I sold my house and put the money into a flat a co-operative society is building. The building is not finished. Have I constructed a house for section 54?
Yes, on these facts. The Bombay High Court held that a member who acquires the right to a specific flat in a building being constructed by a co-operative society, and who pays substantially the whole cost of that flat within the statutory period, has constructed a house property for the purposes of section 54. The test is domain over the flat and investment in it. Formation of a society to build flats is simply the way residential tenements are constructed in a city like Bombay, and the section must be read in that context. The reference was answered in favour of the assessee.
Decided by the High Court (Bombay High Court - Mrs Sujata V. Manohar, J) on 1993-03-02, reported as (1995) 216 ITR 376 (Bom). It bears on section 54 of the Income Tax Act 1961, in Capital Gains and Capital Gains Exemptions matters.
This is the decision that lets flat buyers use section 54 at all. The section speaks of purchasing or constructing a house, and a member of a housing society does neither in the conveyancing sense - the society owns the land, the society engages the builder, and the member holds shares and an allotment. The Court cut through that by asking what the member actually got: a right to a specific flat that could not be cancelled, paid for almost in full within the period. It draws support from the Board's own circular on Delhi Development Authority self-financing flats, which treats the allotment as the cost of construction, and observes that the present case is stronger because the money had actually been paid. It also asks the Board to issue a similar circular for society flats.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee owned a half share in a property at Worli which she and her husband, who owned the other half, used as their residence. By an agreement of 2 October 1972 the co-owners agreed to sell it to a proposed co-operative housing society, and the Andromeda Co-operative Housing Society Ltd was registered on 3 November 1972 to buy the property and build tenements for its members. The property was conveyed to the society on 8 December 1972 and the assessee received Rs 4 lakh on or before 31 March 1973. She was a signatory to the memorandum and agreed to take a flat. By an agreement of 25 October 1973 the society allotted her flat 7A and B of 2,590 square feet on the seventh floor for Rs 2,59,360, of which Rs 30,000 was for shares and the balance was to be treated as a loan to the society. She had to use the flat only as a residence for herself or her family, and could not cancel the agreement or claim damages. She paid Rs 2,59,238 in instalments between September 1972 and March 1975, of which Rs 2,51,238 was paid by 1 November 1974.
The question referred was answered in the affirmative and in favour of the assessee, with no order as to costs: the Tribunal was right to allow relief under section 54. The assessee had acquired substantial domain over the flat under her agreement with the society, coupled with payment of almost the entire cost of construction within two years of the transfer of the original property. Section 54 as then in force required that the assessee, having transferred a residence, purchase a house within one year before or after, or construct one within two years after, the transfer. The Court held that what has to be seen is whether the assessee acquired a right to a specific flat in a building being constructed by the society and made a substantial investment within the prescribed period entitling her to obtain possession of it and reside in it. The material test is domain over the flat and investment in it, and the assessee satisfied both. The Court distinguished Shantaben P. Gandhi and J.R. Subramanya Bhat as turning on their own facts, and recorded a suggestion that the Board issue a circular for society construction like the one it had issued for the Delhi Development Authority.
The Court read section 54 against the way housing is actually built. In a city like Bombay the price of land drives buyers into co-operative societies, which acquire the land and put up a building in which flats are allotted to members; that, the Court said, must also be viewed as a method of constructing residential tenements. Read that way, the enquiry is not into who held the title or who signed the building contract, but into what the assessee had acquired and paid for. On the facts she had a right to an identified flat, described by number, floor and area, which she could not give up and on which she could claim no damages, and which she was bound to occupy as a residence. Against that right she had paid all but Rs 8,000 of the price within two years of the conveyance, so the investment was substantially complete inside the statutory period. Those two elements - domain and investment - were treated as the material test. The Court fortified the conclusion from two directions. The Board's circular of 15 October 1986 on the Delhi Development Authority self-financing scheme accepts that title passes on allotment, that payment of instalments is follow-up action and possession a formality, and directs that such an allotment be treated as the cost of construction; a society member who has paid nearly the whole cost stands on a stronger footing still. Kesho Ram Passey and Shahzada Begum show the same approach to substantial compliance and to full domain and control acquired within the period.
The material test in this connection is domain over the flat and investment in it.
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Handle my notice → Ask a CA on WhatsAppYes, on these facts. The Bombay High Court held that a member who acquires the right to a specific flat in a building being constructed by a co-operative society, and who pays substantially the whole cost of that flat within the statutory period, has constructed a house property for the purposes of section 54. The test is domain over the flat and investment in it. Formation of a society to build flats is simply the way residential tenements are constructed in a city like Bombay, and the section must be read in that context. The reference was answered in favour of the assessee. This was decided by the High Court (Bombay High Court - Mrs Sujata V. Manohar, J) and bears on section 54 of the Income Tax Act 1961. It is reported as (1995) 216 ITR 376 (Bom). This is the decision that lets flat buyers use section 54 at all. The section speaks of purchasing or constructing a house, and a member of a housing society does neither in the conveyancing sense - the society owns the land, the society engages the builder, and the member holds shares and an allotment. The Court cut through that by asking what the member actually got: a right to a specific flat that could not be cancelled, paid for almost in full within the period. It draws support from the Board's own circular on Delhi Development Authority self-financing flats, which treats the allotment as the cost of construction, and observes that the present case is stronger because the money had actually been paid. It also asks the Board to issue a similar circular for society flats. If it applies to you, the first step is this: Anchor the claim on the two things the Court asked about - a right to an identified flat and the money actually paid - and put the allotment agreement and the payment schedule on record.
The assessee owned a half share in a property at Worli which she and her husband, who owned the other half, used as their residence. By an agreement of 2 October 1972 the co-owners agreed to sell it to a proposed co-operative housing society, and the Andromeda Co-operative Housing Society Ltd was registered on 3 November 1972 to buy the property and build tenements for its members. The property was conveyed to the society on 8 December 1972 and the assessee received Rs 4 lakh on or before 31 March 1973. She was a signatory to the memorandum and agreed to take a flat. By an agreement of 25 October 1973 the society allotted her flat 7A and B of 2,590 square feet on the seventh floor for Rs 2,59,360, of which Rs 30,000 was for shares and the balance was to be treated as a loan to the society. She had to use the flat only as a residence for herself or her family, and could not cancel the agreement or claim damages. She paid Rs 2,59,238 in instalments between September 1972 and March 1975, of which Rs 2,51,238 was paid by 1 November 1974. The matter was decided on 1993-03-02 by the High Court (Bombay High Court - Mrs Sujata V. Manohar, J). On those facts the High Court held as follows. The question referred was answered in the affirmative and in favour of the assessee, with no order as to costs: the Tribunal was right to allow relief under section 54. The assessee had acquired substantial domain over the flat under her agreement with the society, coupled with payment of almost the entire cost of construction within two years of the transfer of the original property. Section 54 as then in force required that the assessee, having transferred a residence, purchase a house within one year before or after, or construct one within two years after, the transfer. The Court held that what has to be seen is whether the assessee acquired a right to a specific flat in a building being constructed by the society and made a substantial investment within the prescribed period entitling her to obtain possession of it and reside in it. The material test is domain over the flat and investment in it, and the assessee satisfied both. The Court distinguished Shantaben P. Gandhi and J.R. Subramanya Bhat as turning on their own facts, and recorded a suggestion that the Board issue a circular for society construction like the one it had issued for the Delhi Development Authority.
The Court read section 54 against the way housing is actually built. In a city like Bombay the price of land drives buyers into co-operative societies, which acquire the land and put up a building in which flats are allotted to members; that, the Court said, must also be viewed as a method of constructing residential tenements. Read that way, the enquiry is not into who held the title or who signed the building contract, but into what the assessee had acquired and paid for. On the facts she had a right to an identified flat, described by number, floor and area, which she could not give up and on which she could claim no damages, and which she was bound to occupy as a residence. Against that right she had paid all but Rs 8,000 of the price within two years of the conveyance, so the investment was substantially complete inside the statutory period. Those two elements - domain and investment - were treated as the material test. The Court fortified the conclusion from two directions. The Board's circular of 15 October 1986 on the Delhi Development Authority self-financing scheme accepts that title passes on allotment, that payment of instalments is follow-up action and possession a formality, and directs that such an allotment be treated as the cost of construction; a society member who has paid nearly the whole cost stands on a stronger footing still. Kesho Ram Passey and Shahzada Begum show the same approach to substantial compliance and to full domain and control acquired within the period. In the words reproduced by the source cited on this page: "The material test in this connection is domain over the flat and investment in it."
It was decided by the High Court on 1993-03-02 and is reported as (1995) 216 ITR 376 (Bom). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 54, 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 question referred was answered in the affirmative and in favour of the assessee, with no order as to costs: the Tribunal was right to allow relief under section 54. The assessee had acquired substantial domain over the flat under her agreement with the society, coupled with payment of almost the entire cost of construction within two years of the transfer of the original property. Section 54 as then in force required that the assessee, having transferred a residence, purchase a house within one year before or after, or construct one within two years after, the transfer. The Court held that what has to be seen is whether the assessee acquired a right to a specific flat in a building being constructed by the society and made a substantial investment within the prescribed period entitling her to obtain possession of it and reside in it. The material test is domain over the flat and investment in it, and the assessee satisfied both. The Court distinguished Shantaben P. Gandhi and J.R. Subramanya Bhat as turning on their own facts, and recorded a suggestion that the Board issue a circular for society construction like the one it had issued for the Delhi Development Authority. It arises in Capital Gains and Capital Gains Exemptions matters, on section 54 of the Income Tax Act 1961, and was decided by Bombay High Court - Mrs Sujata V. Manohar, J. 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. Show the payments falling within the statutory period and quantify what proportion of the cost they represent; here all but Rs 8,000 of Rs 2,59,360 was paid inside two years. Rely on the Board's circular treating an allotment under a self-financing scheme as construction, and point out that a paid-up society member stands on stronger ground. Do not let the department make completion of the building or registration of a conveyance the test; the cases it cites for that, such as Shantaben Gandhi, turned on their own facts.
Still good law. A citedby search returns 69 later citing documents; only 4 are High Court. It was applied within a year in Orient Cartons Pvt Ltd v DCIT (7 June 1996, indexed on indiankanoon as Bombay High Court): at para 16 the Bench quoted the test - 'The material test in this connection is domain over the flat and investment in it. The assessee satisfies both these conditions' - and at para 25.1 made it the ground of decision: 'At any rate, the contentions of the learned counsel are supported by the decision of the jurisdictional High Court in the case of Mrs. Hilla J. B. Wadia. The domain over the properties was obtained by the assessee and so we have to hold that the assessee acquired the premises in question.' The Mumbai Tribunal continues to allow s.54 deduction on this footing (ACIT v Vishal Dilip Sankhe, 30 January 2019; ITO v Gope G. Shahani, 31 May 2018; ITO v Pritamlal J Doshi, 26 April 2017). Nothing overruling or doubting it was found. But note two Bombay decisions that confine it on facts. In Ketan Bolinjkar v ACIT (12 May 2003) the CIT(A)'s reliance on it was distinguished, and in Shri Rasiklal M. Parikh v ACIT (10 March 2017) the Bench observed only that 'In Mrs. Hilla J.B. Wadia the assessee had satisfied the material test of having domain over the flat and having made an investment therein', decided the case on the Maharashtra Ownership of Flats Act instead, and answered all three questions in favour of the Revenue. One citator hit is a false alarm: Mrs. Amy F. Cama v CIT (Bombay, 10 June 1998) refuses to apply 'CIT v. J.B. Wadia [1963] 48 ITR 135', a different and much older judgment, not this one. No source could be cited for that finding. 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 batch line listed section 54F; the judgment deals only with section 54, and I have taken the sections from the judgment. The assessment year is not stated on the harvested page, and the Court set out only the material part of section 54 as it then stood - the periods and conditions have since changed. The harvested text carries transcription errors in figures, giving the flat price as both Rs 2,59,360 and Rs 2,59,36 and the agreement date as both 25 and 28 October 1973, and it names only one judge although the judgment speaks in the plural. 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 question referred was answered in the affirmative and in favour of the assessee, with no order as to costs: the Tribunal was right to allow relief under section 54. The assessee had acquired substantial domain over the flat under her agreement with the society, coupled with payment of almost the entire cost of construction within two years of the transfer of the original property. Section 54 as then in force required that the assessee, having transferred a residence, purchase a house within one year before or after, or construct one within two years after, the transfer. The Court held that what has to be seen is whether the assessee acquired a right to a specific flat in a building being constructed by the society and made a substantial investment within the prescribed period entitling her to obtain possession of it and reside in it. The material test is domain over the flat and investment in it, and the assessee satisfied both. The Court distinguished Shantaben P. Gandhi and J.R. Subramanya Bhat as turning on their own facts, and recorded a suggestion that the Board issue a circular for society construction like the one it had issued for the Delhi Development Authority.
TaxSphere, “CIT v Mrs Hilla J.B. Wadia”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-hilla-j-b-wadia/ (validity last checked 2026-08-29)
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