India: Liberal Dimensions Of Secti On 54 Of The Income Tax Act , 1961

Last Updated: 23 April 2013
Article by Smeeksha Bhola

Most Read Contributor in India, December 2018


There has been a phenomenon increase in trend of getting property developed by builders. More and more people are going in for getting their property developed by builders, for which consideration in form of a developed portion of the property (mostly in form of one or more floors) is paid to the builders. A complication that arises in structuring such transaction is the taxation aspect of the capital gains arising on such transfer and development of property. A recent judgment of Delhi high court in the case of CIT v. Gita Duggal1 tries to clarify the applicability of levy of capital gains on such transaction.


The taxpayer was the owner of a property comprising of basement, ground floor, first floor and second floor. The taxpayer entered into a development agreement with a builder in 2006, pursuant to which the builder demolished the property and constructed a new building comprising of three floors. In consideration of the development rights, the taxpayer received INR 40 million and two floors of the new building. Third floor was retained by the builder. In other words, the taxpayer sold his residential property to purchase two units of residential property in the same building.


whether the taxpayer should be given deduction under section 54 of the Act, in respect of different residential units in same building?

Before we discuss further, it would be worth discussing the provisions of section 54 of Income tax act of 1961.

Section 54 of the Income tax Act of 1961

Section 54 provides exemption to capital gains arising from the transfer of a residential house property (being building or lands appurtenant thereto, the income of which is chargeable under the head "Income from house property")

In respect of the above section, following points should be noted:

1. Only an Individual or Hindu Undivided Family can claim exemption.

2. Under section 54 exemptions is available only if the capital asset which is transferred is a residential house property (i.e. building or land appurtenant thereto) whose income is taxable under the head "Income from house property". The exemption is available whether the residential house property is self occupied (in such a case income of house property is nil or negative) or let out.

3. The house property which is transferred should be a long term capital asset.

4. To claim the exemption the taxpayer will have to purchase a residential house property (old or new) or construct a residential house property (hereinafter referred to as "new residential property").

Observations and decision of High Court

1. The Hon'ble High Court, on elaborating the requirements of sections 54 and 54F of the Income tax act, 1961, observed that the Act required the taxpayer to construct a 'residential house'. The only requirement is construction of a residential unit and not the manner in which it is constructed. For convenience it can be constructed into several units, which according to need can be used conveniently and independently.

2. The only requirement to claim exemption under section 54F is that it should be constructed for residential purposes and not commercial.

3. The Hon'ble High court also observed that section 54F nowhere highlights/mentions that the house should be constructed in a particular manner.

4. The high court held that several independent units can constitute 'a residential house' and accordingly,exemption under section 54 or 54F can be claimed by the taxpayer.


The above case very clearly explains and analyses the deduction under section 54 of the Income tax act, 1961, wherein a residential property is sold and sale proceeds earned are invested in another residential unit. There has been a step rise in owners of old house properties entering into development agreement with builders, entrusting the latter to carry out development of their property and making payment towards such development by giving rights of one or more floors to such builders. Such an arrangement mutually benefits both the owner and builder, the owner, with not enough funds to carry out improvement of its property gets newly constructed floors from builders and builder also earns his profit by selling off the floors retained by him in carrying out such construction.

The High court has very exhaustively explained the boundaries of section 54 of the Income tax act, 1961 and provided for an acceptable and welcome interpretation of the said section.


1 CIT v. Gita Duggal (ITA 1237/2011, dated 21 February 2013, Assessment tear 2007-08)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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