The Madras High Court has ruled in favour of senior advocate C. Aryama Sundaram, holding that he was entitled to capital gains exemption under Section 54 of the Income Tax Act despite the demolition of the original house years before sale. The judgment settles long-running appeals relating to redevelopment of a prime Chennai property.
Background of the Case
The dispute arose from the sale of undivided shares in a residential property at Cathedral Road, Chennai, which had been redeveloped under a Joint Development Agreement (JDA) signed in 1994. The house was demolished in 1995 to enable construction by the developer.
Mr. Sundaram sold his share in March 1999 and claimed exemption under Section 54 after reinvesting the capital gains in a residential property in New Delhi in January 2001. While the Commissioner of Income Tax (Appeals) accepted this claim, the Income Tax Appellate Tribunal reversed it, prompting the appeals before the High Court.
Senior counsel for the assessee argued that the tax department wrongly treated the JDA date as the date of transfer. It was submitted that the actual transfer occurred only when sale deeds were executed in 1999, making the New Delhi purchase well within the statutory time limit.
The revenue countered that Section 54 could not apply because the original residential building no longer existed and that the assessee had not deposited the gains under the Capital Gains Account Scheme.
Court’s Observations
A bench comprising Justice Anita Sumanth and Justice K. Govindarajan Thilakavadi rejected the tribunal’s approach.
“The transaction must be viewed as a continuous sequence of events,” the bench observed, clarifying that execution of the JDA did not by itself amount to transfer. The court held that the relevant date was March 1999, when sale deeds were actually executed.
On the demolition issue, the judges noted that redevelopment necessarily involves removal of existing structures and this alone cannot defeat a statutory exemption meant for residential properties.
The court further held that Section 54(2), which requires deposit of gains in a notified scheme, applies only when the assessee does not reinvest within the prescribed time. Since Mr. Sundaram purchased a new residential house within the allowed period, insisting on such a deposit would “nullify the option expressly provided by law.”
However, the High Court declined to interfere with the tribunal’s refusal to examine an alternate claim under Section 54F. It held that exemptions under Sections 54 and 54F operate independently and cannot be granted automatically without a clear claim and supporting facts on record.
Court’s Decision
Answering two substantial questions of law in favour of the assessee, the High Court restored the Section 54 exemption for the relevant assessment years. The remaining appeals were dismissed, bringing the tax litigation to a close.
Case Title: C. Aryama Sundaram v. Commissioner of Income Tax
Case No.: TCA Nos. 1161, 1162, 1163 & 1164 of 2009
Case Type: Income Tax Appeal
Decision Date: 17 December 2025
