Case Law Details
Smt. Gurumurthappa Krishnamurthy Yashoda Vs DCIT (ITAT Bangalore)
Bangalore ITAT: Section 54 Relief Cannot Be Denied If Capital Gains Are Invested Before Filing Return u/s 139(4)
The Bangalore ITAT allowed the assessee’s claim for Section 54 exemption and held that capital gains invested in a new residential house before filing the return under Section 139(4) qualify for exemption even if the unutilized amount was not deposited in the Capital Gains Account Scheme before the due date under Section 139(1).
The assessee had sold a residential property and earned capital gains of about ₹2.33 crore. While a substantial portion of the gains was invested before the due date under Section 139(1), the balance amount of ₹95 lakh was utilized for construction of a new house before filing the belated return under Section 139(4). The Assessing Officer denied exemption on this portion solely because the amount had not been deposited in the Capital Gains Account Scheme before the due date prescribed under Section 139(1).
The Tribunal observed that the assessee had actually invested the entire capital gain in the new residential house before filing the return under Section 139(4) and had produced documentary evidence supporting such investment. It clarified that the requirement of depositing funds in the Capital Gains Account Scheme arises only where the amount remains unutilized up to the date of filing the return. Where the capital gains have already been invested before filing the return under Section 139(4), denial of exemption would be contrary to settled law.
Relying on the Karnataka High Court decisions in Fathima Bai v. ITO, R. Srinivas v. ITO, and other jurisdictional precedents, the ITAT reiterated that the expression “due date under section 139” includes the extended time available under Section 139(4). Accordingly, the exemption under Section 54 was directed to be allowed and the assessee’s appeal was allowed in full.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 09/09/2025 in respect of the A.Y. 2015-16.
2. The brief facts of the case are that the assessee is an individual and filed her return of income on 29/02/2016. The assessee had declared the capital gains and income from other sources. The case was selected for limited scrutiny through CASS and notice u/s. 143(2) was issued. Thereafter notice u/s. 142(1) was issued. The assessee also furnished the details called for by the AO. During the course of assessment proceedings, the AO found that the assessee had claimed exemption u/s. 54 of the Act on the gains earned Rs. 2,16,20,000/-. The assessee claimed that a sum of Rs. 1,21,92,630/- was spent before filing the return of income. The balance amount of Rs. 95,00,370/- was not kept in the capital gain account before the due date for filing the return of income. The AO relied on section 54(2) of the Act had disallowed the capital gain of Rs. 95,00,370/- and added the same to the income of the assessee since the assessee had not deposited the said amount in a capital gain account before filing of the return u/s. 139(1) of the Act.
3. As against the said order, the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) had confirmed the order of the AO.
4. As against the said order, the assessee is in appeal before us.
5. At the time of hearing, the Ld.AR submitted that before filing the return of income u/s. 139(4) of the Act, the capital gain was utilized for construction and also filed evidences to show that the amounts were spent well before the filing of return u/s. 139(4) on 29/02/2016 and therefore eligible for deduction u/s. 54 of the Act. The Ld.AR also filed a paper book enclosing various documents to show that the assessee had complied with the provision. The Ld.AR also relied on the rulings of the Hon’ble Karnataka High Court and filed the copies of the judgments in the paper book and prayed to allow the appeal.
6. The Ld.DR submitted that as per section 54(2) of the Act, the balance amount should be deposited in a capital gain account before the due date for filing the return of income u/s. 139(1) and therefore the order of the AO is in order.
7. We have heard the arguments of both sides and perused the materials available on record.
8. The only dispute involved in this appeal is whether the disallowance of claim of deduction u/s. 54 of the Act is in order or not.
9. Before adverting this issue, it is useful to refer some of the facts which are relevant to decide the issue.
10. The assessee sold a house property on 06/03/2015 for a consideration of Rs. 2,98,76,835/-. She arrived the net capital gains at Rs. 2,33,03,182/-. The assessee invested a part gain of Rs. 1,21,92,630/- by the end of August 2015 and also invested the balance gain on or before the filing of return u/s. 139(4) of the Act i.e. 29/02/2016. The AO had accepted the investments made upto the due date for filing return of income u/s. 139(1) but disallowed the investment made before the filing of return u/s. 139(4) of the Act.
11. As seen from the said facts, the assessee filed her return of income u/s. 139(4) on 29/02/2016 within the extended period and spent the capital gains for constructing new house property. It means that before filing the return of income, she had spent the entire capital gains and also filed the proof for such investments. The AO as well as the Ld.CIT(A) on a misconstruction of the provision, had disallowed the investment made before the date of filing of return u/s. 139(4) of the Act. If the assessee had not invested before filing the return of income u/s. 139(4), definitely the assessee is not entitled for relief. In that circumstances only, the Act mandates that the said amount should be deposited in the capital gain account and the proof for such deposit has to be enclosed along with the return of income filed u/s. 139(1) of the Act.
12. We have perused the various documents filed by the assessee and the said documents establishes the fact that the capital gain of Rs. 95,00,370/-was utilized before the date of filing of the return u/s. 139(4) of the Act. That is before 29/02/2016, the amount was invested in the construction of house property and therefore the assessee is entitled for the benefit granted u/s. 54 of the Act.
13. Even though the authorities have no other evidence, without considering the provision properly, the authorities had disallowed the benefit granted u/s. 54 of the Act. The evidence placed by the assessee in the paper book would support the contention of the assessee.
14. We have also perused the judgment of the Hon’ble Karnataka High Court in the case of Fathima Bai vs. ITO reported in (2009) 32 DTR 243 (Kar) wherein it was held as follows:
“In the instant case, the due date for filing of return is 30.7.88. U/S 139(4) the assessee was entitled to file returns in the extended time, which is within 31.3.1990.
The extended due date u/s 139(4) would be 31.3.1990. The assessee did not file the returns within the extended due date, but filed the returns on 27.2.2000. However, the assessee had utilised the entire capital gains by purchase of a house property within the stipulated periods of Sec. 54(2) ie., before the extended due date for returns U/s 139. The assessee technically may have defaulted in not filing the returns u/s 139(4). But, however, utilised the capital gains for purchase of property before the extended due date u/s 139(4).The contention of the revenue that the deposit in the scheme should have been made before the initial due date and not the extended due date is an untenable contention.
The Gauhati High Court in Commissioner of Income Tax Vs. Rajkamal Jalan has taken a similar view that the time limit for deposit under the scheme or utilisation can be made before the due date for filing of returns u/s 139(4).”
15. The above said principle was followed by the Hon’ble Karnataka High Court in the subsequent decisions reported in (2011) 64 DTR (Kar) 376 and another unreported judgment in ITA No. 384/2015 in the case of R. Srinivas vs. ITO.
16. The facts and the findings are very clear and therefore the said judgments would apply to the facts of the case. We don’t know how the Ld.CIT(A) had not accepted the said findings to the facts of the case on hand.
17. Respectfully following the judgments of the Hon’ble Jurisdictional High Court, we are allowing the appeal filed by the assessee.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 03rd June, 2026.
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