Telangana High Court Grants Homebuyer Section 54F Tax Exemption Despite Builder Delay

Mr Mettu from Hyderabad, along with 45 others owned 4.505 acres of land in Serlingampally Mandal, Rangareddy district, and they decided to sign a deal with a builder in 2016 for its development. The agreement was to build villas worth Rs 43.61 crore on this land, with the landowners getting 47.25% and the builder 52.75% of the shares in the project.

Since Mettu was one of the 46 owners, his share was 1/46th of the share of the owners, which means he was supposed to receive a villa measuring 250 square yards on this 4.505 acres of land. According to the JDA, Mettu was supposed to receive the villa by 2019 but it only came through in 2023. Additionally, Mettu didn't file any income tax return (ITR) but planned to claim a Section 54 tax exemption once he got the villa.

The catch is Section 54F benefits must be claimed within three years if someone sells land and constructs a house using the profits from that sale. So, ideally, Mettu should have claimed the Section 54 tax exemption by finishing the construction by 2019 but this did not happen and the villa was only finished in 2023. The reason for this huge delay in construction, as told by Mettu in court, was that in 2021 the builder and the other landowners got into a dispute which further stalled the construction.

However, the Income Tax Department's International Taxation team in Basheerbagh, Hyderabad, flagged Mettu's transaction and said that he earned Rs 64.57 lakh capital gains which escaped assessment.

Advocate Vijhay K. Punna, senior standing counsel of Income Tax Department said, that the JDA was signed between Mettu along with 45 others and the partners of the builders on May 31, 2016 and it said that the villa would be delivered within 36 months i.e. May 31, 2019, but the construction was completed only in November, 2023 and Mettu didn't register the villa. Hence, the tax department could not extend him the benefit of Section 54F.

Moreover, Advocate Vijhay K. Punna shed some light on the factual aspects of the case, stating that the alleged dispute which rose between the partners of the builders was in October 21, 2021, which was already well beyond the time stipulated in the JDA, and that no serious efforts or steps were undertaken by Mettu to ensure completion of the construction and to compel the builder's partners to honour the agreement.

On July 8, 2026 Mettu won the case in Telangana High Court as the court ruled that he is entitled to tax exemption under Section 54F even if there is a delay in receiving the legal title over residential villa beyond the prescribed period stipulated under Section 54 of the Act due to factors beyond his control. Advocate Ms. Mytri Indukuru represented Mettu in the high court.

(Case no: INCOME TAX TRIBUNAL APPEAL No.78 of 2025 DATE: 08.07.2026)

Sumit Bansal, Partner at S&R Associates said to ET Wealth Online: "Given how common multi-year delays are in joint development projects, this high court ruling gives taxpayers a clearer basis to resist exemption denials that turn purely on developer-side delays. It reinforces that the assessee's own conduct investing the sale proceeds is the operative test under Section 54F, not the developer's timeline."

Chartered Accountant Suresh Surana told ET Wealth Online: In this case, the taxpayer (Mettu) was an individual and a non-resident Indian who had not filed his return of income for Assessment Year 2017-18.

During Financial Year 2016-17, the taxpayer, along with 45 other landowners, entered into a Development Agreement-cum-General Power of Attorney dated May 31, 2016 for the development of approximately 4.505 acres of land. Under the agreement, the landowners were entitled to 47.25% of the developed property, while the developer was entitled to the remaining 52.75%. As part of the arrangement, the taxpayer (Mettu) became entitled to receive a residential villa measuring 250 square yards within 36 months from the date of the agreement.

Based on information relating to the property transaction, the Assessing Officer reopened the taxpayer's assessment under Section 148. The Assessing Officer initially determined the taxpayer's share of the deemed sale consideration under Section 50C at approximately Rs. 64.57 lakh.

During the assessment proceedings, the taxpayer (Mettu) accepted a deemed consideration of Rs 50 lakh, claimed an indexed cost of acquisition of Rs 5.28 lakh and sought exemption under Section 54F on the ground that the capital gains had been invested in the construction of the residential villa receivable under the development agreement.

The Assessing Officer denied the exemption because the villa had not been completed and handed over within three years, the occupancy certificate had not been obtained and legal title had not been registered in the taxpayer's name. The Dispute Resolution Panel upheld this view.

On further appeal, the Hyderabad ITAT also denied the exemption, observing that the construction had remained incomplete for more than seven years, as against the three-year period contemplated under Section 54F. The taxpayer (Mettu) therefore approached the Telangana High Court.

Before the Telangana High Court, Mettu submitted that the development agreement required the villa to be delivered by May 31, 2019. However, disputes between the developer's partners delayed the construction and delivery of the villa. Since the delay was caused by the developer and was beyond the taxpayer's control, it was argued that the taxpayer should not be deprived of the exemption.

The Income Tax Department, on the other hand, contended that construction was completed only in November 2023, the villa had not been registered in the taxpayer's name and the taxpayer had not taken sufficient steps to ensure timely completion.

Surana says that the Telangana High Court held that Section 54F is a beneficial provision intended to encourage taxpayers to reinvest capital gains in residential property and must therefore be interpreted liberally. The essential requirement is that the taxpayer should have invested the capital gains in purchasing or constructing a residential house.

Surana says: "Once the taxpayer has made the required investment, the exemption should not be denied merely because construction, possession or registration could not be completed within the prescribed period for reasons beyond the taxpayer's (Mettu) control."

The high court observed that the taxpayer had parted with and invested the capital gains towards the construction of the residential villa under the development agreement. The subsequent delay on the developer's part did not alter the fact that the taxpayer had substantially complied with the objective and essential requirements of section 54F.

Completion of every aspect of construction, physical occupation and registration of legal title within the stipulated period were not treated as mandatory where the taxpayer had made the investment and the remaining delay was beyond his control.

To reach this conclusion, the High Court relied upon CIT v. C. Gopalaswamy and the principles laid down in CIT v. Sambandam Udaykumar. These decisions recognise that the legislative purpose of section 54F is fulfilled when the capital gains are invested in a residential house.

Surana says: "A taxpayer should not lose the exemption merely because the builder fails to complete the construction or execute the registered document within the prescribed period."

Tanmay Aggarwal from S&R Associates says that Section 54F was introduced to encourage investment in residential housing.

Aggarwal says: "The Telangana High Court has rightly reiterated that it is a beneficial provision and that, where the taxpayer has invested the capital gains towards acquiring or constructing a residential house, exemption should not be denied merely because construction or transfer of legal title is delayed due to circumstances beyond the taxpayer's control."

Surana says that the taxpayer (Mettu) won because he had fulfilled the substantive requirement of Section 54F by investing the capital gains in the residential villa, while the delay in completing and registering the property was attributable to the developer and was beyond his control.

The Telangana High Court set aside the ITAT's order, held the denial of exemption to be unsustainable and directed that the taxpayer (Mettu) be granted the benefit under section 54F.