alone the claim of exemption cannot be denied, particularly when the amount had been actually utilised for the construction of residential house and not for any other purpose. The view was supported by the decision of the Jodhpur Bench of the Tribunal in the case of Jagan Nath Singh Lodha v. ITO, (85 TTJ 173). The Tribunal also agreed with the assessee’s contention that the due date of filing of return of income u/s.139(1) has to be construed with respect to the due date of section 139(4) as the s.s (4) provides for the extended period for filing return as an exception to the section 139(1) and considering this, there was no default as the entire amount of capital gain had been invested within the due date u/s.139(4). For the purpose, reliance was placed on the judgment of the Punjab and Haryana High Court in the case of Ms. Jagrity Aggarwal (339 ITR 610).