Hyderabad: Telangana high court has held that a taxpayer cannot be denied exemption under section 54F of the Income Tax Act merely because a developer failed to complete construction or registration within the prescribed period, provided the capital gains had been invested in a residential house.A division bench of Justice P Sam Koshy and Justice Narsing Rao Nandikonda delivered the ruling while allowing an ITAT appeal filed by an NRI. The court held that denying the benefit due to delays attributable to the developer was illegal and contrary to the intent of the law.Section 54F of the Income Tax Act lets individuals and Hindu Undivided Families (HUFs) save long-term capital gains tax by reinvesting net sale proceeds in residential properties.The petitioner had entered into a joint development agreement in 2016 along with 45 other landowners, handing over land in Guttala Begumpet to a developer. Under the agreement, a villa was to be handed over within 36 months. However, construction was stalled due to disputes among the developer’s partners.The income tax department subsequently rejected the petitioner’s claim for exemption under section 54F on the ground that construction and registration were not completed within the stipulated timeframe. The decision was later upheld by the dispute resolution panel and the Income Tax Appellate Tribunal (ITAT), prompting the petitioner to approach the high court.Setting aside the orders of the tax authorities and the tribunal, the high court observed that the primary objective of section 54F is to encourage taxpayers to reinvest capital gains in residential properties.The bench emphasised that section 54F is a beneficial provision that must be interpreted liberally rather than restrictively. It observed that a taxpayer cannot be deprived of a statutory benefit due to circumstances beyond his or her control, such as delays on the part of a developer.Noting that the record clearly showed the capital gains had been invested in the construction of a residential house, the court held that the exemption could not be denied.Referring to a Karnataka high court judgment on a similar issue, the bench noted that once the entire consideration has been invested, the benefit under section 54F cannot be refused merely because registration or construction is delayed.Holding the decisions of the ITAT and the income tax department to be unsustainable, the high court quashed the orders and declared the appellant eligible for the tax exemption.
