Circular No. 471

428. Capital gains from long-term capital asset - Investment in a flat under the self-financing scheme of the Delhi Development Authority - Whether to be treated as construction for the purposes of capital gains

What this is

Circular No. 471 was issued by the Central Board of Direct Taxes on 15 October 1986. Its subject is 428. Capital gains from long-term capital asset - Investment in a flat under the self-financing scheme of the Delhi Development Authority - Whether to be treated as construction for the purposes of capital gains.

What it does

Treats allotment of a flat under the Delhi Development Authority's Self-Financing Scheme as construction, not purchase, for capital gains relief. That matters because sections 54 and 54F give the exemption on a purchase made within one year before or after the transfer, but on construction completed within three years of the transfer. Under the Scheme the allotment letter issues on payment of the first instalment of the cost of construction, the allotment is final unless cancelled or withdrawn from, the allottee gets title on the allotment letter, the instalments are follow-up action and taking possession is a formality, his remedy for non-delivery being a suit for recovery of possession. On that footing the Board holds that the Authority constructs on the allottee's behalf, the transaction is not a sale, the cost of the new asset is the tentative cost of construction, and payment by instalments does not alter the position.

Why it was issued

The Board examined whether acquiring a flat under the Self-Financing Scheme is a purchase or construction by the Authority on the allottee's behalf, and was advised on the point.

Who it reaches

Allottees of Delhi Development Authority Self-Financing Scheme flats claiming section 54 or 54F relief
Sellers of long-term capital assets reinvesting in such a flat
Assessing Officers computing exempt capital gain on a reinvestment

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.54	s.82

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

428. Capital gains from long-term capital asset - Investment in a flat under the self-financing scheme of the Delhi Development Authority - Whether to be treated as construction for the purposes of capital gains
1. Sections 54 and 54F provide that capital gains arising on transfer of a long-term capital asset shall not be charged to tax to the extent specified therein, where the amount of capital gain is invested in a residential house. In the case of purchase of a house, the benefit is available if the investment is made within a period of one year before or after the date on which the transfer took place and in case of construction of a house, the benefit is available if the investment is made within three years from the date of the transfer.
2. The Board had occasion to examine as to whether the acquisition of a flat by an allottee under the Self-Financing Scheme (SFS) of the D.D.A. amounts to purchase or is construction by the D.D.A. on behalf of the allottee. Under the SFS of the D.D.A., the allotment letter is issued on payment of the first instalment of the cost of construction. The allotment is final unless it is cancelled or the allottee withdraws from the scheme. The allotment is cancelled only under exceptional circumstances. 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. If there is a failure on the part of the D.D.A. to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for recovery of possession.
3. The Board have been advised that under the above circumstances, the inference that can 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. Under the scheme the tentative cost of construction is already determined and the D.D.A. facilitates the payment of the cost of construction in instalments subject to the condition that the allottee has to bear the increase, if any, in the cost of construction. Therefore, for the purpose of capital gains tax the cost of the new asset is the tentative cost of construction and the fact that the amount was allowed to be paid in instalments does not affect the legal position stated above. In view of these facts, it has been 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.
Circular : No. 471 [F. No. 207/27/85-IT(A-II)], dated 15-10-1986.

What to watch

The whole benefit is the longer window: three years from the transfer rather than one year after it.
The cost of the new asset is the tentative cost of construction fixed under the Scheme, and the allottee bears any increase in construction cost.
The circular is written on the features of the Delhi Development Authority's Self-Financing Scheme as they then stood; another scheme has to be tested against those features, not assumed to be covered.
Sections 54 and 54F have since been amended in terms this text does not carry.

Where you meet it

In an assessment where relief under section 54 or 54F is denied because the flat was not acquired within one year of the transfer.

An example

Ours, not the Board’s: a worked case built from the rule the instrument sets, to show how it falls out.

An assessee sells a long-term asset in June 1985 and pays the first instalment on a Self-Financing Scheme flat in March 1987, taking possession in 1988. Treated as a purchase, the reinvestment would be outside the one-year window and the relief would fail. Treated as construction on this circular, it is within three years of the transfer and the relief holds, the cost taken being the tentative cost of construction.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 1/2023 — Extension of time limit for compliance to be made for claiming any exemption under section 54 to 54GB of the income tax 6 January 2023
Circular No. 12/2021 — Extension of time limits of certain compliances to provide relief to taxpayers in view of the severe pandemic 25 June 2021
Notification No 39 /2020 [F. No. 370142/23/2020-TPL] / SO 2126(E) — 2 the Gazette of INDIA : Extraordinary [Part Ii—sec. 3(ii)] 29 June 2020
Notification No.35 /2020 [F. No. 370142/23/2020-TPL] / SO 2033(E) — Ministry of Finance 24 June 2020
Circular No. 743 — 432. Taxability of unutilised deposit under the Capital Gains Accounts Scheme, 1988 in the hands of the legal heirs of t 6 May 1996
Circular No. 672 — 429. Whether allotment of flats/houses by co-operative societies and other institutions, whose schemes of allotment and 16 December 1993

← Circular No. 472 · Circular No. 470 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.

What it means in practice. This page is the instrument. For the question it answers, what the Board decided and what to do about it, see CBDT Circular 471 — a self-financing scheme flat is a construction, s.54.