Long Term Capital Gains Exemption Available Even If Residential House Was Demolished Before Sale: Madras High Court

Madras High Court has held that long-term capital gains (LTCG) exemption under Section 54 cannot be denied merely because the residential house was demolished before the sale, so long as the asset transferred is the same property and the capital gains are reinvested in a new residential house within the prescribed time.

The Madras High Court ruling you shared is titled “C. Aryama Sundaram v. The Commissioner of Income Tax, Chennai” (TCA Nos. 1161, 1163, 1164 and 1162 of 2009).​

Name and details of this ruling

• Case title: C. Aryama Sundaram v. The Commissioner Of Income Tax, Chennai.​
• Court: Madras High Court; Bench of Justices Anita Sumanth and K. Govindarajan Thilakavadi.​
• Core holding: Section 54 exemption is available even though the residential house on the property had been demolished prior to sale, as long as the transfer of the underlying property occurs and the assessee reinvests within Section 54(1) timelines.

Core ratio of the ruling

• The court clarified that what matters for Section 54 is the transfer of a long-term capital asset being a residential house property, not the physical existence of the old superstructure at the exact moment of sale, if the underlying property and ownership continuity are established.​
• Since the assessee sold the property thereafter and duly invested the capital gains in another residential house within the timelines of Section 54, the exemption was held allowable.​

Practical implications

• Demolition of an existing residential house before executing the sale deed will not, by itself, disqualify a genuine claim under Section 54, provided: (a) the property continues to be treated and transferred as a residential house property (land and building), and (b) reinvestment conditions (purchase/construction and time limits) are fully met.​
• This ruling is beneficial where assessees demolish an old structure (e.g., for better commercial realization or as part of redevelopment) before sale, and revenue objects that no “residential house” existed on the date of transfer. The judgment supports continuity of Section 54 benefit in such fact patterns, subject to usual evidentiary and timeline compliance.​

Relation to existing Section 54 jurisprudence

• The decision aligns with earlier liberal interpretations that focus on the substance of investment in residential property and adherence to timelines, rather than hyper-technical objections on the sequence or exact dates of construction, demolition, or sale.​
• However, separate jurisprudence cautions that demolition of the new asset acquired under Sections 54/54F within three years may amount to “transfer” and trigger withdrawal of exemption, which is a different issue and not diluted by this ruling.​

Other rulings on similar themes

There are multiple earlier rulings dealing with demolition/reconstruction and Section 54/54F, though facts vary:

• CIT v. Bharti Mishra (Delhi High Court) – commencement of construction of a new house before sale of the old asset does not bar exemption if statutory timelines and investment conditions are met.​
• Mrs. Chhaya B. Parekh (Bombay High Court) – discussion on whether demolition of a bungalow within three years violates Section 54F(3); Bombay HC held that mere demolition for renovation does not by itself constitute transfer, relying also on Vania Silk Mills (SC).​
• Subsequent analyses (e.g., Taxsutra/Taxmann notes) discuss situations where demolition of the new house within three years may trigger withdrawal of exemption, emphasizing that the law intends promotion of new residential units, not their destruction.​

How to position this Madras HC ruling

• The Aryama Sundaram decision is specifically on the point that non-existence of superstructure on the date of transfer (because of prior demolition) does not defeat Section 54, where the asset is effectively the same residential property and reinvestment within Section 54(1) is proved.​
• It can be read harmoniously with Delhi HC in Bharti Mishra and Bombay HC in Chhaya B. Parekh to argue for a beneficial, substance-over-form interpretation in cases of demolition plus reconstruction or prior demolition before sale, while being cautious where the new asset is demolished within three years (risk of withdrawal)

CA Ankit Gulgulia (Jain)

FCA, CWM (AAFM-US), CBV, CIFRS, R-ID, B.COM (H), RV* (IBBI)

Practising Chartered Accountant in Delhi NCR Since 2011. He can be contacted at ankitgulgulia@gmail.com or +91-9811653975.