Clipped from: https://taxguru.in/income-tax/section-54-capital-gains-tax-exemption-constitutes-date-transfer.html
This article forms Part II of a series on capital gains exemption under Section 54 of the Income-tax Act, 1961, and examines the judicial interpretation of the expression “date of transfer” across varied factual situations.
The article adopts a question-and-answer format, supported by relevant judicial pronouncements, to address practical issues arising in determining the relevant date for claiming exemption under Section 54.
Q1.What is the relevance of the date for the purpose of capital gains tax exemption?
Ans: Section 54 of the Income-tax Act provides that where an individual or a Hindu Undivided Family transfers a residential house and (i) purchases another residential house within one year before or two years after the date of transfer, or (ii) constructs a residential house within three years of the date of transfer, the amount invested in such purchase or construction is eligible for deduction.
Accordingly, the date of transfer of the original residential house and the date of purchase or construction of the new residential house are critical to determining the allowability of the deduction under Section 54.
Q2.Which date of property transfer governs eligibility for exemption under Section 54?
Ans: The relevant date of transfer is the date of the agreement to sell, provided the agreement is accompanied by the handing over of possession, receipt of substantial consideration, or the creation of legally enforceable rights in favour of the purchaser. In such cases, the date of registration of the sale deed is not determinative.
In Poonam Dhananjay Sandu v. CIT (ITAT Mumbai, 2025), the assessee sold a residential flat under an agreement to sell dated 1 December 2016 and received substantial consideration. The sale deed was registered on 30 March 2017. The assessee had purchased a new residential property on 4 December 2015 and claimed exemption under Section 54. The Assessing Officer denied the exemption by treating the date of registration as the date of transfer. The Tribunal held that the agreement to sell created legally enforceable rights in favour of the purchaser and, since substantial consideration had been received, the date of the agreement constituted the relevant date of transfer for the purposes of Section 54.
Q3. What is the date of purchase or construction of a new residential house?
Ans: There is no single fixed date for determining the purchase or construction date of a new residential house. Depending on the facts of each case, it may be the date of allotment, payment, agreement, registration, possession, or completion of construction.
Section 54 emphasises the investment of sale proceeds rather than the completion of legal ownership. Since the provision uses the terms “purchase” and “construction” rather than “ownership”, executing a registered sale deed or taking physical possession is not always essential, provided the investment is made within the prescribed time limits.
Q4.When does the allotment date qualify as the purchase date?
Ans: Where a residential flat is allotted under a housing scheme, such as by the Delhi Development Authority (DDA), the date of allotment is treated as the date of purchase for the purposes of capital gains exemption. This position was clarified by CBDT Circular No. 471 dated 15 October 1986.
Further, CBDT Circular No. 672 dated 16 December 1993 extended this principle to similar schemes of co-operative societies and other institutions, treating such cases as construction for the purposes of Sections 54 and 54F, with the date of allotment as the relevant date of acquisition.
The Supreme Court, in Vembu Vaidyanathan v. PCIT (2019), held that title to the property is acquired upon issuance of the allotment letter and that payment of instalments and taking possession are merely consequential acts. Accordingly, the date of allotment was held to be the relevant date for the acquisition of the property.
Q5.When does the date of possession qualify as the date of purchase?
Ans:Where a new flat in an under-construction building is handed over to the assessee upon completion of construction, the date of possession may be treated as the date of purchase for the purpose of claiming a deduction under Section 54.
In Sunil Amritlal Shah v. ITO (ITAT Mumbai, 2024), the assessee sold a residential flat and booked a new flat under construction. Possession of the new flat was handed over upon completion of construction. The Tribunal held that the date of possession, and not the date of the purchase agreement, was the relevant date of acquisition for the purposes of Section 54.
Q6.What if the sale deed is not registered in the assessee’s favour despite payment of full consideration and taking possession?
Ans: Even without registration of the sale deed, exemption under Section 54 may be claimed if the assessee has paid the full purchase consideration and obtained possession of the property within the prescribed time.
In Shahajada Begam v. CIT (Andhra Pradesh High Court, 1988), the assessee invested the sale proceeds from her residential house in another house within the stipulated period, paid substantial consideration, and took possession, even though registration occurred later. The High Court held that she was entitled to an exemption under Section 54(1).
Q7. Is booking a flat with a builder treated as a purchase or construction for the purpose of the applicable time limit?
Ans:Booking a flat with a builder is treated as the construction of a residential house. Consequently, the applicable time limit for claiming a deduction under Section 54 is three years from the date of transfer of the original property.
This principle was affirmed by the Mumbai Tribunal in Kishore H. Galaiya v. ITO (2012).
Q8. What are the tax implications when possession of an under-construction flat is delayed due to the builder’s default?
Ans: Where the assessee has invested the entire sale consideration in an under-construction residential property within the prescribed time limits, exemption under Section 54 or Section 54F cannot be denied merely because possession is delayed due to the builder’s default.
In ACIT v. Vinay Girish Bajpai (ITAT Mumbai, 2018), the Tribunal held that delay attributable to the builder cannot defeat the assessee’s claim when the investment is made within time.
A similar view was taken in DCIT v. Kushal Singh (ITAT Delhi, 2020). The Mumbai Tribunal reiterated this principle in a subsequent 2024 decision, holding that a prolonged delay by the builder does not disentitle the assessee from the exemption where the investment of capital gains is undisputed.
Q9.What is the relevant date for capital gains deposited in the Capital Gains Account Scheme (CGAS)?
Ans: Where the assessee is unable to utilise the capital gains for the purchase or construction of a new residential house before the due date for filing the return of income under Section 139(1), the unutilized amount must be deposited in the Capital Gains Account Scheme.
In such cases, the date of deposit in the CGAS is treated as the date of utilisation for the purposes of Section 54, provided the amount is subsequently used for purchase or construction within the prescribed period.
Q10.Does the commencement of construction before the date of transfer affect eligibility under Section 54?
Ans: Commencement of construction of a new residential house prior to the date of transfer of the original asset does not, by itself, disentitle the assessee from claiming exemption under Section 54, provided the construction is completed within three years from the date of transfer.
The Karnataka High Court, in CIT v. J.R. Subramanya Bhat (1987), held that Section 54 does not require construction to commence only after the date of transfer and that completion within the stipulated period is the determinative factor.
Key Takeaways :The key takeaways below highlight the main principles emerging from judicial precedents on Section 54.
(a) The relevant “date of transfer” for Section 54 is not necessarily the date of registration of the sale deed; it may be the date of an agreement to sell if it creates enforceable rights and is accompanied by possession or receipt of substantial consideration.
(b) The allowability of exemption under Section 54 depends on the timely investment of capital gains, not on the completion of legal formalities.
(c) There is no single uniform date for determining the date of purchase or construction of a new residential house; the relevant date depends on the facts, such as allotment, agreement, payment, possession, or completion of construction.
(d) In cases of allotment under housing schemes, the date of allotment is treated as the date of purchase.
(e) Where possession of an under-construction flat is handed over upon completion, the date of possession may be regarded as the date of purchase.
(f) Non-registration of the sale deed within the stipulated period does not defeat the exemption where full consideration has been paid and possession has been obtained.
(g) Booking a flat with a builder is generally treated as a case of construction, making the three-year time limit applicable.
(h) Delay in handing over possession due to the builder’s default does not disentitle the assessee from exemption where the investment has been made within the prescribed period.
(i) Deposit of unutilized capital gains in the Capital Gains Account Scheme within the due date under Section 139(1) safeguards the exemption.
(j) Commencement of construction prior to the date of transfer does not affect eligibility, provided construction is completed within three years from the date of transfer.
Conclusion For the purposes of Section 54, the expression “date of transfer” must be interpreted in a practical and purposive manner. Courts have repeatedly held that the relevant date depends on the substance of the transaction—such as the creation of enforceable rights, the handing over of possession, or the receipt of substantial consideration—rather than on mere procedural formalities like registration. Consequently, the question of what constitutes the date of transfer remains fact-specific and must be examined in the context of the transaction’s true nature.
Disclaimer: This article is intended for educational purposes only.
The author can be contacted at caanitabhadra@gmail.com
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