Case Law Details
Usha Rani Laxmeshwar Vs National Faceless Appeal Centre (ITAT Indore)
ITAT Allows Section 54 Relief Because Procedural Lapse Cannot Override Genuine Reinvestment; Reassessment Fails Because Section 54 Benefit Cannot Be Denied for Technical Non-Compliance; Section 54 Deduction Upheld Because New House Was Purchased Within Statutory Time Limit; Capital Gain Exemption Restored Because Actual Investment Took Precedence Over Deposit Procedure.
Summary : The Indore Bench of the Income Tax Appellate Tribunal in held that exemption under Section 54 of the Income Tax Act cannot be denied merely because the assessee failed to deposit the unutilized capital gains in the Capital Gain Deposit Scheme before the due date prescribed under Section 139(1), when the investment in a new residential property was admittedly made within the statutory period of two years. The assessee had sold a jointly owned residential property in Bhopal and later purchased a new residential house in Bangalore on 06.10.2016. Although the Assessing Officer reopened the assessment and disallowed the exemption of ₹1.11 crore on the ground that the investment was made after the due date for filing the return and without depositing the amount in the Capital Gain Deposit Scheme, the Tribunal observed that the substantive condition of reinvestment within the prescribed period had been fulfilled. Relying on earlier ITAT rulings, the Tribunal held that procedural lapses cannot defeat beneficial exemption provisions and accordingly deleted the disallowance made under Section 54.
Core Issue: The Tribunal examined whether non-deposit of capital gains in the Capital Gain Deposit Scheme is fatal to a claim under section 54 when the assessee has, in fact, invested the amount in a new residential house within the two-year period prescribed by the statute.
Facts: The assessee sold her one-third share in a residential property at Bhopal on 23.12.2015 and claimed exemption under section 54 of ₹1,11,25,790 on purchase of a residential house in Bengaluru on 06.10.2016. Though the investment was made within two years from the date of transfer, it was after the due date for filing the return under section 139(1), and no amount had been deposited in the Capital Gain Deposit Scheme before that due date.
Findings of AO and CIT(A): In reassessment proceedings initiated pursuant to a Revenue Audit objection, the AO disallowed the exemption solely on the ground that the assessee had not deposited the unutilized capital gain in the Capital Gain Deposit Scheme before the due date under section 139(1). The CIT(A), NFAC, affirmed the disallowance.
ITAT Findings: The Tribunal held that the decisive fact was that the assessee had actually purchased the new residential house within the two-year period expressly allowed under section 54. The requirement to deposit funds in the Capital Gain Deposit Scheme was held to be procedural in nature, intended only to regulate temporary parking of unutilized funds, and not a substantive condition that could override the assessee’s entitlement arising from timely reinvestment. Denial of exemption on such a hyper-technical ground was held to be unsustainable.
Held: Where the assessee invests the capital gain in a new residential house within the period prescribed under section 54, exemption cannot be denied merely because the amount was not first deposited in the Capital Gain Deposit Scheme before the due date under section 139(1).
Final Conclusion: The ITAT allowed the appeal and directed deletion of the disallowance of ₹1,11,25,790, holding that exemption under section 54 was fully available for AY 2016-17.
Cases Relied Upon:
1. ITO-1(2), Indore v. Rajendra Singh Yadav – 2024 (10) TMI 1805 (ITAT Indore)
2. Ms. Sarita Gupta v. Principal Commissioner of Income Tax, Ghaziabad – 2023 (12) TMI 501 (ITAT Delhi)
3. Shri Ramaiah Dorairaj v. Income Tax Officer, Ward 4(2)(2), Bangalore – 2020 (12) TMI 597 (ITAT Bangalore
FULL TEXT OF THE ORDER OF ITAT INDORE
Feeling aggrieved by appeal-order dated 23.06.2025 passed by learned Commissioner of Income-tax (Appeal), NFAC, Delhi [“CIT(A)”], which in turn arises out of assessment-order dated 13.03.2024 passed by learned Assessment Unit of Income-tax Department [“AO”] u/s 144 r.w.s. 144B of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2016-17, the assessee has filed this appeal on following grounds:
“Ground 1. That the disallowance of exemption of Rs. 1,11,25,790/-claimed u/s 54, as made by the learned AO and 1 upheld by the Honourable CIT(A) be held to be bad in law and unjustified. It is respectfully prayed that the said exemption be held to be allowable and accordingly be allowed.
Ground 2. In the alternative and without prejudice to the ground stated above, the disallowance made by the learned AO and upheld by the Honourable CIT(A) be held to be high and unreasonable and be suitably reduced.
Ground 3. The appellant craves leave to add, amend OR alter any Ground of Appeal before OR during the course of appellate proceedings.”
2. The background facts leading to present appeal are as under:
(i) The assessee-individual filed her return of income of AY 2016-17 u/s 139 on 31.03.2017 declaring a total income of Rs. 3,53,500/-. In the return so filed, the assessee declared capital loss of Rs. (-) 25,59,375/-from a residential property No. 4, MP Nagar, Zone-2, Bhopal sold on 23.12.2015. The said property was a jointly owned property of assessee and his family members, in which the assessee had 1/3rd share. The working of capital loss made by assessee is available in Paper-Book at Page 11, according to which the assessee declared sale-proceed of Rs. 2,00,00,000/- (1/3rd share in total sale consideration); deducted indexed cost of acquisition + improvement; and also deducted exemption u/s 54 and 54EC and arrived at capital loss of Rs. (-) 25,59,375/-. The case of assessee was subjected to scrutiny assessment and the AO passed assessment-order dated 04.12.2018 u/s 143(3) assessing taxable capital gain at Rs. 35,75,441/- against the capital loss of Rs. (-) 25,59,375/- declared by assessee. Consequently, while completing scrutiny assessment through assessment-order dated 04.12.2018 u/s 143(3), the AO assessed total income at Rs. 39,28,941/- [Returned income of Rs. 3,53,500/- (+) Capital gain of Rs. 35,75,441/-]. The copy of assessment-order passed by AO is available at Paper-Book Pages 13-28. In Para No. 11 of assessment-order, the AO has made working of taxable capital gain at Rs. 35,75,441/-, which shows that the AO allowed exemption of Rs. 1,11,25,790/- u/s 54 qua the investment in purchase of a new house in Bangalore. Further, in Para No. 8 of assessment-order, the AO has made following noting:
“8. In response to the show cause notice, the assessee replied vide e-proceeding order sheet entry dated 19/11/2018 and submitted the following document namely (1) statement of capital gain (2) computation sheet of total income (2) Sale deed of property (a residential house no. 4, MP Nagar Zone-2 Bhopal) sold on 23/12/2015(3) Purchase deed of property (a residential house no. 4, MP Nagar Zone-2, Bhopal) purchased on 04/03/1992(4) Purchase deed of property (three bedroom apartment, bearing 04 on the seventh floor in block A4 of Elita Promenade) purchased on 06/10/2016 at Bengaluru. (5) Investment proof in REC of value Rs. 50,00,000/-.”
Thus, the original scrutiny assessment was closed at a total income of Rs. 39,28,941/-.
(ii) Subsequently, the AO re-opened assessee’s case u/s 147 by a notice dated 24.03.2023 u/s 148 after completing the procedure of section 148A and taking into an objection raised by Revenue Audit Party (RAP) that the assessee made investment of Rs. 1,11,25,790/- in purchase of new house in Bangalore on 06.10.2016, which was after the due date of ITR for AY 2016-17. The AO also issued notices u/s 142(1) to assessee. Ultimately, finding no response from assessee, the AO disallowed exemption u/s 54 of Rs. 1,11,25,790/- and completed reassessment at a total income of Rs. 1,50,54,731/-.
(iii) Aggrieved, the assessee carried matter in first-appeal and made submission. The Ld. CIT(A), however, dismissed assessee’s appeal and did not grant any relief.
(iv) Now, the assessee has come before us by way of next appeal.
3. We have heard learned Representatives of both sides and perused the case record including the orders passed by lower authorities.
4. The precise issue in present case is whether the exemption claimed by assessee u/s 54 and allowed by Ld. AO in the course of original scrutiny assessment amounting to Rs. 1,11,25,790/- in respect of investment made in a house at Bangalore was allowable or not?
5. The undisputed facts giving rise to the controversy are as under:
(i) The assessee sold a (jointly owned) residential house situated at No. 4, MP Nagar, Zone-2, Bhopal on 23.12.2015 and earned capital gain.
(ii) The assessee re-invested a sum of Rs. 1,11,25,790/- by purchasing a residential house situated at Bangalore on 06.10.2016, which was after due date for filing of return u/s 139(1).
(iii) The assessee did not make any deposit in Capital Gain Deposit Scheme before due date u/s 139(1).
6. Thus, the assessee has made new investment within the prescribed period of 2 years in section 54 and this fact cannot be disputed by revenue. However, the sole reason of denial of exemption u/s 54 is that the assessee did not follow the procedure of depositing capital gain in Capital Gain Deposit Scheme by the due date for filing of return u/s 139(1) for AY 201617. The AO is of the view that the proper procedure would have been to deposit money in Capital Gain Deposit Scheme before due date u/s 139(1) and thereafter utilize such deposited money in new investment within 2 years.
7. Similar issue has already been decided by ITAT, Indore in ITO-1(2), Indore Vs. Rajendra Singh Yadav, ITA No. 152/Ind/2024, as under:
“7. We have considered rival submissions of both sides and perused the orders of lower-authorities and facts of case in the light of judicial view. The undisputed fact is that the assessee has made investment in new agricultural land within the prescribed period of 2 years as per section 54B. The only point is that the assessee has not followed the route of Capital Gain Deposit Scheme while making such investment. This very situation has been directly dealt in following cases where it has been held that the exemption provision is a beneficial law and the benefit of same cannot be denied on hyper-technical ground of procedural lapse where the assessee has made investment in new asset within the prescribed period:
(i) ITAT, Delhi in Ms. Sarita Gupta Vs. PCIT, ITA No. 1174/Del/2022 order dated 07.12.2023
(ii) ITAT, Banglore in Sri Ramaiah Dorairaj Vs. ITO, Bangalore, ITA No. 1899/Bang/2018 order dated 09.12.2020
8. The view taken by CIT(A) is supported by above decisions of ITAT benches. Therefore, we do not find any illegality in the order of CIT(A) granting exemption u/s 54B to assessee. Accordingly, the order of CIT(A) is hereby upheld and the revenue’s appeal is dismissed being devoid of merit.
9. Resultantly, this appeal is dismissed.”
8. Respectfully following the same view, we too hold that the exemption claimed by assessee in present case u/s 54 cannot be denied merely on account of non-deposit of capital gain in Capital Gain Deposit Scheme before the due date prescribed u/s 139(1), when the assessee has admittedly made investment in a new residential house within the prescribed period of 2 years provided in section 54. The requirement of deposit in Capital Gain Deposit Scheme is a procedural condition intended to regulate utilization of unutilized capital gain and cannot override the substantive compliance of making investment within the stipulated period. Therefore, in the facts of present case, the disallowance of exemption u/s 54 amounting to Rs. 1,11,25,790/- made by AO and sustained by Ld. CIT(A) is not sustainable in law. Accordingly, the same is directed to be deleted.
9. Resultantly, this appeal is allowed.
Order pronounced in the open court on 14.05.2026
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