Deduction Under Section 54 Allowed as Payment Was Proven by Sale Deed and Bank Records.

Issue

Can an Assessing Officer (AO) validly disallow a deduction under Section 54 for the purchase of a new residential property on the ground of non-disclosure of the payment mode, even when the taxpayer provides substantial documentary evidence, including a registered sale deed and bank statements, proving the transaction was genuine and made through explained sources?

Facts

The assessee sold a residential property and reinvested the sale proceeds into another residential property within the prescribed one-month period, claiming a deduction under Section 54.
The AO disallowed the claim, not on the grounds that the investment wasn’t made, but because the mode of payment was allegedly not disclosed.
The assessee furnished compelling evidence to prove the transaction:
- The registered sale deed itself recorded the consideration and acknowledged that a substantial portion was paid via cheques.
- Contemporaneous receipts were annexed to the sale deed.
- The assessee’s bank statements were produced, which clearly reflected the payments and corroborated the details mentioned in the sale deed.

Decision

The High Court ruled in favour of the assessee and allowed the deduction.
It held that the evidence on record, particularly the registered sale deed and the bank statements, established beyond any doubt that the entire purchase consideration was paid through identifiable and explained banking channels.
The court found the AO’s decision to disallow the claim for the alleged absence of disclosure to be unwarranted and contrary to the beneficial purpose of Section 54.

Key Takeaways

Substance Over Form: The core condition of Section 54 is the actual reinvestment of sale proceeds. A minor procedural issue like the alleged non-disclosure of payment mode cannot override the substantive fact of a genuine, proven investment.
Evidence is Paramount: Strong, corroborating evidence like a registered sale deed and bank statements are sufficient to prove the genuineness of a transaction and the source of funds, making the AO’s objections untenable.
Purpose of the Law: Section 54 is a beneficial provision intended to encourage taxpayers to acquire a new residential house. Denying this benefit on hyper-technical grounds, especially when the transaction is transparent, defeats the legislative intent.

IN THE ITAT MUMBAI BENCH ‘B’

Nikhil Ravindra Manjrekar

Commissioner of Income-tax (Appeals) / NFAC, Delhi

Amit Shukla, Judicial Member
and Girish Agrawal, Accountant Member

IT Appeal No.5547 (Mum) of 2024
[Assessment year 2016-17]

SEPTEMBER 30, 2025

Rahul V. Daga, CA for the Appellant. Leyaqat Ali Aafaqui, Sr. AR for the Respondent.

ORDER

Amit Shukla, Judicial Member.- This appeal by the assessee is directed against the order dated 29/08/2024 passed by the National Faceless Appeal Centre (NFAC), Delhi, arising from the assessment framed under section 143(3) of the Income-tax Act, 1961 for the Assessment Year 2016-17.

2. The solitary grievance of the assessee is against the denial of deduction under section 54 of the Act in respect of reinvestment made in a residential property.

3. The relevant facts are that the assessee, an individual, filed his return of income on 04/08/2018 declaring total income of Rs.85,60,120 comprising salary and income from other sources. The case was selected for scrutiny to verify the genuineness of capital gains and the corresponding claim of deduction under section 54.

4. The Assessing Officer issued a show-cause notice dated 26/12/2018, which went unanswered. Consequently, the assessee’s claim of deduction under section 54, arising from the investment of Rs.3,55,00,000 in the new residential property, was summarily disallowed and the assessment came to be completed ex parte.

5. Before the learned CIT(A), the assessee explained that he had sold a residential flat on 08/04/2015 for Rs.2,27,00,000, which had originally been purchased on 04/09/2010 for Rs.1,17,75,000. Soon thereafter, the assessee purchased another residential flat at Oberoi Splendour, Jogeshwari, Mumbai, vide agreement dated 30/05/2015. The computation of long-term capital gain and claim of exemption under section 54 was placed on record as follows:

Sr No.	Particulars	Amount Rs
1.	Sale Consideration	2,27,00,000/-
2.	Less: Indexed cost of Acquisition (CII of FY 2010-11:711 and CII of FY 2015-16:1081) Original Cost [CII of FY 2015-16 / CII of FY 2010-11) i.e, 1,17,75,0001081/711	1,79,02,367
3.	Expenditure for transfer	2,27,000/-
4.	Long Term Capital gain [l-(2+3)] (A)	45,70,363

6. In support of his claim, the assessee produced the following documents: copy of the original purchase agreement dated 04/09/2010, copy of sale deed dated 08/04/2015, and copy of purchase agreement dated 30/05/2015 for the Oberoi Splendour flat.

7. The learned CIT(A), while considering the matter, noted the payment schedule for the new property aggregating to Rs.3,55,00,000 as reflected in the purchase deed.

Rs. 5,00,000/-	Rupees Five Lacs Only as token money
Rs. 20,00,000/-	Rupees Twenty Lacs Being paid as earnest money part payment before the execution of these presents.
Rs. 1,61,45,000/-	Rupees One Crore Sixty One lakhs & Forty Five thousand Only: Being paid as part payment on or before the execution of these presents.
Rs. 3,55,000/-	Rupees Three Lakhs and fifty five thousand only Being TDS 1% of the total consideration to be paid by the TRANSFEREE to the credit of the TRANSFEROR’S Income tax acct, u/s 194 IA of the Income Tax Act, 1961
Rs. 1,65,00,000/-	Rupees One Crore & Sixty Five Lakhs Only: Being the balance full and final consideration, to be paid to the TRANSFERORS on or before the TRANSFERORS hands over all original documents along with the TRANSFERORS handing over the vacant and peaceful possession of the Said Flat
Total Rs. 3,55,00,000/-	(Rupees Three Crore & Fifty Five Lacs Only)

8. However, the learned CIT(A) rejected the claim essentially on the premise that the assessee had failed to furnish the mode of payment in respect of the said purchase and, therefore, the exemption under section 54 could not be allowed.

9. The assessee, in rebuttal, drew attention to the sale deed itself which contained details of cheque payments along with receipts annexed thereto. It was further explained that copies of bank statements were filed (even if as additional evidence) and that at no stage was any specific query raised by the appellate authority regarding the mode of payment. Thus, according to the assessee, the denial of deduction was wholly unwarranted.

10. The learned Departmental Representative, however, urged that the matter may be restored to the Assessing Officer for factual verification.

11. We have given our thoughtful consideration to the rival submissions and perused the material on record. Certain facts stand beyond dispute: the assessee sold his residential property at Kandivali on 08/04/2015 for Rs.2,27,00,000 and, within a short span of over a month, reinvested the sale proceeds into another residential property at Oberoi Splendour, Jogeshwari, for Rs.3,55,00,000 vide agreement dated 30/05/2015. The computation of capital gains placed before us shows that the taxable long-term capital gain amounted to Rs.45,70,363, against which exemption under section 54 was claimed.

12. The reasoning adopted by the learned CIT(A) cannot stand judicial scrutiny. Once the sale deed itself recorded the consideration of Rs.3,55,00,000, acknowledged receipt of substantial part of the consideration by cheques, and annexed contemporaneous receipts, it is wholly incorrect to conclude that mode of payment was not disclosed. The law does not require needless formalism when substantive compliance is manifest.

13. Moreover, it was never the case of the Revenue, either at the assessment stage or at the first appellate stage, that the source of purchase of the new property was doubtful or unexplained. The controversy was confined only to the claim of deduction under section 54. The assessee’s sale deed and supporting documents had already put the matter beyond doubt.

14. Now before us, the assessee has also produced his bank statements reflecting the payments made through regular banking channels. These statements corroborate the recitals in the registered sale deed and receipts, and establish beyond cavil that the entire purchase consideration was discharged through identifiable and explained sources. In this factual matrix, to disallow the claim by alleging absence of disclosure of payment details is not only unwarranted but also contrary to the very purpose of section 54.

15. We, therefore, hold that the assessee is entitled to exemption under section 54 to the extent of Rs.45,70,363. The disallowance sustained by the lower authorities is accordingly directed to be deleted.

16. In the result, the appeal of the assessee is allowed.