Is a flat allotted under a self-financing scheme a purchase or a construction for s.54 and s.54F?
Construction. The Board decided that allotment of a flat under the Self-Financing Scheme of the D.D.A. is to be treated as a case of construction, not purchase, so the three-year window applies rather than the one-year-before or two-years-after window. In reaching that view the Board recorded that the allottee gets title on the issue of the allotment letter and that paying the instalments and taking possession come afterwards — a sentence that has since done a great deal of work outside s.54 and s.54F.
Decided by the CBDT Circulars & Instructions (Central Board of Direct Taxes, Ministry of Finance, Department of Revenue) on 1986-10-15, reported as Circular No. 471 [F. No. 207/27/85-IT(A-II)], dated 15-10-1986. It bears on section 54, section 54F, section 45 of the Income Tax Act 1961, in Capital Gains and Capital Gains Exemptions matters.
This is the older and narrower use of the circular: it buys a longer reinvestment window for someone who books a flat with the sale proceeds. The wider use is the one Bombay put it to in Vembu Vaidyanathan, where para 2 was read as fixing the date on which a purchaser acquires a property at all. Because it is a Board circular, an Assessing Officer cannot take a view contrary to it, which is why it is usually a stronger card than a decision of a High Court that is not yours.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Sections 54 and 54F give relief where the capital gain is invested in a residential house, and they set different windows depending on whether the assessee purchases (one year before or two years after the transfer) or constructs (three years from the transfer). The Board had occasion to examine whether acquisition of a flat by an allottee under the Self-Financing Scheme of the D.D.A. amounts to a purchase or is construction by the D.D.A. on behalf of the allottee. Under that scheme the allotment letter is issued on payment of the first instalment of the cost of construction, the allotment is final unless cancelled or the allottee withdraws, and cancellation happens only in exceptional circumstances.
The Board decided that cases of allotment of flats under the Self-Financing Scheme of the D.D.A. shall be treated as cases of construction for the purpose of capital gains.
The Board was advised that the inference to be drawn is that the D.D.A. takes up the construction work on behalf of the allottee and that the transaction involved is not a sale. Two features carried that inference. First, the allottee's position: he gets title to the property on the issuance of the allotment letter, the payment of instalments is only a follow-up action and taking delivery of possession is only a formality; if the D.D.A. fails to deliver possession after completing construction the allottee's remedy is a suit for recovery of possession. Second, the cost: under the scheme the tentative cost of construction is already determined and the D.D.A. merely facilitates payment in instalments, subject to the allottee bearing any increase in the cost, so for capital gains purposes the cost of the new asset is the tentative cost of construction and payment by instalments does not affect that.
The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking the delivery of possession is only a formality.
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Handle my notice → Ask a CA on WhatsAppConstruction. The Board decided that allotment of a flat under the Self-Financing Scheme of the D.D.A. is to be treated as a case of construction, not purchase, so the three-year window applies rather than the one-year-before or two-years-after window. In reaching that view the Board recorded that the allottee gets title on the issue of the allotment letter and that paying the instalments and taking possession come afterwards — a sentence that has since done a great deal of work outside s.54 and s.54F. This was decided by the CBDT Circulars & Instructions (Central Board of Direct Taxes, Ministry of Finance, Department of Revenue) and bears on section 54, section 54F, section 45 of the Income Tax Act 1961. It is reported as Circular No. 471 [F. No. 207/27/85-IT(A-II)], dated 15-10-1986. This is the older and narrower use of the circular: it buys a longer reinvestment window for someone who books a flat with the sale proceeds. The wider use is the one Bombay put it to in Vembu Vaidyanathan, where para 2 was read as fixing the date on which a purchaser acquires a property at all. Because it is a Board circular, an Assessing Officer cannot take a view contrary to it, which is why it is usually a stronger card than a decision of a High Court that is not yours. If it applies to you, the first step is this: Read para 2 before you rely on it: the reasoning depends on the allotment letter issuing on payment of the first instalment, on the allotment being final unless cancelled or withdrawn from, and on cancellation being possible only in exceptional circumstances.
Sections 54 and 54F give relief where the capital gain is invested in a residential house, and they set different windows depending on whether the assessee purchases (one year before or two years after the transfer) or constructs (three years from the transfer). The Board had occasion to examine whether acquisition of a flat by an allottee under the Self-Financing Scheme of the D.D.A. amounts to a purchase or is construction by the D.D.A. on behalf of the allottee. Under that scheme the allotment letter is issued on payment of the first instalment of the cost of construction, the allotment is final unless cancelled or the allottee withdraws, and cancellation happens only in exceptional circumstances. The matter was decided on 1986-10-15 by the CBDT Circulars & Instructions (Central Board of Direct Taxes, Ministry of Finance, Department of Revenue). On those facts the CBDT Circulars & Instructions held as follows. The Board decided that cases of allotment of flats under the Self-Financing Scheme of the D.D.A. shall be treated as cases of construction for the purpose of capital gains.
The Board was advised that the inference to be drawn is that the D.D.A. takes up the construction work on behalf of the allottee and that the transaction involved is not a sale. Two features carried that inference. First, the allottee's position: he gets title to the property on the issuance of the allotment letter, the payment of instalments is only a follow-up action and taking delivery of possession is only a formality; if the D.D.A. fails to deliver possession after completing construction the allottee's remedy is a suit for recovery of possession. Second, the cost: under the scheme the tentative cost of construction is already determined and the D.D.A. merely facilitates payment in instalments, subject to the allottee bearing any increase in the cost, so for capital gains purposes the cost of the new asset is the tentative cost of construction and payment by instalments does not affect that. In the words reproduced by the source cited on this page: "The allottee gets title to the property on the issuance of the allotment letter and the payment of instalments is only a follow-up action and taking the delivery of possession is only a formality."
It was decided by the CBDT Circulars & Instructions on 1986-10-15 and is reported as Circular No. 471 [F. No. 207/27/85-IT(A-II)], dated 15-10-1986. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 54, section 54F, section 45, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Board decided that cases of allotment of flats under the Self-Financing Scheme of the D.D.A. shall be treated as cases of construction for the purpose of capital gains. It arises in Capital Gains and Capital Gains Exemptions matters, on section 54, section 54F, section 45 of the Income Tax Act 1961, and was decided by Central Board of Direct Taxes, Ministry of Finance, Department of Revenue. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If your client's scheme is not a D.D.A. scheme, do not stop here — go to Circular 672, which is the clause that reaches co-operative societies and other institutions. Where the point is s.54 or s.54F, use it for the three-year construction window; where the point is holding period, use it as Bombay used it, and be ready for the department to say the circular is about something else. Note the cost point in para 3: the Board treats the cost of the new asset as the tentative cost of construction, and the fact that it is payable in instalments does not change that.
Still good law. Still being applied. The Bombay High Court set the circular out and decided PCIT v. Vembu Vaidyanathan on it on 22 January 2019, and the judgment records no submission that it had been withdrawn or superseded. I did not find, and did not have the search budget to look systematically for, any later circular replacing it. That finding was checked against a published source, which is linked on this page, on 2026-08-22. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The circular decides one thing only — that allotment under the D.D.A. Self-Financing Scheme is a case of construction for capital gains purposes. Everything else it says, including the sentence about the allottee getting title on the allotment letter, is the Board's reasoning towards that conclusion, not an operative direction about holding periods. The Bombay High Court in PCIT v. Vembu Vaidyanathan used that reasoning to fix the date of acquisition, and that reading is what most practitioners now cite it for, but the circular itself does not say so. The F. No. and date line reproduced here appears on the taxguru.in text, which carries the full circular. The taxtmi.com page for the same circular is a truncated extract with a differently worded subject line and does not reproduce the sentence quoted below; the quote was confirmed instead on a second taxguru.in reproduction of the circular, which prints "on the issuance of the allotment letter" in the same terms. No second host reproducing that sentence in full was located; thetaxtalk.com carries it only as set out in the Bombay High Court's judgment. It is confined on its face to the D.D.A. Self-Financing Scheme; for anything else you need Circular 672 and the comparison it requires. It does not say what happens if the construction is never completed, or if the allotment is cancelled after some instalments have been paid. It does not address holding period in terms. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Board decided that cases of allotment of flats under the Self-Financing Scheme of the D.D.A. shall be treated as cases of construction for the purpose of capital gains.
TaxSphere, “CBDT Circular 471”, https://taxnotice.vittsphere.com/caselaw/case/cbdt-circular-471-dda-allotment-treated-as-construction/ (validity last checked 2026-08-22)
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I got two independent floors from the builder. Is that one residential house for 54?
I paid the whole price of the new house but put my wife's name on the deed alongside mine. Will the officer cut my section 54F exemption to half?
I booked a flat in 2004 and only signed the agreement in 2008. Does my holding period run from the allotment letter?
I paid for the new house but it's in my son's name. Can I still claim 54F?
