Man sells property for Rs 48 lakh, constructs a new house but faces delay, income tax dept denies Section 54 claim; he fights and wins case in ITAT Chennai

When Mr Rajan from Ambattur, Chennai sold his Noida property on July 9, 2019 for Rs 48 lakh, he made a long term capital gain of Rs 5.59 lakh. He then decided to buy a 1,851 sq.ft. land in Chennai for Rs 94.38 lakh to build his own house. To help with the Chennai land purchase, he took out a loan of Rs 49.85 lakh. Since he claimed Section 54 long term capital gains (LTCG) tax exemption, he didn't have to pay any tax on the sale of the Noida property.

But then the Covid-19 lockdown hit in 2020, leading to a labour shortage that delayed the construction. The legal time limit of three years passed, and the house was still not completed. As a result, the Income Tax Department rejected his Section 54 tax exemption claim and demanded that he pay tax on the Noida property sale.

Determined to contest this decision, Rajan fought back against this and won the case in ITAT Chennai on June 15, 2026. Chartered Accountant Aditya Gupta represented him in ITAT Chennai.


Also read: Man sold unlisted shares, bought Rs 5.65 cr house, faced income tax scrutiny; he fought back and won in ITAT Delhi despite low income declaration

What is Section 54 tax exemption which residential property sellers can claim?

Section 54 of the Income Tax Act, 1961 is now Section 82 of the Income-tax Act, 2025 (ITA 2025).

This Section states that if a taxpayer makes long-term capital gains from selling a residential property, those gains can be exempt if they are reinvested in buying another residential house in India.

The Section applies when an individual or Hindu Undivided Family (HUF) earns long-term capital gains from selling a residential house property (which includes a building or land that goes with it, taxed under the Income from house property category). To claim exemption, the taxpayer must reinvest the capital gains in a new residential house property located in India, within the prescribed timelines:

• Purchase of a new house property within 1 year before or 2 years after the date of transfer or
• Construction of a new house property within 3 years from the date of transfer.

It must be noted that the exemption is limited to the cost of the new asset where the capital gains exceed such cost, with the balance remaining taxable. However, where the capital gains are equal to or less than the cost of the new asset, the entire gain shall be exempt.

Further, the benefit under Section 82 (Section 54) is subject to a monetary threshold, whereby the maximum amount of capital gains eligible for exemption is capped at Rs. 10 crore. Any capital gains exceeding this limit would be taxed in line with the applicable provisions.

ITAT Chennai judgement summary

Chartered Accountant Suresh Surana told ET Wealth Online that the Chennai ITAT, in this case (ITA No.3909 /Chny/2025), dealt with the allowability of tax exemption under Section 54 of the Income-tax Act, 1961 and the sustainability of an addition under Section 56(2)(x) over a minor variation between the actual purchase price and the stamp duty valuation of an immovable property.

The assessee, an individual, had not originally filed his income tax return (ITR) for Assessment Year 2020-21.

Based on information available on record, the Assessing Officer initiated reassessment proceedings under Section 147 by issuing notice under Section 148. In response, the assessee filed his income tax return.

During the course of reassessment proceedings, the Assessing Officer noticed that the assessee had sold a residential property in Noida on 9 July 2019 for Rs 48 lakh and, after claiming indexed cost of acquisition, had computed long-term capital gains of Rs. 5,59,239.

Against the capital gains, the assessee (Rajan) claimed exemption under Section 54 on the ground that he had acquired a plot of land at Ambattur, Chennai on June 21, 2019 to build a residential house.

The Income Tax Assessing Officer rejected the claim of exemption under Section 54 on the ground that the assessee had merely invested in a vacant plot of land and had not given any proof that the construction of the residential house was completed within the prescribed three years.

The Assessing Officer also noticed that the unutilised capital gains were not deposited in the Capital Gains Account Scheme. Accordingly, the exemption of Rs 5,59,239 claimed under Section 54 was disallowed.

In addition, the Assessing Officer noted that the assessee had bought the immovable property for Rs 94,38,249, but the value taken by the Stamp Valuation Authority was Rs 1,01,80,500. The difference of Rs 7,42,251, approximately 7.86% of the actual consideration, was added to the assessee's income under Section 56(2)(x).

The assessee (Rajan) argued that the enhanced safe harbour tolerance limit of 10%, introduced by the Finance Act, 2020, should be applied as the difference was marginal and within the subsequently recognised tolerance band. However, the Assessing Officer rejected this contention on the basis that the amendment was applicable from Assessment Year 2021-22 and not Assessment Year 2020-21. The CIT(A) upheld both additions.

The assessee contended before the Chennai Income Tax Appellate Tribunal, that the plot had been acquired with the bona fide intention of building a residential house and that construction was ultimately completed, though there was a delay due to the extraordinary circumstances arising from the COVID-19 pandemic.

Rajan argued that Section 54 is a beneficial provision and should be interpreted liberally, particularly where the assessee has substantially complied with the requirement of investing the capital gains in a residential house.

The assessee further contended that completion certificate or strict completion of construction within the prescribed period should not be treated as a mandatory pre-condition where the investment and intention are duly established.

The Tribunal accepted the assessee's contention and held that Section 54 is a beneficial provision intended to encourage investment in residential housing and therefore deserves a liberal and purposive interpretation.

The Chennai Tribunal noted that the law mainly requires the reinvestment of capital gains for buying or building a residential house within a set timeframe, and it does not require a completion certificate. It further held that exemption cannot be denied just because some finishing touches took longer than the prescribed period, especially when the assessee had already purchased the land, obtained the approvals and built the house.

The Tribunal also took note of the fact that the relevant period substantially overlapped with the COVID-19 pandemic, during which there were nationwide lockdowns, restrictions on labour movement , disruption in availability of construction materials and restricted functioning of government departments. The Tribunal held that a delay caused by such extraordinary circumstances could not be equated with ordinary commercial delay or negligence on the part of the assessee.

Surana says: "Accordingly, once the assessee had demonstrated bona fide investment in a residential project and the delay was attributable to circumstances beyond his control, exemption under Section 54 could not be denied on hypertechnical grounds."

On the issue of addition under Section 56(2)(x), the Tribunal noted that the variation between the actual consideration and stamp duty value was only around 7.86%. The Tribunal observed that the Finance Act, 2020, enhanced the tolerance band from 5% to 10% to address genuine hardships arising from minor valuation differences in real estate transactions.

The Tribunal treated the amendment as remedial and curative in nature and held that when the variation was below the 10% threshold, the addition under Section 56(2)(x) was not sustainable. Accordingly, the Tribunal directed deletion of the addition of Rs 7,42,251.

Thus, the assessee succeeded on both the issues. The Tribunal directed the Assessing Officer to allow exemption under Section 54 amounting to Rs. 5,59,239 and to delete the addition of Rs 7,42,251 made under Section 56(2)(x).

Mihir Tanna, associate director, S.K Patodia LLP says: Court has taken similar view in many cases and gave weightage to two important things (1) Section 54 of the Income Tax Act is a beneficial provision intended to encourage investment in residential housing and hence deserves a liberal and purposive interpretation.

According to Tanna, the provision mainly needs the capital gains to be invested in buying or building of a residential house within the prescribed period. The statute does not require a completion certificate and also does not stipulate that exemption won't be allowed just because certain finishing touches had extended beyond the prescribed period.