The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that an assessee cannot be denied exemption under Section 54F of the Income Tax Act merely because the conveyance deed for the new residential property was executed after the statutory period, where the allotment had been made within time and the delay was attributable to regulatory and project-related issues beyond the assessee’s control. 

The Bench of Beena Pillai (Judicial Member) and Jagadish (Accountant Member) partly allowed the assessee’s appeal and directed the Assessing Officer to grant deduction under Section 54F in accordance with law. 

The appellant/assessee had not originally filed a return of income for Assessment Year 2018-19. Subsequently, based on information available with the Income Tax Department regarding the sale of an immovable property, reassessment proceedings were initiated under the newly introduced Section 148A mechanism.

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In response, the assessee explained that he was merely a confirming party to the sale transaction involving an immovable property and had received Rs.1.10 crore as his share from the total sale consideration of Rs.5.35 crore. According to the assessee, the amount represented long-term capital gains arising from the transfer of his rights in the property and had been fully invested in acquiring a new residential house, thereby qualifying for exemption under Section 54F. 

However, the Assessing Officer rejected the exemption claim on the ground that the assessee had failed to furnish adequate documentary evidence proving the purchase of the new residential house. Consequently, the exemption of Rs.1.03 crore claimed under Section 54F was disallowed and the income was assessed accordingly. The National Faceless Appeal Centre (NFAC) upheld the disallowance, observing that the residential flat was not completed and ownership had not vested in the assessee within the prescribed period under Section 54F. 

Before the ITAT, the assessee raised an additional legal ground contending that the transfer of the capital asset had actually taken place through a conveyance deed executed on 31 March 2017, which pertained to Assessment Year 2017-18, and therefore the capital gains could not have been taxed in Assessment Year 2018-19.

The Tribunal admitted this additional ground after observing that it involved a pure question of law arising from facts already available on record and did not require any fresh evidence. Relying on the Supreme Court’s decisions in National Thermal Power Co. Ltd. v. CIT and Jute Corporation of India Ltd. v. CIT, the Bench held that such additional legal grounds could be entertained for determining the correct tax liability. 

The assessee submitted that he had acquired development rights over a parcel of land in 2012 by paying consideration to the developer. These rights constituted a capital asset.

When the developer subsequently sold the larger property to another developer under a registered conveyance deed, the assessee surrendered his rights as a confirming party and received Rs.1.10 crore.

Instead of receiving cash, the amount was adjusted against the purchase price of a residential flat in the redevelopment project. An allotment letter dated 10 June 2017 specifically recorded that the amount payable to the assessee had been adjusted towards the purchase consideration of a flat valued at Rs.1.40 crore.

The assessee argued that although the registered sale deed for the flat was executed only on 31 March 2021, the delay occurred because of regulatory approvals, amendments to sanctioned building plans and RERA-related compliance, all of which were beyond his control. Therefore, the benefit under Section 54F could not be denied merely due to delayed registration. 

The Tribunal found that the Revenue did not dispute the genuineness of the allotment letter dated 10 June 2017, which clearly established that the entire consideration of Rs.1.10 crore had been appropriated towards acquiring the new residential property.

The Bench further observed that the Assessing Officer had rejected the exemption solely because the registered conveyance deed had not been produced within the prescribed period and not because there had been any violation of the substantive conditions contained in Section 54F. 

The Tribunal placed significant reliance on CBDT Circular No. 471 dated 15 October 1986, which clarifies that where a residential flat is allotted under a construction scheme, the date of allotment is the relevant date for determining acquisition of the property for tax purposes.

According to the Tribunal, once the allotment letter had been issued and the consideration stood adjusted towards the purchase price, the subsequent delay in execution of the conveyance deed could not defeat the assessee’s statutory entitlement.

The Bench also accepted the assessee’s explanation that the redevelopment project was delayed because of regulatory approvals and amendments under RERA, leading to postponement of the execution of the registered sale deed.

The Tribunal observed that where such delays occur due to circumstances beyond the assessee’s control, they cannot be used as a basis for denying the benefit available under Section 54F, particularly when the investment in the new residential house had already been made through allotment and adjustment of consideration. 

The Mumbai ITAT held that the exemption under Section 54F could not be denied merely because the conveyance deed for the new residential property was executed at a later date.

The Tribunal directed the Assessing Officer to compute and allow the deduction under Section 54F in accordance with law. 

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