ITAT allows Section 54 Exemption for Construction Purposes, Despite Non-Deposit Under CGDS
The assessee, Ram Niranjan Banka, filed an appeal against the order of CIT(A), challenging three different issues. The assessee had entered into a Development Agreement with ODC Engineering and Construction Pvt. Ltd., for the development of a new building after demolishing the old house. There were 7 floors to be built, and the developer was entitled to three flats and 11 car parking spaces, while the assessee was entitled to four flats and the remaining car parking space.
The assessee entered into a sale agreement for a flat on the 1st floor and two car parking spaces before the construction, and a tripartite agreement was made with the developer, who was required to hand over the flat directly to the buyer after completion of construction. The construction was finished on November 30, 2013, and the assessee transferred the undivided land share and computed long-term capital gains (LTCG) on this transaction.
However, the AO treated this as part of the new asset and calculated short-term capital gain under section 54(1)(ii) of the Act. However, the Tribunal noted the 1st-floor flat was sold before construction, and possession was never with the assessee, who just transferred a right to receive the asset. Hence, the Tribunal directed the AO to treat the flat as a long-term capital asset and gains as LTCG, setting aside the CIT(A)’s order.
In the second issue raised in ground no. 3, the assessee challenged the order of CIT(A) confirming the disallowance of Rs 44,26,906 made by the AO under section 48 towards the construction of the area given to the lessee as per the term of the indenture of lease of the property under development. The tribunal noted that the cost incurred by the assessee through the developer under the Indenture of Lease meant the assessee had an obligation to provide the area, and the same must be allowed while calculating capital gains. Therefore, the ITAT set aside the CIT(A)’s order and directed the AO to delete the addition.
In the third issue of ground no. 4, the assessee challenged the order of CIT(A) for disallowing the exemption claimed by the assessee of Rs 1,50,00,000. The assessee had claimed exemption of Rs 1,50,00,000 and had deposited the amount of capital gain remaining unutilized in a nationalised bank in term deposits. However, the AO disallowed the exemption under Section 54(2) since the deposits were not made under the Capital Gain Deposit Scheme (CGDS).
The Tribunal observed that the amount invested in the term deposit was for the construction and super finishes. The tribunal cited the decision of Lucknow ITAT in the case of Smt. Aarti Kumaria ITA no. 97/LKW/2017, where it was ruled that if the assessee intends to invest in construction or purchase of property and the investment is made within the specified time, the assessee must be allowed the exemption benefit under section 54, even if the investment was not made specifically in the CGDS Scheme. Based on this, the CIT(A)’s order was quashed, and the AO was directed to allow the exemption of Rs 1,50,00,000 under section 54(2) of the Act.
Case Citation: Ram Niranjan Banka Vs ACIT (ITAT Kolkata); ITA No.752/KOL/2025; 21/11/2025; 2014-15
