Margaret Smith Brahm Bagh Vs DCIT (International Taxation) (ITAT Jaipur)
Section 54 exemption cannot be denied merely because no original return was filed under Section 139(1); ITAT Jaipur allows the claim made in the return filed in response to Section 148 notice where the entire capital gain was reinvested within the prescribed period.
Case Summary The ITAT Jaipur considered whether exemption under Section 54 could be denied solely because the assessee had not filed an original return under Section 139(1) and had claimed the exemption only in the return furnished in response to notice under Section 148. The assessee had sold an old residential property and invested the entire capital gain in another residential house within the prescribed period. The Tribunal held that Section 54(1) does not make filing of an original return under Section 139(1) a condition for exemption. Since the entire capital gain had already been utilised for purchasing the new residential property, the requirement of depositing unutilised gains under Section 54(2) was also not attracted. The Tribunal directed the Assessing Officer to allow exemption of ₹10,53,992 and delete the long-term capital gains addition.
Core Issue Whether exemption under Section 54 can be claimed in a return filed in response to notice under Section 148, despite non-filing of an original return under Section 139(1), where the entire capital gain has been reinvested in another residential house within the prescribed period.
Fact The assessee, a non-resident individual, had not filed a return of income for AY 2016-17. On receiving information regarding purchase of immovable property, the Assessing Officer issued notice under Section 148 on 06.04.2023. In response, the assessee filed a return on 18.05.2023 declaring income of ₹3,240.
The assessee had sold an old residential flat at Jodhpur on 17.04.2015 and purchased another residential flat on 03.12.2015 for ₹62,27,500. During reassessment proceedings, the Assessing Officer initially proposed an addition of ₹34,89,500 under Section 69 towards unexplained investment and ₹16,50,000 as short-term capital gain on the sale of the old property, as its purchase deed was not initially produced. Before the DRP, the assessee furnished the purchase deed dated 02.11.1996. The Assessing Officer, in the remand report, computed long-term capital gain at ₹10,53,992. The assessee accepted the computation but claimed exemption under Section 54 on the ground that the entire gain had been reinvested in the new residential property.
AO / DRP Finding The DRP accepted the source of investment in the new residential property and directed deletion of the addition under Section 69. It also accepted the computation of long-term capital gain at ₹10,53,992. However, it rejected the Section 54 exemption claim on the ground that the assessee had not filed an income-tax return and that filing of a return was compulsory for claiming the exemption. Consequently, the Assessing Officer added ₹10,53,992 as long-term capital gain without allowing the deduction under Section 54.
ITAT Finding The Tribunal held that Section 54(1) makes exemption dependent upon fulfilment of the prescribed conditions relating to transfer of a residential house and purchase or construction of another residential house within the specified period. Filing of an original return under Section 139(1) is not prescribed as a condition for claiming the exemption.
The Tribunal further observed that Section 54(2) applies where the capital gain has not been utilised for purchasing or constructing the new residential house before the due date for furnishing the return. In the present case, the old property was sold on 17.04.2015 and the new property was purchased on 03.12.2015, within the same previous year. Since the entire capital gain had already been utilised, there was no unutilised amount requiring deposit under the Capital Gains Account Scheme.
The Tribunal also relied upon the Rajasthan High Court decision in PCIT v. Shankar Lal Saini, holding that the reference to Section 139 in the relevant exemption provisions is not restricted to Section 139(1). Further, Section 148(1) provides that the return furnished in response to a reassessment notice shall, so far as may be, be treated as a return required under Section 139.
Importantly, the Tribunal observed that the Revenue had itself examined and accepted the investment in the new residential property while considering the proposed addition under Section 69. Having accepted the investment as genuine for that purpose, the Revenue could not disregard the same investment while examining the exemption claim under Section 54. All substantive conditions for exemption stood established on the Revenue’s own record.
Following the Mumbai ITAT decision in Sanjay Gopaldas Bajaj v. ITO, the Tribunal held that the exemption could not be denied merely because the assessee had not filed an original return under Section 139(1).
Outcome The assessee was held entitled to exemption under Section 54 in respect of long-term capital gain of ₹10,53,992. The Assessing Officer was directed to allow the exemption and delete the addition. Grounds challenging denial of exemption were allowed. The separate ground challenging initiation of penalty proceedings under Section 271(1)(c) was dismissed as premature, without adjudication on the merits of penalty. The assessee’s appeal was allowed.
Cases Discussed
1. PCIT v. Shankar Lal Saini (Rajasthan High Court); (2018) 89 taxmann.com 235.
The Rajasthan High Court considered the interpretation of Section 139 in relation to deductions under Sections 54B and 54F, including whether the statutory reference was confined to the due date under Section 139(1). The ITAT Jaipur relied on this decision while addressing the relevance of return-filing provisions to capital gains exemptions. The High Court’s decision supported the view that the reference to Section 139 was not restricted to Section 139(1).
2. Sanjay Gopaldas Bajaj v. ITO (ITAT Mumbai); [2026] 182 taxmann.com 747.
The Mumbai Bench held that an assessee may claim deduction under Section 54 in a return filed in response to notice under Section 148 where the substantive conditions are satisfied. The exemption cannot be rejected solely because the original return under Section 139(1) was not filed. The ITAT Jaipur expressly agreed with this decision and applied the same principle to allow exemption of Rs. 10,53,992.
FULL TEXT OF THE ORIGINAL JUDGMENT/ORDER
1. This appeal by the Assessee is directed against the final assessment order dated 17.12.2025 passed by the Assessing Officer (hereinafter referred to as “the AO”) under section 147 read with section 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) in conformity with the directions dated 25.11.2025 of the Dispute Resolution Panel 1, New Delhi (hereinafter referred to as “the DRP”) for the assessment year 2016-17.
2. The grounds of appeal raised by the Assessee before us in the memorandum of appeal in Form No. 36 read as under:
“1. Denial of exemption u/s 54 is bad in law
The Ld. AO erred in denying exemption u/s 54 merely for non-filing of return u/s 139(1), ignoring that return was filed u/s 148 and substantive conditions were fulfilled and all the details of capital gains has been provided during the Reassessment proceedings and making an addition of Rs 10,53,992/- to the total income as Income from Long Term Capital Gains.
2. Section 54 is a beneficial provision
The exemption cannot be denied on procedural grounds when investment conditions are satisfied. Law is settled that procedural lapses cannot defeat substantive relief.
3. Misinterpretation of section 139
The term “section 139” in section 54 includes section 139(4) and 139(5), as consistently held by Courts. Filing u/s 148 is a valid compliance for claiming exemption.
4. Incorrect reliance on filing of original return
The Act does not mandate filing of return u/s 139(1) as a pre-condition for exemption u/s 54, especially in reassessment proceedings.
5. Violation of principles of natural justice
The Ld. AO failed to appreciate documentary evidence already verified during DRP proceedings and adopted a hyper-technical approach.
6. Penalty proceedings unjustified
Initiation of penalty u/s 271(1)(c) is unwarranted when income is computed based on disclosed transactions and legal interpretation.
7. Your appellant craves to add, alter, amend any of the above grounds of appeal at the time of hearing.”
3. Briefly stated, the facts of the case are that the Assessee, a non resident individual, did not file a return of income for the year under consideration. On information that she had purchased an immovable property, the AO issued a notice under section 148 of the Act on 06.04.2023, in response to which she filed her return on 18.05.2023 declaring a total income of Rs 3,240. In the draft assessment order, the AO proposed an addition of Rs 34,89,500 under section 69 of the Act, being the unexplained part of the investment of Rs 62,27,500 in a residential flat at Jodhpur purchased by a registered deed dated 03.12.2015, and an addition of Rs 16,50,000 as short term capital gain, being the entire sale consideration of an old residential flat at Jodhpur sold on 17.04.2015, as its purchase deed was not produced.
4. Before the DRP, the Assessee filed additional evidence on which a remand report was called for. The DRP found the source of the investment in the new flat explained and directed the deletion of the addition under section 69 of the Act. On the old flat, the purchase deed dated 02.11.1996 was produced and the AO, in the remand report, worked out the long term capital gain at Rs 10,53,992. The Assessee accepted this computation but claimed that the gain was exempt under section 54 of the Act, as the entire sale proceeds were invested in the new flat. The DRP accepted the computation but rejected the claim in the following words:
“6.6 However, to claim deduction under Section 54 of the Income Tax Act, which provides exemption from long-term capital gains tax on sale of a residential property if the capital gains are reinvested in purchasing or constructing another residential house property, filing of the Income Tax Return (ITR) is compulsory. The taxpayer must declare the capital gains and the exemption claim in their ITR.
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6.8 However, in the case of the assessee no ITR was filed as has been accepted by assessee himself. In view of the above, the claim of assessee for granting of exemption u/s 54 cannot be given. Thus, Ground number 3 taken by the assessee is rejected.”
5. In conformity with these directions, the AO added Rs 10,53,992 as long term capital gain without allowing the deduction under section 54 of the Act. Aggrieved, the Assessee is in appeal before us.
6. The learned Authorised Representative (hereinafter referred to as “the learned AR”) submitted that section 54 of the Act does not make the filing of a return under section 139(1) of the Act a condition for the deduction. The return filed in response to the notice under section 148 of the Act is a valid return and the claim was made in it. All the facts relevant to the deduction are on record and stand verified. Reliance was placed on the order of the Mumbai Bench of the Tribunal in Sanjay Gopaldas Bajaj v. ITO [2026] 182 taxmann.com 747 (Mumbai Trib.), which is on identical facts.
7. The learned Departmental Representative (hereinafter referred to as “the learned DR”) relied on the directions of the DRP and the order of the AO and submitted that the Assessee had not filed any return voluntarily and the claim was made only after the reassessment was initiated.
8. We have heard the rival submissions and perused the material on record. The computation of the long term capital gain at Rs 10,53,992 is not in dispute. The only question is whether the deduction under section 54 of the Act can be denied solely because the Assessee did not file a return under section 139(1) of the Act and made the claim in the return filed in response to the notice under section 148 of the Act.
8.1 Section 54(1) of the Act grants the deduction where the capital gain arises from the transfer of a residential house held as a long term capital asset and the Assessee purchases another residential house within one year before or two years after the date of transfer, or constructs one within three years. None of these conditions is linked to the filing of a return. The only reference to section 139 of the Act is in section 54(2) of the Act, which requires the gain not utilised for the new house before the date of furnishing the return to be deposited in the Capital Gains Account Scheme. Where the entire gain has already been utilised in purchasing the new house, section 54(2) of the Act has no application. Here, the old flat was sold on 17.04.2015 and the new flat was purchased on 03.12.2015, within the same previous year and well before the due date for furnishing the return. Nothing remained to be deposited.
8.2 Even where section 54(2) of the Act is attracted, the Hon’ble Rajasthan High Court has held that the reference to section 139 of the Act in sections 54, 54B and 54F of the Act is not confined to section 139(1) of the Act. In PCIT v. Shankar Lal Saini [2018] 89 taxmann.com 235 (Rajasthan), the question framed and the conclusion read as under:
“2. This court while admitting the appeal on 1.06.2017 framed following substantial question of law:—
“(i) Whether, the tribunal was justified in allowing the deduction of Rs. 1,60,00,000/- u/s 54B and Rs. 52,00,000 u/s. 54F of the Act, ignoring the specific provisions of Section 54B(2) and 54F(4) which refers to the due date of Section 139(1) and not Section 139(4) of the Act?”
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21. In that view of the matter, the issue is required to be answered in favour of the assessee and against the department.”
8.3 The premise of the DRP that “no ITR was filed” is also contrary to the record. The Assessee filed her return on 18.05.2023 in response to the notice under section 148 of the Act, and section 148(1) of the Act provides that the provisions of the Act shall, so far as may be, apply to such a return as if it were a return required to be furnished under section 139 of the Act. A claim for deduction in respect of the very income sought to be taxed in the reassessment, raised in the course of those proceedings, cannot be brushed aside because no earlier return was filed. On identical facts, the Mumbai Bench in Sanjay Gopaldas Bajaj (supra) held as under:
“4.6 In view of the foregoing discussion, we hold that the assessee is entitled, in law, to claim deduction under section 54 of the Act in the return of income filed in response to notice under section 148, provided the substantive conditions prescribed under the said section are duly satisfied. The lower authorities were, therefore, not justified in rejecting the claim solely on the ground that no original return under section 139(1) was filed.”
We are in respectful agreement with this view.
8.4 The substantive conditions of section 54 of the Act stand established on the record of the Revenue itself. The AO himself proceeded on the footing that the Assessee had invested Rs 62,27,500 in the new flat, for that was the basis of the proposed addition under section 69 of the Act, and the DRP recorded (in paragraph no. 6.5) that she “had purchased a new property within the time available for an amount exceeding capital gains amount”.
8.5 Having treated the investment as the Assessee’s own for the purpose of section 69 of the Act, the Revenue cannot disregard it for the purpose of section 54 of the Act. Every fact needed for the deduction has already been examined and accepted by the AO in the remand report and by the DRP.
8.6 Section 54 of the Act is a beneficial provision and the Assessee did exactly what it intends. To deny her the deduction for want of a return which the Act does not make a condition of the deduction would be to let the shadow of procedure obscure the substance of the law. We hold that the Assessee is entitled to the deduction under section 54 of the Act in respect of the long term capital gain of Rs 10,53,992. The AO is directed to allow the deduction and delete the addition. Grounds No. 1 to 5 are allowed.
9. Ground No. 6 against the initiation of penalty proceedings under section 271(1)(c) of the Act is premature and is dismissed. Ground No. 7 is general in nature and requires no adjudication.
10. In the result, the appeal filed by the Assessee is allowed.
Order pronounced in the open court on 03.11.2026
