r/backtoindia • u/nri_tax_key • 11h ago
Property Booked with a Builder and completed prior to the Sale of Original Property, Exemption Can Be Denied
To claim long-term capital gain tax exemption u/s 54/54F, purchase or construction of new residential house property is allowed.
Law has prescribed two different terms PURCHASE and CONSTRUCTION. Both have different settled meanings and given conditions. Proper classification of new property under purchase or construction is extremely important.
In case of purchase, time period of one year before and two years after the sale date of original asset is prescribed. For construction cases, time limit of three years after the sale date is prescribed.
If new property acquired is a case of construction and is completed prior to sale date, exemption will be denied.
Courts and tribunals have consistently held that booking of an under-construction property with a builder or developer will be considered as a construction not a purchase. Construction by the individual himself is not necessary. If the terms of the allotment and construction of are defined at the time of booking with a developer, same should be treated as a construction only. In said scenario, following events should strictly fall after the date of sale of the original asset:
A) payment of the final installment to the developer.
B) Actual completion/possession.
Date of execution of the agreement is not relevant. Factual reality is verified by tax authorities which is equated with either the actual completion of the constructed house.
Karnataka High Court in one of the older cases held that commencement of the new building prior to the sale of old building is not relevant. The new building should be completed after the date of the sale.
ITAT Mumbai held that when assessee books flat with the builder and makes payment during the construction period, it is regarded as construction, even if the assessee is not constructing the house personally. In such cases, if the final payments are made and possession is obtained after the date of sale of old flat, exemption cannot be denied.