A Section 54 exemption is valid if the investment is made, despite a CGAS lapse.

Issue

Can a taxpayer be denied the capital gains exemption under Section 54 of the Income-tax Act, 1961, for the procedural failure of not depositing the unutilized sale proceeds into the Capital Gains Account Scheme (CGAS) before the due date of filing their return, even if they have ultimately fulfilled the main condition of investing the funds in a new house within the prescribed three-year period?

Facts

An assessee sold a residential house on April 1, 2009.
The law required them to either invest the capital gains in a new house or, if the funds were still unutilized by the due date of filing their income tax return (around July 31, 2010), to deposit the unutilized amount in a Capital Gains Account Scheme (CGAS).
The assessee failed to deposit the unutilized funds into the CGAS by the due date.
However, the assessee did eventually purchase and begin construction of a new house in January 2012. This action was well within the overall three-year period allowed by Section 54 for construction from the date of the original sale.
The Assessing Officer (AO) disallowed the entire exemption claim under Section 54. The AO’s decision was based solely on the procedural lapse of not depositing the funds into the CGAS on time.

Decision

The court ruled in favour of the assessee.

It held that the substantive and most important requirement of Section 54 is the actual investment of the funds in a new residential property within the specified overall timeline (two years for purchase or three years for construction).
The court found that the requirement to deposit the funds into the CGAS is a procedural and directory requirement, not a mandatory one that can defeat the entire claim if the main condition is met.
Since the assessee had fulfilled the main, substantive condition by actually investing the money in a new house within the three-year period, the exemption could not be denied merely on account of this technical, procedural lapse. The assessee was held to be entitled to the full exemption.

Key Takeways

Substance Over Form: This is a classic legal principle where the courts prioritize the substance of the taxpayer’s action (the actual, timely investment in a new house) over a procedural formality (the interim step of depositing the money into a specific account).
Procedural vs. Substantive Conditions: The court made a clear distinction between the main, substantive condition of the law (re-investment) and the secondary, procedural condition (deposit in CGAS). As long as the primary goal of the law has been met, a failure in the secondary procedure is often condoned.
The Purpose of the CGAS: The underlying purpose of the CGAS is to ensure that the taxpayer does not misuse the funds that are earmarked for re-investment in a new house. If the taxpayer actually re-invests the funds correctly and within the overall time limit, that purpose is fulfilled, making the failure to use the CGAS a non-fatal error.
Section 54 is a Beneficial Provision: The exemption under Section 54 is a beneficial provision designed to encourage and facilitate the purchase of residential housing. The courts tend to interpret such beneficial provisions liberally to ensure that the intended benefit is not denied to a genuine taxpayer on hyper-technical grounds.

IN THE ITAT CHENNAI BENCH ‘B’

Krishnamoorthy Vijayaraghavan

Income-tax Officer

GEORGE GEORGE K., Vice President
and S.R. Raghunatha, Accountant Member

IT Appeal No.1976 (CHNY) of 2025
[Assessment year 2010-11]

SEPTEMBER 19, 2025

N. Arjun Raj, Adv. for the Appellant. Ms. Gouthami Manivasagam, JCIT for the Respondent.

ORDER

George George K., Vice President.- This appeal filed by the assessee is directed against the order of the Addl/JCIT(A), Nashik dated 31.03.2025, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2010-11.

2. There is a delay of 45 days in filing this appeal. The assessee has filed a petition for condonation of delay and also a supporting affidavit. On perusal of the reason stated in the petition for condonation of delay, we are of the view that there is sufficient cause in belated filing of this appeal and no latches can be attributed to the assessee. Hence, we condone the delay in filing this appeal and dispose of the same on merits.

3. The solitary issue argued by the Ld.AR is whether the First Appellate Authority (FAA) is justified in confirming the AO’s action in disallowing the claim of deduction u/s.54 of the Act amounting to Rs.10,27,558/-.

4. Brief facts of the case are as follows:

The assessee, for the assessment year 2010-11, had not filed his return of income. The Department was having information that assessee had sold an immovable property during the relevant assessment year. Since assessee had not filed his return of income admitting long term capital gains, the AO issued notice u/s.148 of the Act on 31.03.2017 calling upon the assessee to file the return of income. The assessee, in response to notice issued u/s.148 of the Act, filed his return of income on 27.04.2017 admitting income of Rs.6,89,617/-. Thereafter notice u/s.143(2) of the Act was issued. In response to notice issued u/s.142(1) of the Act, the assessee furnished the working of Long-Term Capital Gains and investment details vide letter dated 20.11.2018. The AO noted from the details filed that assessee had made investment in the new asset only on 19.01.2012 and show-cause the assessee, why the claim of deduction u/s.54 of the Act cannot be denied for the reason that unutilized sale proceeds of the original asset were not invested in the capital gains account scheme (CGAS) before the due date of filing of return of income u/s.139(1) of the Act. The assessee in response vide letter dated 27.11.2018 submitted that he had invested the sale proceeds of the original asset within three years from the date of sale and hence, eligible for exemption u/s.54 of the Act. The AO however rejected the objection of the assessee and denied the benefit of deduction u/s.54 of the Act by observing as under:-

“4. In this case, the due date for furnishing the return of income was 3107-2010 and the assessee has not made any deposit under the capital gain deposit scheme before this date nor utilized the capital gain for purchase or construction of property before the due date for furnishing the return of income. Hence, the assessee has not satisfied the provisions of section 54(2) of the Income-tax Act, 1961 and therefore not eligible to claim exemption u/s 54 of the Income-tax Act, 1961. Accordingly the deduction claimed u/s.54 of the Income-tax Act, 1961 is disallowed and added to the income returned.”

5. Aggrieved by the assessment order, assessee filed appeal before the FAA. The FAA confirmed the disallowance made by the AO. Further, the FAA at para 7.4 of the impugned order also observed that assessee has not provided proof with regard to utilization of sale proceeds of original asset on investment of new asset within the period of three years from the date of sale of the original asset.

6. Aggrieved by the order of the FAA, assessee has filed the present appeal before the Tribunal. The assessee has filed a paperbook enclosing therein the sale deed of original asset dated 01.04.2009, purchase deed dated 19.01.2012 of the new property (undivided share) and construction agreement dated 11.11.2012 entered by the assessee and builder.

7. The Ld.AR submitted that the issue involved in this appeal is the denial of deduction under Section 54 of the Act to the extent of Rs.10,27,558/-, sustained by the FAA. The Ld.AR submitted that the order of the NFAC is erroneous both on facts and in law. Firstly, the fact of reinvestment of the capital gains into a new residential property within the prescribed time limit is not in dispute. The assessee has complied with the substantive requirement of Section 54 of the Act. Once this fact is admitted, the deduction cannot be denied merely on account of a technical lapse. The only objection of the learned authorities is that the assessee did not deposit the unutilised capital gains in the Capital Gain Account Scheme before the due date. The Ld.AR submitted that this requirement is only directory, not mandatory. It was stated that courts have consistently held that where the assessee has utilised the capital gains for the purchase or construction of a residential house within the prescribed period, the benefit of Section 54 of the Act cannot be denied merely for not depositing the amount in the specified account. It was submitted that Section 54 of the Act is a beneficial provision intended to promote investment in housing. Therefore, it has to be interpreted liberally and purposively, not in a restrictive or technical manner. The Ld.AR submitted that the AO himself has not disputed the creation of the new asset. In such circumstances, sustaining disallowance solely on the basis of non-deposit under the Capital Gain Account Scheme is contrary to both the letter and spirit of the law. Therefore, he prayed that the disallowance sustained under Section 54 of the Act amounting to Rs.10,27,558/- be deleted and the assessee’s claim of deduction be allowed in full.

8. The Ld.DR submitted that assessee had not given any details with regard to the cost of construction of new asset and when construction was completed. Therefore, it was submitted that the matter needs to be remanded back to the AO for the assessee to produce the necessary evidence.

9. We have heard rival submissions and perused the material on record. The AO has denied the benefit of deduction u/s.54 of the Act solely for the reason that assessee has not invested the unutilized portion of sale consideration of original asset before the due date of filing of return u/s.139(1) of the Act. The view taken by the AO was endorsed by the FAA. The FAA has also stated at para 7.4 of the impugned order that assessee has not given any details with regard to investment made in the new asset.

10. The Chennai Bench of the Tribunal in the case of Avanasiyappan Eswaran v. ITO [IT Appeal No.1666 (CHNY) of 2025, dated 8.09.2025] by following the judgment of Hon’ble Jurisdictional High Court in the case of Venkata Dilip Kumar v. CIT 111/419 ITR 298 (Madras) had held that non-deposit of unutilized sale consideration of the old asset before filing of return u/s.139(1) of the Act in the capital gain account scheme is not fatal and deduction u/s.54F of the Act cannot be denied solely for the said reason. The relevant finding of the Tribunal reads as follows:

“8. We have heard rival submissions and perused the material on record. Before we adjudicate the issues raised, it is necessary to bring on record the relevant dates, consideration received, deemed sale value u/s.50C of the Act, etc., as detailed below:-

Date of sale of the Agricultural Land	:	16.06.2015
Due date for filing the ITR u/s 139(1)	:	31.07.2016
Due Date for filing the ITR u/s.139(4)	:	31.03.2018
Date of filing of the ITR (within 139(4)	:	15.09.2017
Due date for completion of the house -(3 yrs from the date of Original Transfer)	:	15.06.2018
Period of construction (within the time)	:	11.09.2016 to 31.03.2018
House-warming ceremony	:	22.01.2018
Cost of construction	:	Rs.62,50,000
Actual Sale consideration of asset sold	:	Rs.60,00,000
Deemed Sale value u/s 50C	:	Rs.96,13,000
LTCG (before 54F) Returned & Accepted	:	Rs.91,47,514
Deduction claimed u/s 54F (not allowed)	:	Rs.91,47,514

9. The assessee’s claim of deduction u/s.54F of the Act was denied by the assessee solely for the reason that the details of construction of new asset were not furnished during the course of assessment proceedings. The FAA on the other hand denied the benefit of deduction u/s.54F of the Act only for the reason the assessee did not deposit the sale consideration of the old asset namely, the agricultural land into the bank account under CGAS scheme. The assessee has produced cost of construction of new asset certified from an approved valuer and also proof that the construction of the new house has been completed well within the stipulated time namely three years from the date of sale of original asset. The Hon’ble Jurisdictional High Court in the case of Venkata Dilip Kumar v. CIT reported in 111/419 ITR 298 (Madras) had held at para 17 of the judgment as under:-

17. The claim of the assessee for deduction of the disputed sum towards the additional construction cost was rejected only on the ground that the said sum was not deposited in the capital gain account. In view of my findings rendered supra, the Revenue is not justified in making such objection. On the other hand, it has to verify as to whether the said sum was utilised by the petitioner within the time stipulated under Section 54(1) for the purpose of construction. If it is found that such utilisation was made within such time, the Revenue is bound to grant deduction. Therefore, this Court is of the view that the matter needs to go back to the first respondent for considering the issue as to whether the disputed amount, claimed by the assessee as deduction, has been utilised by the petitioner towards the additional construction within the time limit prescribing under Section 54(1) and thereafter, to pass fresh order accordingly in the light of the findings and observations rendered supra. Accordingly, the writ petition is allowed and the matter is remitted back to the first respondent to pass a fresh order accordingly. Such exercise shall be done by the first respondent within a period of eight weeks. No costs.

10. The above judgment of the Hon’ble Madras High Court was taken up in Writ Appeal by the Revenue and the same was dismissed by the Division Bench in the case reported in 437 ITR 137. Similar view was held by the Hon’ble Madras High Court in the case of CIT v. Smt.Umayal Annamalai and CIT v. Sardarmal Kothari (supra). In light of the above judicial pronouncements of the Hon’ble Jurisdictional High Court, we hold that non-deposit of sale consideration before filing of return u/s.139(1) of the Act in the capital gains account scheme is not fatal and deduction u/s.54F of the Act cannot be denied solely for the said reason.”

11. In light of the above judicial pronouncement, we hold that non-deposit of unutilized sale consideration of the old asset before filing of return u/s.139(1) of the Act in the capital gains account scheme is not fatal and deduction u/s.54F of the Act cannot be denied solely for the said reason. In the instant case, the original asset has been sold on 01.04.2019. The new asset has been purchased on 19.01.2012 (i.e., undivided share of land) and assessee had entered into the construction agreement on 11.01.2012. The three years from the date of sale of original asset ends on 31.03.2012. In the instant case, the assessee had invested a sum of Rs.34,15,040/- in purchase of undivided share of land and entered into construction agreement of an apartment. The builder has acknowledged receipt of payment of Rs.34,15,040/- which was paid by way of cheque drawn on ICICI Bank. This fact is also acknowledged by the AO in the impugned assessment order dated 27.11.2018 at para 2, which reads as under:-

“2. In response to notices u/s.143(2) and 142(1) of the Income-tax Act, 1961, the assessee appeared and furnished the details called for. The assessee has also furnished a working of long term capital gain and investment details vide letter dated 20-11-2018. It is noticed from the details filed that the assessee has made investments in properties only on 19-01-2012.”

12. Since, in this case, assessee had made investment / utilized the sale proceeds of the original asset in purchase of a new asset within the stipulated period i.e, three years from the date of sale of original asset, assessee is entitled to claim deduction u/s.54 of the Act amounting to Rs.10,27,558/-. It is ordered accordingly.

13. In the result, the appeal filed by the assessee is allowed.