ITAT Chennai Allows Section 54F Exemption on Flat Retained Under JDA, Rejects Revenue’s Objection

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) on 8 June 2026 held that an assessee who transferred land under a Joint Development Agreement (JDA) and retained one residential flat for personal use was entitled to claim exemption under Section 54F of the Income-tax Act. A Bench comprising Judicial Member Shri Aby T. Varkey and Accountant Member Shri S.R. Raghunatha directed the Assessing Officer to allow the exemption of Rs.1.01 crore claimed by the assessee.

The dispute arose for AY 2023-24 after the Assessing Officer denied the assessee’s claim of exemption under Section 54F in respect of Flat No. 501 received under a JDA with a developer. The AO held that the assessee had not satisfied the conditions prescribed under Section 54F and added Rs.1.01 crore to the taxable income. The Commissioner (Appeals) affirmed the disallowance.

Before the Tribunal, the assessee submitted that he had entered into a Joint Development Agreement in 2019 for the development of residential apartments. Under the arrangement, he transferred land to the developer and, in return, became entitled to nine flats. During the relevant year, four flats were sold, and the corresponding capital gains were offered to tax. Out of the remaining flats, Flat No. 501 was retained for personal residential use, and an exemption under Section 54F was claimed in respect of that flat alone.

The assessee argued that transfer of land under the JDA constituted transfer of a long-term capital asset and the consideration received was reinvested in the construction of a residential flat, thereby fulfilling both essential conditions prescribed under Section 54F.

The Tribunal noted that Section 54F requires two conditions to be satisfied: first, the transfer of a long-term capital asset other than a residential house; and second, the investment of the consideration in the purchase or construction of a residential house within the prescribed period. It was observed that the assessee had transferred land under the JDA and received residential flats as consideration, thereby satisfying the first condition.

The Bench further held that the assessee had effectively invested the consideration arising from the transfer of land towards the construction of a residential flat under the development arrangement. Relying on earlier decisions involving similar JDA transactions, including those where multiple flats were allotted to landowners, the Tribunal observed that the exemption under Section 54F cannot be denied merely because the residential unit was received pursuant to a development agreement.

The Tribunal emphasized that the assessee had claimed exemption only in respect of one residential flat retained by him and had duly fulfilled all conditions required under Section 54F.

Thus, the ITAT set aside the findings of the lower authorities and directed the Assessing Officer to grant the exemption claimed under Section 54F. The appeal of the assessee was allowed.

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