ITAT Mumbai Allows Section 54 Exemption: Possession Date of New House is Key

In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, reaffirmed that possession of a new house—and not merely the date of agreement—determines eligibility for capital gains exemption under Section 54 of the Income Tax Act, 1961.

The case, Payal Kishore Kulchandani vs. Income Tax Officer (ITA No. 3647/MUM/2025, decided on 18 August 2025), revolves around the interpretation of “purchase” for claiming exemption from Long-Term Capital Gains (LTCG) on the sale of a residential property.

Facts of the Case

• Assessee: Ms Payal Kishore Kulchandani

• Old Property Sold: 21 July 2011

• Capital Gains Declared: ₹91.33 lakh

• Exemption Claimed: Section 54 – reinvestment in a new residential flat worth ₹3.05 crore

The assessee had entered into an agreement to purchase a new flat on 28 August 2009—more than one year before selling her old flat.

However, crucially, the final payment of ₹5.00 lakh was made on 5 April 2011, and possession of the new flat was handed over on 6 April 2011—well within one year before the sale date.

The Assessing Officer denied the Section 54 exemption on the ground that the agreement date and substantial payments were outside the one-year period preceding the sale. The Commissioner (Appeals) upheld this disallowance.

Issue Before the Tribunal

Whether an assessee can claim exemption under Section 54 when the agreement to purchase a new property was executed earlier than the one-year window, but possession and final payment fell within that period?exemption under Section 54 when the agreement to purchase a new property was executed earlier than the one-year window, but possession and final payment fell within that period

Tribunal’s Observations

The ITAT analysed the timing of possession, payments, and legislative intent of Section 54, emphasizing that the law must be interpreted purposively, not pedantically.

The bench noted that:

• The purpose of Section 54 is to encourage investment of capital gains into residential housing, not to deny benefit on technicalities.

• The word “purchase” in Section 54 should be interpreted pragmatically—the relevant date is when the buyer actually acquires possession and ownership rights, not merely when the sale agreement is executed.

To support this interpretation, the Tribunal relied on judicial precedents:

1. CIT v. Smt. Beena K. Jain (217 ITR 363 – Bom HC)

2. Sanjeev Lal v. CIT [2014] 365 ITR 389 (SC)

Both rulings establish that possession or completion of the transaction within the prescribed window suffices for claiming Section 54 relief.

Tribunal’s Decision

The Mumbai Bench held that:

• Since the possession of the new flat was taken on 6 April 2011, and the old flat was sold on 21 July 2011, the acquisition fell within one year before the date of transfer.

• Therefore, the assessee’s investment satisfied the conditions of Section 54(1).

• The disallowance by the AO and CIT(A) was unjustified.

Accordingly, the appeal was allowed, and the Section 54 exemption was granted to the assessee.

Key Takeaways

1. Possession date governs the exemption:
   For Section 54, the date when the assessee obtains possession (and completes payment) is the relevant factor—not necessarily the agreement date.

2. Substance over form:
   The ruling upholds the principle that intention and timing of actual acquisition should prevail over procedural dates.

3. Relief for home buyers in similar situations:
   Taxpayers who booked or agreed to purchase flats earlier but took possession within one year before selling their old homes can rely on this judgment.

4. Judicial consistency:
   The decision aligns with long-standing Bombay High Court and Supreme Court precedents that promote a liberal interpretation of beneficial provisions.

Conclusion

The Payal Kishore Kulchandani judgment reinforces that timely possession is the determining event for availing capital gains exemption under Section 54.

By recognising the spirit of the law over its letter, the ITAT Mumbai has offered much-needed clarity to taxpayers reinvesting in residential property.

This ruling will serve as a valuable precedent for those facing similar disputes, especially in cases involving under-construction or pre-booked flats.

Citation

Kishore Kulchandani v. Income Tax Officer 3647/MUM/2025 – ITAT Mumbai Bench 18 August 2025