Deposit in Capital Gains Scheme entitles Section 54 exemption,

Deposit in Capital Gains Scheme entitles Section 54 exemption, while distance of agricultural land and indexation require re-verification.

Issue

Whether an assessee is entitled to exemption under Section 54 when bank documentation confirms the deposit of unutilized sale proceeds into the Capital Gains Accounts Scheme.
Whether the classification of agricultural land as a non-capital asset—based on its distance from the nearest municipal limits—requires re-verification when conflicting evidence exists between the Assessing Officer’s findings and the Tehsildar’s certificate/Google Maps distance.
Whether capital gains from the sale of a residential property must be recomputed by allowing the benefit of indexation to the assessee.

Facts

Section 54 Claim:
- The assessee sold a residential property in Dwarka and claimed exemption under Section 54 by depositing unutilized capital gains into a bank account within the prescribed timeline.
- The Assessing Officer (AO) disallowed the exemption, stating the assessee failed to provide sufficient proof of utilization or validity of the deposit.
- The CIT(A)/NFAC upheld the disallowance, treating the deposit as a standard fixed deposit rather than a Capital Gains Accounts Scheme deposit.
- Evidence from Punjab National Bank (bank statement and certificate) proved that ₹19.90 lakhs was indeed deposited under the Capital Gain Scheme.
Agricultural Land Exemption:
- The assessee sold agricultural land at Village Khori Jamalpur and claimed the gains were exempt under Section 10(1), arguing the land was rural agricultural land outside municipal limits and not a “capital asset” under Section 2(14).
- The AO treated the land as a capital asset and taxed the gains, holding that the land was situated within 8 km of the Faridabad Municipal Corporation.
- The assessee submitted a certificate from the Tehsildar stating the land was over 11 km away from the nearest municipality, alongside Google Maps aerial distance measurements.
Indexation Benefit:
- The assessee declared capital gains from the sale of the Dwarka property in their income tax return.
- The AO computed the capital gains without granting the statutory benefit of indexation.

Decision

Section 54 Deduction Allowed: The Tribunal held that since bank evidence conclusively established that the deposit of ₹19.90 lakhs was made under the Capital Gain Scheme, the denial of deduction under Section 54 was unjustified. (In favour of assessee)
Agricultural Land Status Remanded: The issue regarding whether the land fell within the 8 km limit of the Faridabad municipality was remitted back to the AO for fresh verification and adjudication in light of the Tehsildar’s certificate and distance evidence. (Matter remanded)
Indexation Computation Remanded: The issue of capital gains computation was remitted back to the AO with a direct instruction to allow the indexation benefit to the assessee. (Matter remanded)

Key Takeaways

Bank Certificates Serve as Valid Proof: Formal bank certificates and statements specifically confirming a deposit under the Capital Gains Accounts Scheme outweigh administrative assumptions regarding the nature of the deposit.
Factual Discrepancies on Land Location Warrant Re-examination: When official revenue records (such as a Tehsildar certificate) and spatial evidence contradict the AO’s distance findings regarding municipal boundaries, the matter must be remanded for factual verification.
Indexation is a Statutory Requirement: The Assessing Officer cannot compute long-term capital gains on eligible assets without granting indexation benefits as prescribed under the law.

IN THE ITAT DELHI BENCH ‘G’

Sonu Grover

Income-tax Officer

SATBEER SINGH GODARA, Judicial Member
and Naveen Chandra, Accountant Member

IT Appeal No. 1209 (Delhi) of 2026
[Assessment year 2022-23]

JUNE 29, 2026

Ayush Garg and Ms. Kanishka Garg, CAs for the Appellant. Choudhary N. C. Roy, Sr. D.R. for the Respondent.

ORDER

Naveen Chandra, Accountant Member.- This captioned appeal has been filed by the learned CIT(A)-NFAC, Delhi order dated 19.12.2025 arising from the assessment order dated 29.07.2022 under Section 143(3) r.w.s. 144B of the Income Tax Act, 1961 (‘the Act’) by the Income Tax Department, Delhi concerning Assessment Year (A.Y.) 2022-23.

2. Brief facts of the case are that the assessee is an individual, had filed its return of income for A.Y. 2022-23 on 29.07.2022 declaring a total income of Rs.14,00,780/-. The case was selected for complete scrutiny under CASS due to specific risk parameters, including large agricultural income shown per acre and large agricultural income in a non-business ITR.

3. During the F.Y. 2021-22, the assessee sold two properties; a residential flat in Dwarka, Delhi for Rs.1,40,00,000/- and agricultural land in Village Khauri Jamalpur, Faridabad for Rs.1,25,00,000/-. In the return of income, the assessee treated the sale of agricultural land as exempt u/s 10(1) considering his rural agricultural land as not falling under definition of ‘capital asset’ u/s 2(14) of the Act. For the residential property, the assessee claimed exemption under section 54 of the Act asserting that the capital gains of Rs 16,61,677/- were deposited into a Capital Gains Accounts Scheme (CGAS) within prescribed time period.

4. During the Assessment Proceedings, AO found that the agricultural land was situated within the 8 km of the jurisdiction of the Faridabad Municipal Corporation and thus qualified as a ‘Capital asset’ under section 2(14) of the Act. Regarding the residential property, learned AO observed that the assessee failed to provide sufficient evidence of the utilization of the sale proceeds or the validity of the CGAS deposit. Consequently, AO denied the exemptions/deduction u/s 54 and completed the assessment under section 143(3) r.w.s 144B of the Act on 20.03.2024, determining the total income at Rs.1,19,59,957/-.

5. Aggrieved, assessee was in appeal before the learned CIT(A)/NFAC. The learned CIT(A)/NFAC rejected the plea of the assessee.

6. Aggrieved by the order of CIT(A)/NFAC, assessee is now in appeal before us with the following grounds:

“On the facts and circumstances of the case, the order passed by learned Commissioner Income Tax (Appeals), Income Tax Department, National Faceless Appeal Centre [CIT(A).] is bad both in the eye of law and on facts.

(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the disallowance of Rs. 16,61,677/- made by the AO denying the exemption claimed by the assessee under section 54 of the Income Tax Act while computing the capital gain on sale of residential house property.

(ii)

That the abovesaid disallowance has been confirmed rejecting the detailed submissions and explanation along with the evidences brought on record by the assessee to justify that the amount has been deposited under the capital gain account scheme within the stipulated time as per the provisions of sub-section (2) of section 54 of the Act.

(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the addition of Rs. 88,97,500/- made by the AO denying the exemption claimed by the assessee on account of long-term capital gain on sale of agricultural land.

(ii)

That the abovesaid addition has been confirmed by rejecting the detailed submissions, explanations and documentary evidences placed on record by the assessee, which clearly established that the land sold by the assessee was agricultural land falling outside the definition of “capital asset” as provided under section 2(14)(iii) of the Income-tax Act, 1961, and therefore no capital gains tax could be levied on its transfer.

On the facts and circumstances of the case, the learned CIT(A) has grossly erred in confirming the additions made by the Assessing Officer solely on the basis of surmises, conjectures, assumptions and presumptions, without any cogent material on record and without proper application of mind.

Without prejudice to the foregoing grounds and on the facts and circumstances of the case, the learned Assessing Officer has committed a computational error in the computation sheet annexed to the assessment order while computing income chargeable under the head “Capital Gains”, as a result of which an incorrect and excessive demand has been raised upon the assessee, which is liable to be rectified/deleted.

That the appellant craves leave to add, amend or alter any of the grounds of appeal. “

7. Ground No.1 is general. Ground 2 is with regard to the disallowance of exemption claimed under section 54 of the Act by the assessee in respect of sale of a residential flat situated in Dwarka. At the outset, learned Counsel for the assessee submitted that during the year, the assessee had sold the residential property situated at Dwarka on 06.08.2021 for a consideration of Rs.1,40,00,000/-. The said property was originally purchased on 20.09.2010 for Rs. 65,00,000/-. The assessee after indexation, claimed exemption under section 54 of the Act of the capital gain amounting to Rs.16,61,677. In the assessment proceedings, the assessee furnished before the Ld. AO sale deed and purchase deed of the aforesaid property placed at PB Pg. Nos. 42-54 and 36-41 respectively. The assessee also submitted evidence regarding deposits made in the Capital Gain Account Scheme, as reflected from the confirmation/certificate of fixed deposit issued for capital gain purposes, which clearly establishes eligibility for exemption under section 54 of the Act. However, the Id. AO denied the exemption claimed under section 54 of the Act on the ground that the assessee had allegedly failed to furnish supporting documents regarding deposit in the Capital Gain Account Scheme. As per section 54(2) of the Act, the unutilized amount should be deposited in an account in any such bank or institution before the due date of filing the return u/s 139(1) of the Act, and utilized in accordance with Capital Gain Account Scheme. It is submitted that in the present case, the assessee had deposited Rs.20,00,000/- on 30.07.2022 in a separate account for the purpose of opening a fixed deposit under the Capital Gain Account Scheme, well within the prescribed due date.

8. The Ld. CIT(A) further erred in sustaining the disallowance while ignoring the evidences and explanations placed on record by the assessee. The Ld. CIT(A), without properly appreciating the bank statements and confirmation issued by Punjab National Bank, merely observed that the deposit appeared to be a standard fixed deposit rather than a deposit under the Capital Gain Account Scheme, 1988. However, the confirmation issued by Punjab National Bank specifically mentions that the deposit was made for the purpose of capital gains, thereby clearly evidencing compliance with the requirements of section 54(2) of the Act. In view of the above facts, the disallowance of Rs. 16,61,677 is not justified and deserves to be deleted.

9. On the other hand, learned DR relied upon the order of the CIT(A).

10. We have heard the rival submissions and perused the material available on record. We find from the bank statement and certificate of Punjab National Bank filed before us at pages 64 and 65 of the paper book, that the assessee made a deposit of Rs 19,90,000/- under the Capital Gain Scheme on 06.08.2022. As the evidence, which was before the AO and the CIT(A), show the deposit made in PNB is on account of Capital Gain scheme, we are of the view that the denial of deduction u/s 54 is not warranted and the same is directed to be deleted. Ground 2 is allowed.

11. Ground 3 is with regard to the addition made by treating the sale of agricultural land as taxable under the head ‘Capital Gain’. At the outset, learned Counsel for the assessee submitted that during the year under consideration, the assessee sold agricultural land for a consideration of Rs. 1,25,00,000/- vide sale deed dated 08.07.2021. The said land was originally purchased by the assessee on 30.11.2007 for Rs. 14,00,000/-. The assessee submitted that the land was situated at Village Khori Jamalpur and was located at a distance of more than 11 kilometers from the nearest municipality. Accordingly, the said land did not fall within the definition of “capital asset” under section 2(14) of the Act and therefore the income arising there from was exempt.

12. The assessee could not furnish a certificate from the Tehsildar evidencing that the land in question was agricultural land situated outside the prescribed municipal limits, the Ld. AO proceeded to make the addition of Rs. 88,97,500/- under the head “Capital Gain”. During the appellate proceedings, the assessee furnished the Tehsildar certificate before the Ld.CIT(A), which clearly certifies that the agricultural land is situated at a distance of more than 11 kilometers from the nearest municipality.

13. On the other hand, learned DR relied upon the order of the CIT(A).

14. We have heard the rival submissions and perused the material available on record. The assessee has filed before us a copy of google map showing aerial distance measured from Khori Jamalpur and Faridabad. We are of the considered view that the matter of whether the land was situated with 8 kms of the local limits of the Faridabad municipality be remitted back to the AO for verification and adjudication afresh. Ground 3 is allowed for statistical purposes.

15. Next Ground is with regard to the computational error made by AO in the computation sheet while calculating the income under the head capital gain. At the outset, learned Counsel for the assessee submitted that the assessee filed the return of income on 29.07.2022 declaring total income of Rs. 14,00,780/-, comprising income under the head “Capital Gains” amounting to Rs. 6,28,210/- and income from other sources amounting to Rs. 7,82,571/-. The return of income was selected for scrutiny assessment and the Ld. AO made the following additions:

Particulars	Addition Amount (Rs.)
Sale of Flat Situated at Dwarka	16,61,677/-
Sale of agricultural land	88,97,500/-
Total (Rs.)	1,05,59,177/-

16. Accordingly, the total income was determined at Rs. 1,19,59,957/-. However, in the computation sheet issued along with the assessment order, the learned Assessing Officer has erroneously computed the income under the head “Capital Gains” at Rs. 1,70,25,710/-. It is submitted that while preparing the computation sheet, the learned Assessing Officer failed to grant the benefit of indexation in respect of the sale of the residential flat situated at Dwarka. Although the addition made in the assessment order was computed after allowing indexation benefit, the computation sheet incorrectly considered the capital gain without granting such indexation. The incorrect computation of capital gain on sale of residential property at Dwarka, without granting indexation benefit, is as under:

Particulars	Addition Amount (Rs.)
Sale of Flat at Dwarka	Rs. 1,40,00,000/-
Less: Cost of Acquisition of plot	Rs. 65,00,000/-
Capital Gain computed without indexation	Rs. 75,00,000/-

17. Accordingly, the amount of Rs.1,70,25,710/- reflected in the computation sheet has been arrived at by the Ld. AO in the following manner and prayed for correction in the computation:

Particulars	Addition Amount (Rs.)
Capital gain already disclosed in the return of income	Rs.6,28,210/-
Addition on account of sale of agricultural land	Rs.88,97,500/-
Addition on account of sale of residential property at Dwarka (without indexation)	Rs. 75,00,000/-
Total capital gains as per computation sheet	1,70,25,710/-

18. On the other hand, learned DR relied upon the order of the CIT(A).

19. We have heard the rival submissions and perused the material available on record. We find that the AO has not allowed the indexation benefit on the capital gains arrived on sale of property at Dwarka. We have already decided the issue of capital gain on sale of property at Dwarka herein above. The issue of its computation is remitted back to the AO for fresh adjudication with the direction to allow the indexation benefit for calculating the capital gain. Ground 5 is allowed.

20. In the result, appeal filed by the assessee in ITA No.1209/Del/2026 is partly allowed.