Section 54 Relief Where Builder Defaults on Flat Delivery: Analysis of Veena Chadha Vs Assessing Officer (ITAT Delhi)

The Delhi Bench of the ITAT in Veena Chadha Vs Assessing Officer has addressed a recurring practical problem: whether an assessee, who has invested long-term capital gains in a new residential flat within the statutory time limits, can be denied Section 54 relief merely because the builder does not complete the project or execute a registered conveyance deed.

In this case, the Tribunal did not itself compute or finally allow the deduction. Instead, it sent the matter back to the Assessing Officer (AO) for a fresh examination of the long-term capital gain (LTCG) computation and scrutiny of the documents evidencing the investment in the new flat. However, it laid down a clear principle: if the assessee has invested the capital gains in a residential flat within the prescribed period, failure of the developer to hand over possession or register the sale, due to circumstances beyond the assessee’s control, cannot be used as the sole reason to reject a legitimate Section 54 claim.

Background of the Case and Reopening of Assessment

The dispute relates to Assessment Year (AY) 2015–16. The assessee had not filed an income tax return for this year. The Income Tax Department, based on its information systems, found that she had sold an immovable property for ₹55,00,200 during the relevant period.

  • A notice under Section 148A(b) was issued on 22.03.2022 seeking an explanation regarding the property sale.
  • No response was filed by the assessee to this initial notice.
  • An order under Section 148A(d) and a notice under Section 148 were then issued on 04.04.2022, reopening the assessment under Section 147.

Assessee’s Explanation Before the AO

During reassessment, the assessee explained that:

  • The sold property was Flat No. BF-5D (3rd Floor), DDD Flats, Munirka, New Delhi.
  • It was jointly owned with her husband.
  • Her 50% share in the sale consideration came to ₹55,00,200.
  • She claimed an indexed cost of acquisition of ₹35,92,814 for her share.
  • On this basis, she computed a LTCG of about ₹19.07 lakh.
  • She further stated that she had invested in a new residential property valued at ₹52,50,000 and claimed exemption under Section 54 against the LTCG.

The AO, however, was not satisfied, primarily due to lack of complete and convincing supporting documents at the assessment stage. Consequently:

  • The AO treated the entire amount of ₹55,00,200 as short-term capital gain (STCG).
  • The Section 54 exemption was fully denied.
  • A refund claim of ₹55,000 was also rejected.
  • The assessment was finalised under Section 147 r.w.s. 144B at an income of ₹55,00,200 vide order dated 04.01.2024.

First Appeal Before CIT(A) and Grounds Raised

The assessee challenged the reassessment and the additions before the National Faceless Appeal Centre [Ld. CIT(A)]. Key grounds (summarised) included:

  • Reopening under Section 147 was contested.
  • The demand of ₹42,46,480 (Demand Identification No. 2023201537003267622T) was termed arbitrary and violative of natural justice.
  • It was argued that the assessee’s taxable income was below the basic exemption limit, and there was no escapement of chargeable income.
  • The assessee asserted that her 50% LTCG of ₹19,07,186 was fully reinvested (to the extent of ₹37,23,484.13) within the permissible period under Section 54, resulting in no tax liability.
  • The assessee disputed the AO’s classification of the gain as STCG, arguing it was LTCG and that even the CIT(A) had effectively recognized it as LTCG under Section 250.
  • It was contended that once the asset is treated as long-term, a tax computation on STCG rates could not survive.
  • Denial of exemption under Section 54 was challenged as being contrary to law, especially given the substantial reinvestment.
  • The assessee also pointed out that stamp duty of ₹2,50,000 on acquisition of the original property (her 50% share: ₹1,25,000) had not been considered in the indexed cost of acquisition, and inclusion of this would reduce capital gains further.
  • Interest charged under Sections 234A, 234B and 234C and continuing interest from 21.10.2025 on a disputed demand were also objected to as unwarranted.

The CIT(A) nevertheless upheld the AO’s order, observing that the assessee had failed to substantiate her position with adequate documentary evidence, particularly regarding the purchase of the new flat and the acquisition history of the old property.