In the case of Sheela Ramchand Uttamchandani v. ITO [2024] 163 taxmann.com 265 (Mumbai - Trib.), the central issue revolved around the eligibility of Sheela Ramchand Uttamchandani to claim capital gains exemption under Section 54 of the Income Tax Act. Sheela had sold her residential property in July 2012, realizing a long-term capital gain. To avail of the exemption, she deposited this amount into a Capital Gains Account Scheme with SBI on 29th July 2013. Subsequently, on 10th September 2014, she booked an under-construction residential flat and made initial payments towards it.

The controversy arose due to the delay in the construction of the flat, which exceeded the permissible three years from the date of the sale of her original property, potentially jeopardizing her claim for exemption under Section 54.

Initially, the Assessing Officer (AO) disallowed the exemption claimed by Sheela, thereby adding the entire capital gain amount to her income for the year. This decision was upheld by the Commissioner of Income Tax (Appeals), prompting Sheela to appeal to the Mumbai Tribunal.

During the proceedings, Sheela argued that despite the construction delay being beyond her control, her booking of the under-construction flat should qualify as compliance with the conditions stipulated under Section 54. Her representative cited legal precedents and judicial interpretations supporting the contention that substantial investment in an under-construction property should qualify for exemption, even if the construction period exceeds three years.

The Mumbai Tribunal, after considering the arguments and precedents, ruled in favour of Sheela. It emphasized that the booking of an under-construction property within the stipulated time frame constituted a bona fide investment in the construction of a residential house, aligning with the legislative intent of Section 54 and established judicial interpretations. Consequently, the Tribunal directed the AO to allow exemption to the extent of the amount invested by Sheela in the under-construction property, and only tax the remaining unutilized portion of the capital gain.

This case highlights the challenges taxpayers face in navigating the complexities of capital gains exemptions under Section 54, particularly when confronted with delays in construction beyond their control. The Tribunal’s decision provides clarity and relief to Sheela while setting a precedent that may guide future cases dealing with similar issues of interpretation and application of tax laws concerning capital gains exemptions.