Section 54 Benefit for Under-Construction Flats: ITAT Mumbai Confirms Possession Date as Crucial

Background of the Dispute

In Prakash Devidas Vs ACIT (ITAT Mumbai), the core controversy revolved around the assessee’s eligibility to claim exemption under Section 54 of the Income Tax Act 1961 on Long Term Capital Gain (LTCG) arising from the sale of a residential flat.

  • The assessee had reported Long Term Capital Gain of ₹62,31,962 on sale of a residential property and claimed exemption under Section 54.
  • The Assessing Officer (AO) and the NFAC rejected this claim, holding that the new residential flat was “purchased” outside the permissible time window because the agreement for the new under-construction flat was executed on 23-05-2012.
  • The assessee argued that:
    • The new property was under construction.
    • Payments were made in line with construction stages.
    • Possession of the fully constructed flat was received on 07-01-2015, which falls within two years from the date of sale of the old flat, i.e., 28-10-2013.

The ITAT Mumbai was required to decide whether, for purposes of Section 54, the relevant date is the date of the agreement for purchase of an under-construction flat or the date on which possession of the completed flat is actually taken.

Grounds Raised Before ITAT

The assessee challenged the order of the Ld. CIT(A)-NFAC dated 16-09-2025 for AY 2014-15 on, broadly, the following lines:

  1. The Ld. CIT(A) erred in sustaining the disallowance of exemption under Section 54 with respect to LTCG of ₹62,31,962 on sale of a residential flat.
  2. The assessee had complied with all preconditions of Section 54, specifically by taking possession of the new flat on 07-01-2015, i.e., within two years from the date of transfer of the old flat (28-10-2013).
  3. The impugned order was contrary to law and facts, and required to be modified so as to allow the exemption.
  4. Each ground was kept independent and without prejudice to the others, with liberty to raise or modify grounds and file additional evidence if required.

Key Facts and Timeline of Transactions

The ITAT noted the essential facts and sequence of events as undisputed:

  1. Return of income

    • The assessee filed a return declaring total income of ₹33,13,550.
    • Included in this was LTCG of ₹62,31,962 on sale of a residential flat, against which exemption under Section 54 was claimed.

  2. Sale of original residential property

    • Flat No. C/504 at Anand Heritage Building was sold on 28-10-2013 for ₹80,00,000.
    • LTCG from this sale formed the basis of the exemption claim under Section 54.

  3. Investment in new residential property

    • The assessee opted for an under-construction flat: Flat No. 201, F-Wing, Octacrest, Akurli, Kandivali East, Mumbai.
    • Relevant dates for the new flat:
      • Agreement for purchase: 23-05-2012
      • Completion of construction: 26-12-2014
      • Possession taken (on final payment to developer M/s. Lokhandwala Construction): 07-01-2015

  4. Nature of the new property transaction

    • The agreement dated 23-05-2012 pertained to an under-construction flat, not a ready-to-move property.
    • Total consideration was ₹1,75,52,500, payable in construction-linked instalments.
    • At booking, only a small initial amount of ₹8,77,625 was paid.
    • Subsequent payments were made progressively as the construction advanced.
    • A final payment of ₹5,18,611 was made on 07-01-2015, following the developer’s possession letter dated 26-12-2014.
    • Only after full payment and completion of construction did the assessee receive possession of the flat on 07-01-2015.