Section 54 Relief Can’t Be Denied Merely Due to Section 50C Addition: Pune ITAT

Himanshu Jain Vs DCIT (ITAT Pune)

Pune ITAT: Section 54 Relief Cannot Be Denied Merely Because Section 50C Enhances Sale Consideration; Matter Remanded for Verification

The Pune ITAT held that where an assessee sells a residential house for a value lower than the stamp duty valuation, resulting in an addition under section 50C, such deeming fiction does not automatically disentitle the assessee from claiming exemption under section 54/54F if the capital gains have been invested in a new residential house.

In this case, the assessee sold a residential property for ₹1.10 crore against a stamp duty valuation of ₹1.962 crore, leading to an addition of ₹86.20 lakh under section 50C. The assessee contended that the sale was under distress due to transfer of employment and had invested the entire sale proceeds, along with housing finance, in purchasing a new residential flat costing ₹1.92 crore. Although the claim under section 54/54F had not been made in the original return, it was raised before the CIT(A) as an additional ground.

The Tribunal observed that section 50C is only a deeming provision for computation of capital gains and does not override the beneficial provisions of sections 54/54F. It further held that if the investment in the new residential house is sufficient even after adopting the deemed sale consideration under section 50C, the assessee would, in principle, be entitled to the exemption. 

Relying on the decisions of the Bombay High Court in Hilla J.B. Wadia, the Delhi High Court in R.L. Sood, and CBDT Circular No. 471 dated 15.10.1986, the Tribunal reiterated that acquisition of substantial rights in a residential flat through an allotment or instalment scheme constitutes sufficient compliance with section 54, and physical possession or registration is not decisive where substantial investment has been made within the prescribed period.

However, since the assessment was completed ex parte under section 144 read with section 144B, and the lower authorities had not verified the payment schedule and agreement for the new flat, the Tribunal restored the matter to the Assessing Officer to verify the evidence and adjudicate the claim under sections 54/54F in the light of the above judicial precedents. The appeal was accordingly allowed for statistical purposes.

Cases Discussed

• CIT vs. R.L. Sood (Delhi High Court), (2000) 245 ITR 727 (Del)
• CIT vs. Mrs. Hilla J.B. Wadia (Bombay High Court), (1995) 216 ITR 376 (Bom)
• CIT vs. J. R. Subramanya Bhat (Karnataka High Court), (1987) 165 ITR 571 (Kar)
• Kesho Ram Passey vs. Reserve Bank of India (Punjab & Haryana High Court), (1984) 146 ITR 16 (P&H)
• Smt. Shantaben P. Gandhi vs. CIT (Gujarat High Court), (1981) 129 ITR 218 (Gujarat)

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal filed by the assessee is directed against the order dated 30.10.2025 of the Ld. CIT(A) / NFAC, Delhi relating to assessment year 2023-24.

2. Facts of the case, in brief, are that the assessee is an individual and filed his return of income on 30.06.2023 declaring total income of Rs.49,99,240/- from salary, capital gain and other sources. The case was selected for complete scrutiny through CASS as immovable property was sold for a consideration much below the stamp duty valuation attracting the provisions of section 50C of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). The Assessing Officer accordingly issued statutory notice u/s 143(2) of the Act. Thereafter a notice u/s 142(1) of the Act along with a questionnaire was issued in response to which the assessee filed various details.

3. During the course of assessment proceedings the Assessing Officer noted that the assessee has sold an immovable property for a consideration of Rs.1,10,00,000/- whereas the stamp duty valuation was at Rs.1,96,20,000/-. The submission of the assessee that the sale was a distress sale, was not accepted by the Assessing Officer and he held that section 50C does not provide any relaxation for distress sale. The Assessing Officer accordingly, apart from other additions, made addition of Rs.86,20,000/- by invoking the provisions of section 50C of the Act which is the subject matter of the appeal.

4. Before the Ld. CIT(A) / NFAC, the assessee challenged the addition made by the Assessing Officer u/s 50C and non-granting of exemption u/s 54 / 54F of the Act. An additional ground was also raised before the Ld. CIT(A) / NFAC stating that the capital gain arising on sale of the residential house property having been utilized / for purchase of new residential house, exemption u/s 54 be allowed and the addition of Rs.86,20,000/- be deleted. The Ld. CIT(A) / NFAC admitted the additional ground raised before him. However, he dismissed the ground challenging the addition of Rs.86,20,000/- and non-allowance of deduction u/s 54 / 54F by observing as under:

5.4. Grounds 3, 4, 5 and Additional Ground: Capital Gains Addition u/s 50C and Exemption u/s 54/54F (Rs. 86,20,000/-) a) Observation: This matter involves the determination of the full value of consideration via Section 50C and the subsequent claim for exemption under Section 54/54F. Since the asset transferred was a residential house and the new investment was in a residential house, Section 54 is the correct provision for claiming exemption, not Section 54F. The AO’s application of the deeming fiction of Section 50C to substitute the actual sale price with the higher Stamp Duty Valuation is in accordance with the law for computing capital gains. b) Statutory Timelines u/s 54(2): While Section 54 provides a benefit, its operation is strictly governed by the time limits prescribed in sub-section (2). Section 54(2) mandates that if the capital gain (computed using the full value of consideration, including the deemed consideration under Section 50C) is not utilized for the purchase or construction of the new house before the due date of furnishing the return of income under Section 139(1), the unutilized amount must be deposited into the Capital Gains Account Scheme (CGAS) before the said due date. c) Mandatory Nature of CGAS Deposit: The requirement to deposit the unutilized amount into the CGAS is a mandatory and non-negotiable statutory condition for claiming the exemption for the unutilized portion. Failure to comply with the deposit requirement by the due date of filing the return results in the forfeiture of the exemption. The benevolent nature of Section 54 does not permit the condonation of non-compliance with the strict procedural framework of Section 54(2). d) Finding on Compliance: The appellant is raising this claim for exemption as an additional ground. He admits that although the facts of investment were put forth, the “claim for exemption could not be made in particular” before the AO. Crucially, the appellant has not produced any evidence before the AO (resulting in a Section 144 order) or before this appellate authority to establish that the entire deemed capital gain was either: (i) utilized for the purchase of the new house before 31st July 2023 (the due date u/s 139(1) for AY 2023-24); OR (ii) deposited into a valid CGAS account before 31st July 2023. e) Conclusion: Since the appellant has failed to prove the fulfillment of the mandatory and prerequisite condition of depositing the unutilized capital gain into the Capital Gains Account Scheme by the statutory due date, the claim for exemption under Section 54/54F must fail on technical and legal grounds. The benevolent provision of Section 54 cannot be extended when there is a clear, unrectified failure to adhere to the mandatory procedural requirements specified under Section 54(2). f) Decision: The claim for exemption under Section 54/54F is rejected on merits due to the appellant’s failure to substantiate compliance with the mandatory deposit requirement under Section 54(2). Consequently, the addition of Rs. 86,20,000/- made on account of Section 50C and the consequential denial of exemption is confirmed. Grounds of Appeal 3, 4, 5, and the Additional Ground are thus rejected.

Summary of Decision

Ground Issue

Addition Amount (Rs.) Decision 

The total addition confirmed in this order is Rs. 86,20,000/- on account of the capital gains. The AO may proceed with the consequential penalty proceedings initiated u/s 270A based on the outcome of this confirmed addition.

5. Aggrieved with such order of the Ld. CIT(A) / NFAC the assessee is in appeal before the Tribunal by raising the following grounds:

1. Because the CIT(A) has erred on facts and in law in denying exemption/deduction of Rs.86,20,000/-, available under section 54 of the Income-tax Act, 1961, which denial of exemption is contrary to facts, bad in law be allowed.

2. Because on a proper appreciation of facts and circumstances of the case, it would be found that the entire capital gains earned by the assessee on sale of residential house, has been invested in purchase of another residential house, as per the provisions of section 54 of the Act, there arises no reason for denial of exemption of Rs.86,20,000/- claimed by the assessee the exemption claimed be allowed.

6. The Ld. Counsel for the assessee submitted that the assessee sold his residential house property situated at Ghaziabad for a total sale consideration of Rs.1,10,00,000/- against the stamp duty valuation of Rs.1,96,20,000/- resulting in a difference of Rs.86,20,000/- which has been added by the Assessing Officer by invoking the provisions of section 50C of the Act which has been upheld by the Ld. CIT(A) / NFAC. He submitted that the sale was executed under forced and distressed circumstances since the assessee was transferred to Pune being employed with Spark Minda. He submitted that the assessee was left with no other option except to sell the property at the best available price. He submitted that while filing the return of income the assessee had computed the long term capital gain at Rs.21,77,239/- after deducting the indexed cost of acquisition from the sale proceeds. He submitted that on account of wrong advice, the assessee could not claim deduction u/s 54 / 54F towards purchase of new residential property from such long term capital gain for which the assessee filed an additional ground before the Ld. CIT(A) / NFAC for admission of the same and the Ld. CIT(A) / NFAC also admitted the ground for claim of deduction u/s 54 / 54F.

7. The Ld. Counsel for the assessee submitted that the assessee purchased a residential house on 12.03.2024 on instalment basis from Mahindra Lifespaces Developers Ltd. for a total consideration of Rs.1,92,19,975/- being Flat No.1D1, Green Fields, Pimpri, Near Antariksh Society, Pune — 411012 by investing the entire sale proceeds of Rs.1,10,00,000/-. The house at Ghaziabad was a residential house and the assessee, after sale of the same, had purchased a house at Pune and therefore the assessee is eligible to invest and claim the entire capital gain against the purchase consideration of the new house. He submitted that the provision of section 50C is a deeming provision. The provisions of section 50C exclude the provisions of section 54 and 54F of the Act. Section 50C is meant for computation of capital gains and its taxability. It comes into play only when capital gains earned or arising are not appropriated as per the provisions of section 54 or 54F of the Act. The Ld. Counsel for the assessee drew the attention of the Bench to the provisions of section 54 and 54F and submitted that the computation of capital gain liability would arise only when the provisions of exemption have been applied and stand exhausted. He submitted that both the provisions are incentive giving provisions meant for giving a boost to the housing industry. He submitted that since in the present case the assessee has invested not only the capital gains arising on sale of house property at Ghaziabad but the entire sale consideration as received and also obtained loan from HDFC Bank Limited, therefore, the assessee is entitled to get the benefit of deduction u/s 54F of the Act.

8. Referring to the order of the Ld. CIT(A) / NFAC he submitted that the Ld. CIT(A) / NFAC has held that the provisions of section 50C are applicable thereby treating the stamp value as adopted by the Sub-Registrar for stamp duty purposes as the deemed sale consideration and has sustained the addition of the difference between the actual sale consideration and the deemed sale consideration to the total income of the assessee. He submitted that once the capital gain as computed on the basis of actual sale consideration as received is invested as laid down in section 54, then there arises no question of any addition u/s 50C. He submitted that section 50C is applicable only when the capital gains as computed is not appropriated as per the provisions of section 54 or 54F.

9. Without prejudice to the above, he submitted that even if the capital gains computed by the Assessing Officer at Rs.86,20,000/- is also taken into consideration, since the total investment made in the new asset being Rs.1,92,19,975/- is more than the capital gains of Rs.1,07,97,239/- as computed, therefore, no addition is called for in view of exemption u/s 54 / 54F of the Act.

10. Relying on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Mrs. Hilla J.B. Wadia reported in (1995) 216 ITR 376 (Bom), the decision of the Hon’ble Delhi High Court in the case of CIT vs. R.L. Sood reported in (2000) 245 ITR 727 (Del) and the CBDT Circular No.471(F.No.207/27/85-IT(A-II), dated 15.10.1986, he submitted that once the assessee enters into an agreement to purchase a house on installment basis, he is eligible for deduction u/s 54 / 54F.

11. Referring to the CBDT Circular No.14 (XL-35) of 1955 dated 11.04.1955, he drew the attention of the Bench to the same which reads as under:

“…

(3) Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him.”

12. He accordingly submitted that the order of the Ld. CIT(A) / NFAC be set aside and the grounds raised by the assessee be allowed.

13. The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC.

14. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We find the Assessing Officer in the assessment completed u/s 144 r.w.s. 144B, apart from various additions, made addition of Rs.86,20,000/- by invoking the provisions of section 50C of the Act on the ground that the stamp duty valuation of the property sold was Rs.1,96,20,000/- whereas the assessee has sold the property for a consideration of Rs.1,10,00,000/-. We find before the Ld. CIT(A) / NFAC the assessee apart from challenging the addition of Rs.86,20,000/- by invoking the provisions of section 50C of the Act, raised an additional ground for claim of deduction u/s 54 / 54F on the ground that the assessee has invested the sale consideration of the residential house property towards purchase of a flat at Pune for a total consideration of Rs.1,92,19,975/-. We find the Ld. CIT(A) / NFAC although admitted the additional ground, however, rejected the claim of the assessee on the ground that the assessee failed to prove the fulfilment of mandatory and pre-requisite condition of depositing the unutilized capital gain into the Capital Gains Account Scheme by the statutory due date nor utilized the same for purchase of new house before 31.07.2023 by producing documentary evidence. It is the submission of the Ld. Counsel for the assessee that the entire sale consideration was utilized for purchase of a new flat at Pune, the cost of which is at Rs.1,92,19,975/-. The assessee has also obtained loan from HDFC Bank Limited. It is his submission that in view of the various decisions cited (supra) and the CBDT Circular which is binding on the Revenue, the assessee is eligible to claim deduction u/s 54 / 54F since the entire capital gain arising on sale of the residential house has been utilized for purchase of a new flat.

15. We find some force in the above arguments of the Ld. Counsel for the assessee. The provisions of section 50C of the Act are attracted as the immovable property was sold at Rs.1,10,00,000/- and the stamp duty value was at Rs.1,96,20,000/- and the section does not provide any relaxation for distressed sale. However, if the assessee has invested the entire long term capital gain for purchase of a new residential property even after calculating the same by considering the stamp duty value at Rs.1,96,20,000/-, the assessee in our opinion is entitled to claim deduction u/s 54F of the Act. In the instant case, as stated by the Ld. Counsel for the assessee, the cost of the new asset is Rs.1,92,19,975/- which is to be paid in instalments.

16. We find the Hon’ble Bombay High Court in the case of CIT vs. Mrs. Hilla B. Wadia (supra), following the CBDT Circular No.471(F.No.207/27/85-IT(A- II), dated 15.10.1986 has held that where the assessee has acquired a right to a specific flat in a building which is being constructed by the Society and where she has made a substantial investment within the prescribed period which will entitle her to obtain possession of the flat so constructed and in which she intends to reside, the assessee is entitled to claim deduction u/s 54 of the Act. The relevant observations of the Hon’ble High Court read as under:

“6. From the above facts, it is clear that under the agreement of 25th October, 1973 the flat bearing No. 7A & B on the 7th floor of the proposed building was to be constructed for the benefit of the assessee and the assessee was required to pay and, in fact, paid various payment as set out above to the Society for this purpose. The assessee has thus paid a total sum of Rs. 2,59,36 towards the cost of construction of this flat. Out of this amount, a sum of Rs. 2,51,238 is paid by the assessee by 1st November, 1974, that is to say within a period of 2 years from the date when the said property was conveyed to the society. Thus substantially the entire cost of construction barring a very small amount of Rs. 8,000 has been paid by the assessee within a period of 2 years.

7. Under the terms of the agreement of the assessee with the Society, the assessee obtained a right to take possession of a specific flat bearing No. 7A & B on the 7th floor of the said Society. The assessee under the terms of the agreement had no right to cancel the agreement or claim any damage. Thus, the assessee acquired a substantial domain or control over the above flat by virtue of making almost the entire payment relating to the cost of construction of this flat to the society, within a period of two years from the date when the assessee and her husband conveyed the original property to the assessee.

8. In these circumstances, we have to see whether the assessee has complied with the requirements of s. 54 of the IT Act, 1961 as then in force. The material part of s. 54 at the relevant time was as follows :

“Sec. 54. Profit on sale of property used for residence – Where a capital gain arises from the transfer of a capital asset……….. being building or lads appurtenant thereto the income of which is chargeable under the head “Income from house property”, which in the two years immediately preceding the date on which the transfer took place, was being used by the assessee …….  mainly for the purposes of his own ………….  residence, and the assessee has within a period of one year before or after that date purchased, or has within a period of two years after that date constructed, a house property for the purposes of his own residence, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section…..

(i) ……………………….

(ii) ……………………….”

In the present case, the assessee had transferred the property in which she had a half share and which was being used for the purpose of her residence to the Society. The question is whether she can be said to have constructed a house property for the purpose of her residence within a period of 2 years from that date. This provision will have to be constructed in the context of the manner in which such residential properties are now being constructed in a city like Bombay where, looking to the cost of the land, Co-operative Housing Societies are being formed for constructing a building in which flats are allotted to members. This must also be viewed as a method of constructing residential tenements. What we have to see is whether the assessee has acquired a right to a specific flat in such a building which is being constructed by the Society and whether she has made a substantial investment within the prescribed period which will entitle her to obtain possession of the flat so constructed and in which she intends to reside. The material test in this connection is domain over the flat and investment in it. The assessee satisfies both these conditions. She has acquired such a domain and has invested almost the entire requisite amount in it within a period of 2 years prescribed under s. 54.

9. In this connection our attention was drawn to a circular of the CBDT bearing No. 471 dt. 15th October, 1986 which dealt with the investment in flats under the Self Financing Scheme of the Delhi Development Authority. The Board has stated in the circular that when an allotment letter is issued to an allottee under this scheme on payment of the first instalment of the cost of construction, the allotment is _.final unless it is cancelled. The allottee, thereupon, 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 delivery of possession is only a formality. The Board has directed that such an allotment of flat under this scheme should be treated as cost of construction for the purpose of capital gains. The present case is on a much stronger footing because there is not merely an allotment of the flat but even almost the entire cost of construction is paid by the assessee within a period of 2 years.

Our attention in this connection was also drawn to a decision of the Andhra Pradesh High Court in the case of CIT vs. Mrs. Shahzada Begum . In the case before the Andhra Pradesh High Court, the assessee had paid a substantial purchase instalment and secured possession of the property within one year of the sale of her residential property, but the sale deed in respect of the property so purchased by her was executed and registered after the expiry of one year. The Andhra Pradesh High Court said that the assessee was entitled to the benefit of s. 54(1) because the house property purchased by the assessee had come into full domain and control of the assessee within a period of one year.

10. In the case of Kesho Ram Passey vs. Reserve Bank of India reported in (1984) 146 ITR 16 (P&H), the Punjab and Haryana High Court considered the provisions of s. 54E of the IT Act which were then in force. It had to consider whether the capital gains arising from the transfer of the capital asset were invested in a new asset within a period of 6 months. The petitioner who sold a plot of land deposited the consideration amount in National Rural Development Bonds by sending a bank draft for the amount alongwith his application in the prescribed form within a period of 6 months. However, on account of certain technical problems, the bonds were not issued to the assessee until after the expiry of 6 months. The Court held that by depositing the amount with the agent of the Reserve Bank of India within 6 months, the assessee had substantially complied with the provisions of s. 54E and he should be given the benefit of that section.

11. Dr. Balasubramanium drew our attention to a decision of the Gujarat High Court in the case of Smt. Shantaben P. Gandhi vs. CIT reported in (1981) 129 ITR 218 (GO. In that case, the assessee’s property was divided into two portions one of which was larger than the other. A building was constructed on the larger portion which was partly occupied by the assessee. The assessee constructed a house on the smaller plot and the construction was completed in March, 1968. The larger plot with the building standing thereon was, thereafter, sold and the conveyance was executed in March, 1974. In respect of capital gains arising from the sale of the larger property, the assessee claimed the benefit of s. 54 on the ground that the house on the smaller plot had been constructed for the purpose of residence. The Court held that the assessee was not entitled to the exemption because the assessee could not be said to have constructed a new house on the smaller plot, within a period of two years after the transfer of the larger plot. We do not see how this decision is of assessment year assistance to the Revenue because it turned entirely on the facts of that case. Similarly, the decision of the Karnataka High Court in the case of CIT vs. J. R. Subramanya Bhat reported in (1987) 165 ITR 571 (Kar) also does not assist the Revenue. In the case before the Karnataka High Court, the assessee sold a building on the ground floor of which the assessee was residing, in February, 1977. In March, 1976, the assessee had commenced construction of the new house which was completed in March, 1977. The assessee claimed exemption from tax on capital gains under s. 54 of the IT Act, 1961. The Court said that the assessee had resided in a major portion of the building which the assessee had sold and had completed the construction of a new residential house in March, 1977. Hence, the assessee was entitled to the benefit of s. 54 even though the construction of a new house started prior to the sale of the old building. This decision once again has turned on its own facts and it does not assist us in any manner because the circumstances of the present case are very different.

12. For the reasons which we have set out above, in our view, the present case falls within the provisions of s. 54 in view of the fact that the assessee had acquired substantial domain over the flat in question under the agreement with the Society coupled with the payment of almost the entire cost of construction within a period of two years.

13. The following question, therefore, referred to us under s. 256(1) of the IT Act, 1961, namely .-

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to relief under s. 54 of the Act ?”

is answered in the affirmative and in favour of the assessee.

14. We may observe here that the situation of the kind which is before us is likely to arise frequently in a city like Bombay. It is desirable, in order to avoid litigation on this topic, that the CBDT issues a circular similar to the circular which is issued in respect of the construction work done by the Delhi Development Authority on 15th October, 1986_. or the proper guidance of the IT Department and in order to carry out the letter and spirit of s. 54. No order as to costs. “

17. We find the Hon’ble Delhi High Court in the case of CIT vs. R.L. Sood (supra), following the CBDT Circular No.471(F.No.207/27/85-IT(A-II), dated 15.10.1986 has held that where the assessee has made payment of a substantial amount in terms of the agreement of purchase dated September 25, 1981 i.e. within four days of the sale of his old property, the assessee acquired substantial domain over the new residential flat within the specified period of one year and complied with the requirements of section 54 of the Act. Merely because the builder failed to hand over possession of the flat to the assessee within the period of one year, the assessee cannot be denied the benefit of the said benevolent provision. This would not be in consonance with the spirit of Section 54 of the Act.

18. In view of the above decisions, we are of the considered opinion that the assessee is entitled to claim deduction u/s 54 / 54F on account of investment in the new residential flat which is much more than the long term capital gain computed after considering the deemed sale consideration. However, since the assessment order was passed u/s 144 r.w.s. 144B and the Ld. CIT(A) / NFAC has given a finding that the assessee has not produced any evidence before the Assessing Officer or before him to establish that the entire deemed capital gain was utilized for purchase of house before 31.07.2023, therefore, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to verify the details of payment and copy of the agreement for purchase of the flat at Pune and consider the claim of deduction u/s 54 / 54F in the light of the decisions cited (supra). Needless to say, the Assessing Officer shall afford reasonable opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed for statistical purposes.

19. In the result, the appeal filed by the assessee is allowed for statistical purposes.

Order pronounced in the open Court on 8^th July, 2026.