Telangana High Court Allows Section 54F Exemption Despite Delayed Villa Handover by Developer

Background and Context

The Telangana High Court in Sudhakar Reddy Mettu. Vs ACIT examined an important issue concerning availability of exemption under Section 54F of the Income Tax Act 1961 where the assessee had invested capital gains in a residential villa, but legal title and possession were delayed for several years due to the developer’s default and disputes among the developers.

The appeal was filed under Section 260A challenging the order dated 29.05.2024 passed by the Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, in ITA No.231/Hyd/2024. The ITAT had upheld denial of exemption under Section 54F and confirmed the long-term capital gains addition made by the Assessing Officer.

The High Court was called upon to decide whether the exemption under Section 54F can be refused merely because the assessee did not receive legal title or fully completed possession of the new residential villa within the statutory period, even though the capital gains were duly invested and the delay was attributable to the developers, not to the assessee.

Facts of the Case

Development Agreement and Property Details

  1. The assessee is an individual non-resident Indian.
  2. For Assessment Year 2017-18, he did not file a return of income.
  3. On the basis of data from the I&CI wing for Financial Year 2016-17, the Assessing Officer noticed that the assessee, along with 45 other landowners, had executed a Development Agreement-cum-General Power of Attorney (DAGPA).
  4. The DAGPA, bearing document No. 6418/2016 dated 31.05.2016, pertained to land admeasuring 4.505 acres (21,806 square yards) in Survey No. 14 of Guttala Begumpet Village, Serlingampally Mandal, Rangareddy District, with an approximate proposed built-up area of 2,75,00,000 sq. ft.
  5. The total consideration as per the DAGPA was ₹43,61,20,000, whereas the SRO value was ₹62,86,20,000.
  6. Under the DAGPA, 47.25% of the project was allocated to the owners and 52.75% to the developers.
  7. Being one of the 46 co-owners, the assessee’s share of the owners’ entitlement translated, under Section 50C, to chargeable deemed sale consideration of ₹64,57,000 for purposes of long-term capital gains computation.

Reopening of Assessment and Capital Gains

  • The Assessing Officer concluded that long-term capital gains of ₹64,57,000 had accrued to the assessee during Financial Year 2016-17 relevant to Assessment Year 2017-18.
  • Since no return had been filed, it was held that income had escaped assessment.
  • Accordingly, reassessment proceedings were initiated by issuing notice under Section 148 after obtaining requisite approval.
  • Further notices under Section 142(1) and a show cause notice were issued.

In response, the authorised representative of the assessee:

  • Accepted a deemed sale consideration figure of ₹50,00,000,
  • Claimed indexed cost of acquisition of ₹5,28,000, and
  • Asserted entitlement to exemption under Section 54F on the footing that the capital gains had been invested in a residential villa as per a Joint Development Agreement.

Claim Under Section 54F and AO’s Rejection

The Assessing Officer, however, refused to grant Section 54F exemption.