Section 54F Exemption: Matter Remanded for AO to Verify Assessee's Compliance with Capital Gain Account Scheme

Section 54F Exemption: Matter Remanded for AO to Verify Assessee’s Compliance with Capital Gain Account Scheme

Issue:

Whether an assessee, who applied to open a capital gain account within the time limit prescribed under Section 139(1) but whose bank opened the account after the due date, should be denied deduction under Section 54F of the Income-tax Act, 1961, without proper verification by the Assessing Officer (AO) regarding the assessee’s substantial compliance.

Facts:

For the assessment year 2022-23, the assessee sold properties and claimed a deduction under Section 54F of the Income-tax Act, 1961. The Assessing Officer (AO) denied this deduction on the ground that the assessee did not deposit the net consideration in a specific bank account within the time limit prescribed under Section 139(1) (the due date for filing the return of income). The assessee, however, submitted that he had made an application to his banker for opening a capital gain account within the due date specified under Section 139(1), but the bank only opened the said account after the due date.

Decision:

Yes, the court held that since there was no verification by the Assessing Officer as to whether the assessee had substantially complied with the conditions provided under sub-section (1) of Section 54F in appropriating the net consideration in the new asset, the matter was to be remanded back to the Assessing Officer for his verification.

Key Takeaways:

Conditions for Section 54F Exemption: To claim exemption under Section 54F, the assessee must invest the net consideration (or a portion of it) from the sale of a long-term capital asset (other than a residential house) into the purchase or construction of a new residential house within prescribed timeframes. Crucially, if the amount is not invested before the due date of filing the return of income under Section 139(1), it must be deposited in a Capital Gain Account Scheme (CGAS) with a specified bank before that due date.
Assessee’s Diligence vs. Bank’s Delay: The case highlights a situation where the assessee took proactive steps to comply with the law by applying for the CGAS account within the deadline. The subsequent delay was attributable to the bank.
Substantial Compliance: Courts often consider the principle of “substantial compliance” over strict literal compliance, especially when the assessee has taken all reasonable steps to fulfill their legal obligations, and the non-compliance is due to external factors beyond their control.
AO’s Duty of Verification: The Assessing Officer has a duty to properly investigate and verify the assessee’s claims. Simply denying the deduction without verifying the assessee’s assertion about applying for the account within the time limit (and the bank’s delay) is not a proper application of mind.
Remand for Factual Verification: When there are factual disputes or a lack of proper inquiry by the AO regarding the assessee’s compliance efforts, the matter is typically remanded back to the AO for fresh consideration and verification. This ensures that a genuine claim is not denied on mere technicality or unverified assumptions.

IN THE ITAT CHENNAI BENCH ‘A’

Murugan Doraisamy

Income-tax Officer, International Taxation

S.S. Viswanethra ravi, Judicial Member
and S.R. Raghunatha, Accountant Member

IT Appeal No. 367 (Chny.) of 2025
[Assessment year 2022-23]

MAY 14, 2025

P. Ranga Ramanujam, CA for the Appellant. S. Senthil Kumaran, CIT for the Respondent.

ORDER

S.S. Viswanethra Ravi, Judicial Member.- This appeal filed by the assessee is directed against the final assessment order dated 28.01.2025 passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 [“Act” in short] for the assessment year 2022-23.

2. The assessee raised 10 grounds of appeal, amongst which, the only short point raised for consideration whether the Assessing Officer is justified in denying the deduction claimed under section 54F of the Act in the facts and circumstances of the case.

3. At the outset, we note that the assessee is a non-resident and filed his return of income declaring total income at Rs.9.72,170/-. According to the assessing Officer, the assessee sold 2 properties and his share is 50%. On an examination of return of income, the Assessing Officer denied deduction claimed under section 54F of the Act for the reason that the assessee did not deposit the net consideration in specific bank account within the specified time under section 139(1) of the Act. The Assessing Officer discussed the said issue in para 6 & 7 of the impugned order. We note that the assessee explained that he made an application for opening capital gain account to his banker on 28.07.2022, the Assessing Officer held that the net consideration credited to the said capital gain account only on 03.10.2022, since is beyond the due date for filing return of income under section 139(1) of the Act, the Assessing Officer denied deduction claimed under section 54F of the Act. Having aggrieved by the order of the Assessing Officer, the assessee is in appeal before us.

4. The ld. AR Shri P. Ranga Ramanujam, CA submits that the opening of capital gain account within the time stipulated under the Act was beyond the control of the assessee and it was due to internal process of the bank. The assessee made an application in time, but, however, the bank opened said account on 03.10.2022, in this regard, there is no fault of the assessee. He drew our attention to page 98 & 99 of the paper book and submits that the assessee immediately after opening the capital gain account, transferred the said net consideration from his savings bank account to capital gains account. He argued vehemently that the delay of bank procedure in opening the account cannot be fixed to the assessee as he made the application much before the time specified under section 139(1) of the Act. Further, he argued that merely because the assessee has not been able to deposit in the capital gain account, the deduction under section 54(1) of the Act cannot be denied. He submits that it is a mere non-compliance of procedural requirement under section 54(2) of the Act itself cannot stand in the way of getting the benefit to the assessee under section 54F of the Act. He drew our attention to the order of the Delhi Benches of the Tribunal in the case of ITO v. Vinod Gugnani (Delhi – Trib.) and argued that the Tribunal held the assessee is entitled to get deduction under section 54F of the Act even though net consideration was deposited in capital gain account with a delay of 31 days. Further, he argued that the impugned order is not justified in denying the deduction under section 54F of the Act for non- compliance of deposit of capital gain without examining the requirement of law under sub-section 1 of section 54F of the Act. He argued that the compliance of requirement under section 54(1) of the Act is mandatory and as to be construed as substantial compliance to grant the benefit of deduction. He submits that the Assessing Officer denied exemption for mere non-compliance of requirement of law under sub-section (1) of section 54F of the Act is not justified and he prayed to remand the matter to the file of the Assessing officer for verification whether the assessee complied with the condition stipulated under sub-section (1) of section 54 of the Act.

5. The ld. DR Shri S. Senthil Kumaran, CIT relied on para 7 of the impugned order.

6. Heard both the parties and perused the material available on record. We note that as rightly pointed out by the ld. AR, there was no examination with regard to compliance under sub-section (1) of section 54 of the Act. The Assessing Officer denied deduction under section 54F of the Act only on the sole reason that the assessee did not comply with the condition provided under sub-section (4) of section 54F of the Act. On perusal of the case law provided in paper book in the case of ITO v. Vinod Gugnani (supra), we note that it was held that non-compliance of the same, the assessee cannot be denied the benefit under section 54(1) of the Act. As discussed above, admittedly, there was no verification by the Assessing officer whether the assessee substantiated complying with the net consideration in investing of new asset. Since there is no verification, we deem it proper to remand the matter to the file of the Assessing Officer for his verification as to whether the assessee complied with the conditions provided under sub-section (1) of section 54 of the Act in appropriating the net consideration in new asset or not. Therefore, the final assessment order is set aside and the grounds raised by the assessee are allowed for statistical purposes.

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