Section 54 Exemption Is Restricted to Actual Investment Made Before Due Date Without CGAS Deposit

By | October 10, 2026
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Section 54 Exemption Is Restricted to Actual Investment Made Before Due Date Without CGAS Deposit

Issue

  • Whether Section 54 exemption can be restricted to the amount actually invested before the due date under Section 139(1) when unutilised capital gains are not deposited in the Capital Gains Account Scheme (CGAS).
  • Whether interest charged under Sections 234B and 234D is mandatory and consequential upon determination of tax liability.

Facts

  • Capital Gain & Exemption Claim: For AY 2017-18, the assessee declared long-term capital gains of ~Rs. 2.28 crores from the sale of two residential properties and claimed full exemption under Section 54 by purchasing two adjacent residential units intended to be used as a single home.
  • Non-Deposit in CGAS: The assessee did not deposit the unutilised capital gain balance into the Capital Gains Account Scheme prior to filing the return of income.
  • AO Action: The AO restricted the Section 54 exemption to the amount actually spent before filing the return.
  • CIT(A) Decision: CIT(A) accepted that the two adjacent units formed a single residential unit, but restricted the deduction to payments made up to the Section 139(1) due date (~Rs. 1.38 crores for CH-1 and ~Rs. 57.21 lakhs for CH-2), sustaining a disallowance of ~Rs. 32.17 lakhs.
  • Statutory Interest: The AO levied interest under Sections 234B and 234D on the resulting tax liability.

Decision

  • Exemption Restricted to Actual Spend: Following Humayun Suleman Merchant v. CCIT, if unutilised capital gains are not deposited in CGAS before filing the return under Section 139(1), exemption under Section 54 is strictly limited to amounts invested prior to that due date. The order of the CIT(A) is confirmed.
  • Statutory Interest Upheld: Levy of interest under Sections 234B and 234D is mandatory and consequential, and was correctly sustained.

Key Takeaways

  • Deposit in CGAS Mandatory for Full Exemption: Unutilised capital gains must be deposited into the Capital Gains Account Scheme on or before the Section 139(1) due date to protect full Section 54 exemption.
  • Forfeiture on Non-Deposited Balance: Failure to deposit unutilised funds in CGAS leads to disallowance of exemption on the unspent balance.
  • Consequential Statutory Interest: Interest levies under Sections 234B and 234D automatically follow any tax demand arising from restricted deductions.
IN THE ITAT MUMBAI BENCH ‘I’
Biswaranjan Sen
v.
Income-tax Officer
SAKTIJIT DEY, Vice President
and BIJAYANANDA PRUSETH, Accountant Member
IT Appeal No.1527 (MUM) of 2026
[Assessment year 2017-18]
SEPTEMBER  10, 2026
Nikhil Tiwari and Ms. Palak Mehta for the Appellant. Sridhar G. Menon, Sr. AR for the Respondent.
ORDER
Bijyananda Pruseth, Accountant Member.-This appeal filed by the assessee emanates from the order passed u/s 250 of the Income-tax Act, 1961 (in short, ‘Act’) by the Commissioner of Income Tax, Appeal-58, Mumbai [in short, ‘CIT(A)’], dated 15.02.2024 for the assessment year (AY) 2017-18.
2. The grounds of appeal raised by the assessee are as under:
“General Ground:
1 erred in assessing the total income of the Appellant at Rs. 93,59,140 as against Rs. 4,20,830 offered to tax by the Appellant in the Return of Income on account of disallowance of exemption u/s 54 of the Act;
Not passing draft assessment order thereby leading to assessment proceedings bad in law:
2. erred in not passing the draft assessment order in case of Appellant who is an ‘eligible assesssee as per Section 144C(15) of the Act and thereby violating the provisions of Section 144C of the Act and leading to entire assessment proceedings being bad in law;
Disallowance of deduction u/s 54 of the Act amounting to Rs. 32,17,168:
3. erred in denying the partial exemption u/s 54 of the Act merely on the ground of non-deposit of unutilized capital gains in the Capital Gains Account Scheme (‘CGAS’) as on due date of filing Return of Income u/s 139(1) of the Act, without appreciating that the entire capital gain was duly invested in a residential property within the prescribed time limit u/s 54(1) of the Act,
4. erred in not appreciating that the condition of deposit in CGAS is directory and not mandatory, particularly when the capital gains have been fully utilized for the purchase/construction of a new residential property within the stipulated period,
5. erred in not appreciating the fact that Section 54 being beneficial provision needs to interpreted liberally and strict interpretation of the said Section would defeat the purpose of introduction of the Section 54 and thus, the Ld.AO/CIT(A) should not have denied deduction to the Appellant merely on the ground that unutilized amount was not deposited in CGAS account,
6. erred in denying the exemption u/s 54 of the Act without independently verifying the factual matrix and merely relying on the procedural default, thereby causing injustice to the Appellant;
Levy of Interest u/s 234B of the Act:
7. erred in levying interest u/s 234B of the Act amounting to Rs 5,54,202,
Levy of Interest u/s 234D of the Act:
8. erred in levying interest u/s 234D of the Act amounting to Rs. 19,416.”
3. There is a delay of 646 days in filing the appeal. The assessee has filed an salaried employee of a multinational corporation and, owing to his senior leadership role, was required to undertake extensive overseas travel and discharge demanding professional responsibilities. He had been relying upon tax professionals appointed by his employer as well as his personal Chartered Accountant for handling his Indian tax matters. The CIT(A) order dated 15.02.2024 was duly communicated to the outgoing tax consultant; however, owing to a transition between the outgoing and incoming tax consultants and lack of coordination between the professionals, the appeal could not be filed within the prescribed period. The assessee, being a layperson in tax matters, was under the bona fide belief that the matter was being appropriately handled by the professionals. Upon subsequently becoming aware that the appeal had not been filed, the assessee immediately engaged a new tax consultant, reviewed the matter and authorised filing of the present appeal along with the application for condonation of delay. It was also submitted that the delay was neither intentional nor deliberate and occurred due to circumstances beyond the assessee’s reasonable control.
3.1 The assessee also placed on record an affidavit of Shri Himanshu Shah, Chartered Accountant, who stated that he had been associated with the assessee’s personal tax matters for several years prior to the assessee’s overseas assignment. He submitted that, during the relevant period, the assessee’s tax matters were primarily handled by the tax consultant appointed by his employer, while his own involvement was limited to supervisory and administrative matters. It was stated that the communication from the tax consultant regarding the CIT(A)’s order was inadvertently archived along with routine correspondence, and the requirement of filing a further appeal before the Tribunal was consequently not acted upon. Thereafter, owing to the transition from the outgoing tax consultant to a new consultant, the matter remained unattended, as the incoming consultant was initially not handling legacy litigation. He submitted that the lapse was neither intentional nor deliberate, but occurred due to the inexperience of the junior staff, transition of consultants and reduced involvement of his office in the assessee’s tax affairs during the relevant period.
3.2 On the other hand, the Ld. Sr. DR submitted that the Bench may decide the matter as it thinks fit. Considering the entire factual position as explained before us and keeping in view the principles laid down by the Hon’ble Supreme Court in case of Collector, Land Acquisition v. Mst. Katiji And Others–Land Acquisition v. Mst. Katiji [1987] 167 ITR 471 (SC) , where it was held that when substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay, we condone the delay.
4. Facts of the case, in brief, are that the assessee filed his return of income for AY 2017-18 declaring total income of Rs.4,20,830/-. The case was selected for limited scrutiny under CASS for examining capital gain arising from sale of property and the claim of exemption from capital gains. The assessee had sold two residential properties for an aggregate consideration of Rs.3 Cr. and declared long-term capital gain of Rs.2,27,85,907/-. Against the said capital gain, exemption u/s 54 of the Act was claimed for the entire amount, resulting in NIL taxable LTCG. During the assessment proceedings, the assessee submitted that the capital gain had been invested in two adjacent residential units, namely CH-1 and CH-2 in Tata Avenida, Kolkata, which were intended to be conjoined and used as a single residential unit. The assessee furnished the purchase-related documents and details of payments made towards the two units. The AO observed that the assessee had filed the return on 01.08.2017 and had not deposited the unutilised capital gain in the Capital Gains Account Scheme before furnishing the return. Accordingly, the AO held that only the amount actually utilised for purchase of one residential property up to the date of filing of the return could be considered for deduction u/s 54 of the Act. On this basis, the deduction was initially considered at Rs.1,38,47,601/-. The AO also rejected the assessee’s contention that CH-1 and CH-2 constituted a single residential unit, observing that no sufficient evidence had been furnished to establish that the two flats were in fact one residential property. The AO, therefore, restricted the deduction u/s 54 of the Act to Rs.1,38,47,601/- and disallowed the balance claim of Rs.89,38,316/-, treating the same as taxable long-term capital gain. The total income was determined at Rs.93,59,140/- as against the returned income of Rs.4,20,830/-.
5. Aggrieved by the order of AO, the assessee filed appeal before the CIT(A). The CIT(A) noted that the assessee had invested the capital gains in two adjacent units, namely CH-1 and CH-2 at Tata Avenida, Kolkata. While upholding the AO’s view that, in the absence of deposit of the unutilised capital gain in the Capital Gains Account Scheme, deduction u/s 54 of the Act could be allowed only in respect of the amount utilised up to the due date of filing of the return, the CIT(A) differed with the AO on the nature of the two units. On examination of the combined layout plan and the confirmation issued by Tata Housing Development Company Ltd., the CIT(A) held that CH-1 and CH-2 were adjacent duplex flats, conjoined and intended for use as a single residential unit. Relying upon the decisions of the Hon’ble Bombay High Court, including CIT v. Devdas Naik 366 ITR 12(Bom.) and Commissioner of Income-tax-12 v. Raman Kumar Suri [2013] 29  (Bombay), he held that the payments made towards both units up to 01.08.2017 were eligible for deduction u/s 54 of the Act. Accordingly, the AO was directed to allow deduction of Rs.1,38,47,601/- in respect of CH-1 and Rs.57,21,138/- in respect of CH-2, being the amounts paid up to the date of filing of the return. Thus, the grounds relating to deduction u/s 54 of the Act were partly allowed. The ground relating to levy of interest u/ss 234B and 234D of the Act was dismissed by the CIT(A), holding that the levy of such interest was consequential and mandatory. Consequently, the appeal of the assessee was partly allowed.
6. Aggrieved by the order of CIT(A), the assessee filed appeal before the Tribunal. The Ld. AR of the assessee has filed factual and legal paper books and submitted that exemption u/s 54 of the Act are to be allowed if the amount is invested on or before the due date of filing of return u/s 139(4) or 139(5) of the Act. He also submitted that it has been held by the Hon’ble Courts and Tribunals that mere non-compliance of a procedural requirement u/s 54(2) of the Act itself could not stand in the way of assessee getting benefit u/s 54 of the Act. The Ld. AR submitted that the AO has allowed exemption for the payments upto the due date of filing the return of income u/s 139(1) of the Act and not upto the time available for the revised return of income till 31.03.2018. The Ld. AR has relied on the following decisions for the above propositions: (i) CIT v. Rajesh Kumar Jalan 286 ITR 274(Gauhati), (ii) Venkata Dilip Kumar v. CIT [2019] 111  (Karnataka), (iv) Dr. Dharmista Mehta v. Income-tax Officer [2023] 198 ITD 106 (Mumbai – Trib.)/IT Appeal No. 1885 (MUM.) of 2017 (Mumbai –Trib.), (v) Dhruv Bishwa Tewari v. ITO [ITA No. 4233/Mum/2017 dated 05.11.2019] (Mumbai – Trib), (vi) Mukesh Babulal Shah v. ITO [ITA No. 5882/Mum/2025 dated 22.04.2026] (Mumbai – Trib), (vii) Venkata Dilip Kumar v. CIT 419 ITR 298 (Madras).
7. On the other hand, the Ld. DR for revenue supported the order of the lower authorities. He further submitted that the unutilised capital gain was not deposited in the Capital Gains Account Scheme before the due date of filing the return. Therefore, the deduction u/s 54 was rightly restricted to the amounts of Rs.1,38,47,601/- and Rs.57,21,138/- till 01.08.2017, the date of filing the return u/s 139(1) of the Act, and the balance amount of Rs.32,17,168/- was rightly brought to tax.
8. We have heard both sides and perused the materials on record. We have also carefully deliberated on the decisions relied upon by both sides. There is no dispute that the due date for filing the return u/s 139(1) of the Act was 01.08.2017 and the appellant had paid Rs.1,95,68,739/- (Rs.1,38,47,601/- (+) Rs.57,21,138/-) till 01.08.2017. Sub-section (2) of section 54 of the Act stipulates that the unutilized amount of the capital gain towards purchase for construction of the new asset shall be deposited in the Capital Gains Account Scheme before furnishing the return u/s 139(1) of the Act. The word used is “shall”, which makes the condition mandatory in order to avail the impugned exemption u/s 54 of the Act. The CIT(A) has allowed deduction in respect of both units which had been restricted to only one unit by the AO. However, he did not allow the claim of the entire LTCG of Rs.2,27,85,907/- claimed u/s 54 of the Act. While doing so, he has relied on the decision of the Hon’ble Jurisdictional High Court in case of Humayun Suleman Merchant v. CCIT 387 ITR 421 (Bombay) . The relevant part of the order of CIT(A) is reproduced below for ready reference:
“6.2. Order of the AO and submission of the assessee have been examined. The AO in his order has allowed deduction in respect of payment made by the assessee against the unit CH-1 till August 2017 as he concluded that the assessee can claim the benefit u/s.54 of the IT Act if the investment has been made in the purchase of a new property on or before the due date of filling of the return u/s.139(1) of the IT Act. The assessee in his submission mentioned that section 54 of is a beneficial provision and hence needs to be interpreted liberally and as per the payment schedules towards the property CH1, a payment of upto August 2018 which is higher than exemption claimed under section 54 of the IT Rs. 2,27,56,485/- has been made Act. Further, the assessee has relied on various case laws. The case laws submitted by the assessee are examined. In this regard, it is found that facts of the assessee are covered by the decision of the Jurisdictional Bombay High Court in the case of Humayun Suleman Merchant v. Chief Commissioner of Income-tax, Mumba 387 ITR 421 (Bombay) (Bombay) wherein it is held that the mandate under sub-Section (4) of Section 54F of the Act is that the amount not utilized towards the purchase of the flat has to be deposited before the due date of filing return of Income under Section 139(1) of the Act in the specified bank account. The said decision has also been followed by the Mumbai ITAT in the case of Rajan Gumba Telang v. PCIT, Circle- 21, Mumbai ([2019]  94/[2020] 180 ITD 184 (Mumbai)) in which it was held that the assessee was required to deposit the unutilized capital gain in capital gain account scheme within the due date of filing of return of income under section 139(1) of the Act and thus, prima facie, the conditions of section 54(2) of the Act have not been complied. In view of the facts of the case and decision of the Jurisdictional High Court and ITAT, payment made by the assessee till the date of filing of the return u/s/139(1) of the IT Act to be allowed for claiming deduction u/s 54 of the IT Act.”
8.1 It clear from the above that the CIT(A) has followed the binding decision of the Hon’ble Jurisdictional High Court in case of Humayun Suleman Merchant (supra) and also the co-ordinate Bench of Mumbai Tribunal in case of Rajan Gumba Telang v. PCIT [2019] 112  [2020] 180 ITD 184 (Mumbai)). The decision of Rajesh Kumar Jalan (supra) and K. Ramachandra Rao’s case (supra), relied upon by the Ld. AR, were also considered by the Hon’ble Bombay High Court and distinguished. In the case of Humayun Suleman Merchant (supra), the Hon’ble High Court held that where assessee had filed return of income and entire amount which was subjected to capital gain tax had not been utilized for purpose of construction of new house, nor were unutilized amounts deposited in notified bank accounts before filing return of income, AO rightly restricted exemption u/s 54F of the Act proportionately to amount invested. The Hon’ble High Court, after considering observation of the Hon’ble Bombay High Court in case of CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 727 (Bombay), also observed that the decision of one High Court is not a binding precedent upon another High Court and at best can only have persuasive value. The Ld. AR has not been able to distinguish the binding decisions of the Hon’ble Bombay High Court, either on fact or in law. Hence, we do not find any infirmity in the order of CIT(A) which we confirm. Accordingly, the grounds No.3 to 6 are dismissed.
9. Ground No.1 is general in nature and do not require adjudication.
10. Ground No.2 was not pressed and hence, the same is dismissed as not pressed.
11. Grounds No.7 and 8 pertain to levy of interest u/s 234B and 234D of the Act. These are consequential in nature and are mandatory. The CIT(A) has also relied on the decisions of the Hon’ble Supreme Court in case of CIT v. Bhagat Construction [2016] 383 ITR 9 (SC) to dismiss the grounds. Accordingly, the grounds are dismissed.
12. In the result, the appeal is dismissed.