However, a recent ruling by the Income Tax Appellate Tribunal (ITAT) Mumbai brings huge relief and shows that this fear may be overstated.

What Happened in This Case?

Vaibhav Vijay Sawant sold his residential flat in Andheri West, Mumbai, on 21st July 2016 for ₹5.50 crore. After indexation, he earned a long-term capital gain of ₹2,52,02,110. He invested the entire gain amount by booking two under-construction flats in the “Millionist-14” project by M/s. Aadinath Developers.

He received allotment letters in June 2016 and paid ₹2.60 crore to the builder — more than the capital gain. However, like many real estate projects, this one got badly delayed. There was no registered sale agreement, and possession was never given even after several years.

When his return was selected for scrutiny, the Income Tax Officer raised strong objections and issued notices. The AO disallowed the entire ₹2.52 crore deduction under Section 54, adding it back as taxable income. The main objection was:

“Mere allotment letter is not proof of purchase. No registered agreement. No possession. Hence, deduction not allowed.”

This is exactly why the headline says “Will You Get a Tax Notice?” — because this is how the department typically reacts in such cases.

The Final Relief – ITAT Order

Fortunately, the story did not end with the tax demand.

• The CIT(A) allowed the appeal in favour of the assessee.
• The Revenue challenged the order before ITAT Mumbai.
• On 20th May 2026, the ITAT bench of Judicial Member Shri Sandeep Singh Karhail and Accountant Member Shri Bijayananda Pruseth delivered the order in ITA No. 6105/Mum/2025, dismissing the Revenue’s appeal.

Key Highlights of the ITAT Ruling

• Booking an under-construction flat through an allotment letter + substantial payment is sufficient to claim exemption under Section 54.
• Actual registration of agreement or physical possession is not mandatory.
• Investment in under-construction property qualifies as “purchase/construction” of a residential house.
• Delay in project completion due to reasons beyond the buyer’s control (common builder delays, regulatory issues) cannot be held against the buyer.
• The Tribunal relied on Bombay High Court judgments, Calcutta High Court, Madhya Pradesh High Court rulings, and CBDT Circulars 471 & 672.

The ITAT observed that in today’s real estate market, where delays are rampant, insisting on possession or registration within the time limit would make Section 54 unworkable for genuine homebuyers.

Important Takeaway for Homebuyers

Yes — selling an old flat and investing in an under-construction project without a registered agreement can attract a tax notice. But as this case shows, you can successfully defend your claim and win at the appellate level if you have proper documentation (allotment letter + proof of payment).

This ruling gives confidence to thousands of homebuyers who have booked under-construction flats but are yet to get possession.

Also Read: Income Tax Tribunal Rules: Redevelopment Gains Not Taxable for Housing Societies; Crucial Shield for Flat Owners

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