Builder’s Mistake Won’t Affect Tax Benefits: ITAT

 In a recent case handled by the Income-tax Appellate Tribunal (ITAT), Mumbai bench, a taxpayer named Mukesh Harilal Mehta claimed a tax deduction under section 54 of the Income-tax (I-T) Act for the financial year 2014-15. Despite a mistake made by the builder in allocating the flat, the tax tribunal ruled that this claim cannot be denied. The builder had erroneously assigned the flat Mehta had purchased to another buyer, but they acknowledged the error and provided Mehta with a similarly placed flat in the same building. Under section 54 of the I-T Act, any long term capital gain arising from the sale of a residential property is exempt to the extent that the capital gain is reinvested in the purchase of another residential property within a specific timeframe.

These conditions were fulfilled by Mehta. However, during the assessment, the I-T officer initially rejected the claim as there was no registered sale deed to prove the purchase of the new flat. Additionally, the details of the new flat mentioned in the possession letter differed from the flat towards which the payment had been made. The ITAT deemed the denial of the exemption unjustified as Mehta should not be penalized for the builder’s mistake in allotting the flat. This ruling provides clarity to taxpayers in similar situations who may encounter errors made by builders in property allocation.

Section 54 of the Income-tax Act

Section 54 of the Income-tax Act allows individuals to claim tax exemption on long term capital gains made from the sale of residential property if the proceeds are invested in the purchase of a new residential property. The exemption can be claimed if the new property is purchased within one year before the sale or up to two years after the sale. Alternatively, the capital gain can be invested in the construction of a new residential property within three years from the date of the original property’s sale. This provision aims to encourage individuals to invest their gains from the sale of property into residential real estate. By providing tax benefits, the government incentivizes individuals to reinvest in the real estate market, thereby stimulating economic growth in the sector.

Implications for Taxpayers

The recent ruling by the ITAT sets a precedent that an error in flat allotment by a builder will not impact a taxpayer’s ability to claim tax benefits under section 54 of the I-T Act. This is good news for individuals who may face similar issues in dealing with property developers. The ITAT’s decision ensures that taxpayers are not made liable for mistakes beyond their control and protects their rights to avail tax deductions in accordance with the law. Taxpayers facing a situation where a builder has wrongly allocated a flat they have purchased should now feel reassured that they can still claim the necessary tax benefits. It is essential for such taxpayers to present evidence of the transaction, such as payment receipts, possession letters, and correspondence with the builder, to support their claim for tax exemption. Proper documentation is crucial in establishing the connection between the sale of the old property and the purchase of a new property.


The ITAT’s ruling provides relief to taxpayers by ensuring that an error committed by a builder in allocating a flat will not hinder their ability to claim tax benefits under section 54 of the I-T Act. This decision protects taxpayers’ rights and ensures fair treatment, even in cases where they encounter challenges caused by mistakes made by builders. Moving forward, individuals who find themselves in a similar situation of property misallocation should gather all relevant documentation and present it to tax authorities to assert their right to claim the appropriate tax benefits. This ruling reinforces the principle that taxpayers should not suffer unnecessary consequences due to errors made by others and emphasizes the importance of clear and unequivocal guidelines for the tax benefit claim process.

Sumit Mondal Content Analyst at Square Yards
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