Mumbai ITAT Allows Rs 2 Crore Tax Relief Despite Delayed Property Registration
The Income Tax Appellate Tribunal (ITAT) in Mumbai has ruled that capital gains tax relief under Section 54 of the Income-tax Act cannot be denied to a taxpayer simply because the final conveyance deed of a new property is executed after the prescribed period, provided the investment was made within the statutory timeline. The ruling secured a Rs 2 crore deduction for an unnamed taxpayer, represented by his legal heir, who had invested in a redevelopment project.
The case originated from the sale of a residential property during the financial year 2013-14. Following the sale, the taxpayer entered into an investment agreement for a redevelopment project in January 2014. However, the registered transfer deed for the new property was executed later, in November 2016.
Initially, an Income Tax officer and the National Faceless Appeal Centre (NFAC) rejected the taxpayer's claim for the Rs 2 crore tax deduction. The tax authorities argued that the taxpayer had only acquired rights in a "future property" through an unregistered arrangement and had failed to purchase a residential house within the legally prescribed timeframe.
The ITAT reversed this decision, noting that the taxpayer had effectively bought a specific flat when the payment was made under the January 2014 agreement. The tribunal clarified that the subsequent registration of the sale deed in November 2016 merely formalised the existing purchase.
According to the tribunal, Section 54 is a beneficial provision designed to encourage investment in residential housing and must be interpreted liberally. The ITAT cited precedents from the Supreme Court and various high courts, which established that acquiring substantial rights in an identifiable flat qualifies as a purchase even before a formal conveyance deed is registered.
In addition to the Rs 2 crore capital gains deduction, the ITAT allowed the taxpayer to claim a deduction of Rs 16.24 lakh for legal, brokerage, and consultancy expenses incurred during the sale of the original property. Although the tax department sought to restrict this deduction because the taxpayer only owned a 49 per cent share in the old property, the tribunal ruled that the full amount must be allowed since the taxpayer had paid the entire expense.
The tribunal also addressed the tax department's application of clubbing provisions. The taxpayer had gifted a portion of the old property to his wife before selling it, meaning the capital gains from her share were taxable in his hands to prevent tax avoidance. However, the ITAT ruled that if the husband is taxed for his wife's share of the gains, he must also receive the corresponding Section 54 tax exemption that she would have been entitled to.
