Taxpayer builds new house before selling old property, faces Section 54 dispute; ITAT Delhi quashes tax notice

A taxpayer who constructed a new house before selling his old residential property has won a case against the tax department. In its 3 August 2026 order in Raj Kumar vs ITO, ITA No. 3396/Del/2026, the ITAT Delhi quashed the reassessment after finding that the Section 148 notice was issued beyond the permissible limitation period.

Raj Kumar, a resident of Rajouri Garden, Delhi, owned a residential flat in Paschim Vihar, which he had purchased on 20 July 2005 for ₹6.48 lakh, including stamp duty. He sold the property on 9 October 2013 for ₹53 lakh. Since he had held the property for more than 36 months, the resulting gain was treated as long-term capital gain.

Kumar claimed a Section 54 exemption after investing in a new residential house in Tilak Nagar. According to the ITAT order, his total investment towards land and construction was around ₹47.38 lakh. He supported the investment with bank entries from Indian Overseas Bank and invoices from vendors including Singla Iron Store and KONE Elevators.

Why the tax department rejected the exemption

The dispute arose over when Kumar began constructing the new house. The construction started on 31 October 2012, almost a year before he sold the Paschim Vihar property on 9 October 2013.

The Assessing Officer denied Kumar the Section 54 exemption and treated the entire ₹53 lakh sale consideration as short-term capital gain. The AO also denied him the benefit of indexed cost of acquisition.

Kumar challenged the assessment before the CIT(A)/National Faceless Appeal Centre (NFAC), but the authority sustained the additions. The CIT(A) held that the Section 54 exemption was not available because construction of the new house had begun before the sale of the original property.

Kumar then approached the ITAT Delhi. His counsel, Nitin Gulati, raised an additional ground challenging the validity of the Section 148 notice. He argued that the notice was barred by limitation in light of the Supreme Court's judgment in Union of India vs Rajeev Bansal.

ITAT finds Section 148 notice was time-barred

The limitation issue ultimately decided Kumar's appeal.

The ITAT noted that Kumar had initially received a Section 148 notice on 28 May 2021. Applying the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, or TOLA, and the Supreme Court's decision in Rajeev Bansal, the tribunal found that 33 days of the limitation period remained.

The case was subsequently affected by the Supreme Court's judgment in Ashish Agarwal. Kumar was issued a show-cause notice under Section 148A(b) on 18 May 2022. He sought an adjournment and filed his detailed submission on 6 June 2022.

The ITAT held that the surviving 33-day period commenced from 6 June 2022 and expired on 9 July 2022. However, the Assessing Officer passed the order under Section 148A(d) and issued the fresh Section 148 notice only on 23 July 2022.

The tribunal concluded that the AO had exceeded the surviving limitation period for issuing the Section 148 notice. It therefore quashed the notice as barred by limitation. Since the reassessment under Section 147 was based on that notice, the tribunal also held that the resultant reassessment order could not survive.

The ITAT accordingly allowed Kumar's appeal. The order was pronounced in the open court on 3 August 2026.

Importantly, the tribunal's order does not decide the Section 54 issue on its merits. The CIT(A) had rejected Kumar's exemption because construction of the new house had begun before the sale of the old property, but the ITAT allowed the appeal on the separate jurisdictional ground that the Section 148 notice was time-barred. Therefore, the ruling should not be read as a finding that construction of a new house before selling the old property automatically qualifies for a Section 54 exemption.