Telangana High Court Upholds Capital Gains Tax Exemption Despite Delay In Villa Registration

The Telangana High Court has held that a taxpayer who invested capital gains in a residential villa under a joint development agreement cannot be denied tax exemption merely because the developer delayed construction and execution of the sale deed.

The court observed that delays beyond the assessee's control cannot defeat the benefit intended under the law.

A Division Bench of Justice P. Sam Koshy and Justice Narsing Rao Nandikonda allowed the appeal filed by non-resident Indian Sudhakar Reddy Mettu. It set aside the Income Tax Appellate Tribunal's order denying him the exemption.

"If, after the payment for the residential property has been made, and merely due to delay, for reasons beyond the control of the assessee, the registered sale deed has not been executed and registered in favour of the assessee, the Department cannot deny the benefit of the provision to the assessee.", the court ruled.

The Income Tax Department reopened the assessee's assessment for the 2017-18 assessment year after finding that he had not filed an income tax return despite earning long-term capital gains under a joint development agreement. The assessee claimed exemption on the ground that he had invested those gains in a residential villa under the agreement.

The tax authorities rejected the claim because the villa had not been completed or registered in the assessee's name within the prescribed period. The tribunal upheld that decision.

Before the High Court, the assessee contended that disputes among the developer's partners delayed completion of the project and that the delay was entirely beyond his control.

The Income Tax Department argued that construction was completed only in November 2023, the villa had still not been registered in the assessee's name and the assessee had not taken adequate steps to secure completion of the project.

Accepting the assessee's contention, the court held that the exemption is a beneficial provision that must be interpreted liberally. It observed that the assessee had already invested the capital gains in the residential property and could not be deprived of the benefit because of delays attributable to the developer.

"Section 54F of the Act in essence, is a beneficial piece of provision and has to be liberally construed and the fact that the partners of the developers delayed in constructing the residential property of the assessee would not disentitle the appellant from claiming the benefit of Section 54F because the assessee has already shown on record that the capital gains realized from the sale of the long term assets was parted off by the assessee and subsequently invested to construct the residential property. Therefore, the exemption under Section 54F of the Act cannot be denied by the Department.", the court ruled.

The court also relied on the Karnataka High Court's decision in CIT v. C. Gopalaswamy. It noted that an assessee who has invested capital gains in a residential property cannot be denied the benefit merely because construction remains incomplete or the sale deed is not registered within the prescribed period for reasons beyond the assessee's control.

Allowing the appeal, the court set aside the tribunal's order and held that the assessee was entitled to the exemption.

For Appellant: Advocate Mytri Indukuru,

For Respondent: Advocate Vijhay K. Punna