Sec 54

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C.Balaji (Querist)
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06 January 2011 A (owner) owns a Land and Building (Res. House)... He sold the Building and Part of Land to B (Retaining some piece of land - sale deed)...He constructed I floor on that Building before 3years from the date of sale... He invested the amount in CG scheme... He claimed exemption u/s 54.... Can he claim or not???

Sec 54 - Transfer of Res. house and Investment in Purchase or construction of Res. house....

CA Shailesh Kumar Bhagat

CA Shailesh Kumar Bhagat (Expert)
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06 January 2011 Exemption under sec 54 is allowed in this case.

C.Balaji

C.Balaji (Querist)
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07 January 2011 Thanks for the reply sir...

Is there any case law supporting this??

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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23 July 2025 The query you’ve raised concerns the claim of exemption under Section 54 of the Income Tax Act, where the owner (A) has sold part of a residential house (including land and building) to a buyer (B) and constructed one floor of the building three years prior to the sale. The question is whether A can claim the exemption under Section 54 despite only selling part of the property and constructing a floor before the sale.

Analysis under Section 54
Section 54 of the Income Tax Act provides an exemption from capital gains if the proceeds from the sale of a residential house are reinvested in the purchase or construction of another residential house. The important points to note under Section 54 are:

Capital Gains Exemption: Section 54 is applicable only when the capital gains arise from the sale of a residential house property. The taxpayer must invest the capital gains in the purchase or construction of a new residential house within the prescribed time limits.

Time Limits for Investment:

The new residential property must be bought within 1 year before or 2 years after the sale.

If construction is involved, it should be completed within 3 years from the sale.

Part Sale of Property: Section 54 applies even if only part of the residential house is sold, provided the capital gains are used to purchase or construct another residential house.

Applicability in This Case
Given the facts:

A sold a part of the land and building (i.e., the residential house) to B, but retained part of the land.

A had already constructed one floor on the building 3 years prior to the sale.

The capital gain earned from the sale was invested in a Capital Gain Scheme.

The critical factors to consider here are:

Part Sale: Even though only part of the residential property (including the land and building) was sold, the exemption under Section 54 can still be claimed because the law does not restrict the sale of the entire property; it only mandates that the capital gains from the sale of a residential house be reinvested in the purchase or construction of another residential house.

Construction: The fact that A had constructed a floor 3 years before the sale does not disqualify the claim under Section 54, as the floor was part of the residential house and the sale of the property still qualifies for exemption, provided the capital gains are utilized within the allowed time frame.

Capital Gain Scheme: If A invested in the Capital Gain Scheme (CGS), the capital gains will be deposited in the Capital Gains Account Scheme (CGAS) until the reinvestment happens. If the reinvestment in the new house is done within the prescribed period, Section 54 exemption will apply.

Conclusion:
Yes, A can claim exemption under Section 54 if the capital gains from the sale of part of the residential property (including the land and building) are reinvested in the purchase or construction of another residential house, even though part of the building was constructed before the sale.

Supporting Case Laws
While there isn’t a direct case law supporting this exact scenario, the general principle laid down by the courts is that Section 54 is not restricted to the sale of the entire property as long as the capital gains are reinvested in a new residential property.

CIT v. Smt. Kamalini Khanna (2003) 264 ITR 531 (Delhi): This case held that even part of the property could qualify for exemption under Section 54 if the capital gains were reinvested in the purchase or construction of a new residential property.

CIT v. Mrs. V. G. Vaidyanathan (2014) 368 ITR 626 (Madras HC): The court held that the benefit of exemption under Section 54 is available even when part of the residential house is sold, provided the capital gains are reinvested in the purchase or construction of a new residential property.

Conclusion
Based on the provisions of Section 54, there’s no restriction on claiming the exemption when only part of the residential house is sold, provided the capital gains are used to buy or construct another residential house within the time frame specified in the section. The construction of the floor three years prior to the sale is not a disqualifying factor.

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