Section 54 is about Intent, Not Brick-by-Brick Completion

Team Counselvise-January 24, 2026

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Tax law often forgets one thing: real life doesn’t move at the speed of statutes.
Construction approvals get delayed. Plans change. Timelines slip.

The Kolkata Bench of the ITAT has now reaffirmed this reality in a welcome ruling under Section 54 of the Income-tax Act.

Table of Contents

The Story in Brief:

The assessee, Ramautar Saraf (HUF), sold a residential house property during FY 2015-16 for a consideration of ₹6.25 crore, resulting in long-term capital gains of ₹5.48 crore.

Against this capital gain, the assessee claimed exemption under Section 54, on the basis that the gains were invested in:

- Purchase of land for construction of a residential house,
- Architect fees,
- Deposit in the Capital Gains Account Scheme (CGAS).

After claiming exemption, only ₹1.88 lakh was offered to tax as taxable LTCG.

Yet, despite genuine investment and commencement of construction, the exemption was denied.

Why?
Because the house was not fully constructed within three years.

Why the Tax Authorities Said “No”?

The Assessing Officer — and later the CIT(A) — took a strict view:

- Construction was not completed within three years,
- Municipal approval came after the statutory deadline,
Therefore, the conditions of Section 54 were allegedly violated.

In essence, delay equalled disqualification.

Issue Before the ITAT:

Whether exemption under Section 54 can be denied merely because construction of the residential house was not completed within three years, despite the capital gains having been invested within the prescribed period?

What the ITAT Looked at:

The Tribunal shifted the focus from paperwork to purpose.

It asked a simple but powerful question:

Did the taxpayer genuinely reinvest the capital gains into a residential house?

The answer was clearly yes.

The ITAT held that:

(a) Section 54 is a Beneficial Provision

The Tribunal reiterated that Section 54 is a beneficial provision and must be interpreted liberally.

(b) Completion of Construction is Not Mandatory

The law does not require completion of construction within three years. What is material is:

Utilization of capital gains for construction within the stipulated period; not whether the house is fully completed or habitable.

(c) Investment in Land is part of Construction

Purchase of land for the purpose of constructing a residential house qualifies as eligible investment under Section 54.

The Tribunal noted that the assessee had:

- Paid ₹2.80 crore for purchase of land,
- Incurred architect fees,
- Started construction within the three-year window,
- Deposited unutilized amounts in CGAS.

These actions satisfied the statutory requirements.

A Crucial Timing Insight:

One of the most practical takeaways from the ruling is this:

The question of whether construction was ultimately completed does not arise in the year of transfer.

That examination can happen only after the three-year window expires, and even then, only to the extent funds remain unutilized.

Denying the exemption prematurely, as done in this case, was held to be legally flawed.

Judicial Consistency, Not Judicial Sympathy:

This wasn’t an emotional decision — it was a legally consistent one.

The ITAT relied on well-settled principles laid down by:

- Supreme Court in Fibre Boards
- Multiple ITAT benches across India

The consistent message:
“Utilization” is the key word in Section 54 — not “completion.”

Final Verdict:

- Disallowance of ₹2.86 crore under Section 54 was deleted,
- Order of the CIT(A) was set aside,
- Appeal of the assessee was allowed in full.

Practical Takeaways for Taxpayers:

✔ Section 54 exemption cannot be denied solely due to incomplete construction,
✔ Completion of construction is not a condition precedent,
✔ Timing of assessment matters, premature denial is unsustainable.