Exemption under section 54 allowed even if possession not given to assessee within 2 years of transfer of house

(I)        Exemption under section 54 allowed even if possession not given to assessee within 2 years of transfer of house


Recently, the Hon’ble Delhi High Court in the case of CIT v. Kuldeep Singh [2014] 49 taxmann.com 167, held that where the assessee had sold his residential property and entered into an agreement with a builder within the prescribed period of two years for purchase of flat, the payment of which was linked to the stage of construction, the assessee's claim for exemption under section 54 of the Act was to be allowed.


Brief facts of the case are that the assessee in his return had declared a taxable income of Rs. 47,88,579/- after claiming benefit of Section 54 of the Act.  The Assessing Officer referred to the copy of the flat buyers agreement dated 9th February, 2006 between the assessee and the builder and observed that the ownership in the new property would be conferred on the date of issuance of occupation certificate. Further, the expected date of completion was 36 months from the date of the agreement dated 9th February, 2006 i.e. 8th February, 2009. He held that the assessee was not entitled to benefit of Section 54 of the Act as he had not purchased the new property within a period of one year before the sale of first property on 3rd June, 2005 or within two years from the date on which the transfer took place. The assessee had not constructed residential house within three years from 3rd June, 2005.


In this case, the assessing officer had given a narrow meaning to the term ‘purchase’. However, as per the decision given by the Hon’ble Court in this case, the word “purchase‟ as used in sub-section (2) of section 54 of the Act, indicates that the said word is not restricted or confined to a registered sale deed or even possession but has a wider connotation. Recently, even the Hon’ble Supreme Court in Civil Appeal titled Sh. Sanjeev Lal Etc. Etc. vs. CIT, Chandigarh & Anr., decided on 01.07.2014 [2014] 8 SCALE 432, again examined Section 54 of the Act and held that the principle of purposive interpretation should be applied to sub-serve the object and more particularly when one was concerned with exemption from payment of tax.


The purpose of exemption under section 54 of the Act is to give impetus for purchase/ construction of residential houses. However, the tax authorities interpret the law in a manner to deny the claim of exemption. It would be in the interest of justice that either necessary amendment be made in the law to cover the issues w.r.t. exemption under section 54 of the Act or CBDT should come out with necessary clarification on certain issues so that the taxpayer's money is not spent on unnecessary litigation.