Facts of the Case

The assessee, Nilanjan Chaudhari, filed his return of income for Assessment Year 2013-14 declaring total income after claiming deduction under Section 54 of the Income Tax Act on account of long-term capital gains arising from the sale of a residential property.

The assessee reinvested the sale consideration in purchasing another residential property. However, he did not deposit the unutilized capital gains in the Capital Gains Accounts Scheme before the due date prescribed under Section 139(1) of the Act.

The Assessing Officer allowed exemption only to the extent of the amount invested up to the due date under Section 139(1) and disallowed the balance amount invested thereafter. The order of the Assessing Officer was affirmed by the Commissioner of Income Tax (Appeals). Aggrieved by the same, the assessee filed an appeal before the Income Tax Appellate Tribunal. 

Issues Involved

Whether the assessee is entitled to claim exemption under Section 54 of the Income Tax Act when the entire long-term capital gain has been reinvested in the purchase of a new residential house within the period prescribed under Section 139(4), even though the amount was not deposited in the Capital Gains Accounts Scheme before the due date under Section 139(1).

Petitioner’s Arguments

The assessee contended that the entire sale consideration arising from the transfer of the old residential property had been reinvested in the purchase of a new residential house within the time limit allowed under the Income Tax Act.

It was argued that the failure to deposit the amount in the Capital Gains Accounts Scheme was merely a procedural lapse and should not disentitle the assessee from claiming exemption when the substantive requirement of reinvestment had already been fulfilled.

The assessee further relied upon judicial precedents holding that investments made up to the due date of filing return under Section 139(4) should also be considered for the purpose of granting exemption under Section 54.

Respondent’s Arguments

The Revenue submitted that the assessee had not complied with the mandatory requirement of depositing the unutilized capital gains in the Capital Gains Accounts Scheme before the due date of filing the return under Section 139(1).

According to the department, exemption under Section 54 should be restricted only to the amount actually invested before the due date prescribed under Section 139(1), and therefore the Assessing Officer was justified in denying the exemption for the remaining amount invested after that date. 

Court Order / Findings

The Income Tax Appellate Tribunal held that the assessee had substantially complied with the conditions prescribed under Section 54 of the Income Tax Act by reinvesting the capital gains in a residential property within the permissible time limit.

The Tribunal relied on the judgment of the Punjab and Haryana High Court in CIT v. Jagtar Singh Chawla, wherein it was held that if the assessee reinvests the capital gains in a new residential house within the extended time limit available under Section 139(4), exemption under Section 54 cannot be denied merely because the amount was not deposited in the Capital Gains Accounts Scheme.

Accordingly, the Tribunal held that the assessee was entitled to claim exemption under Section 54 for the entire amount reinvested in the new property, and the appeal of the assessee was allowed. 

Important Clarification

The Tribunal clarified that the requirement of depositing capital gains in the Capital Gains Accounts Scheme is intended to ensure that the assessee retains the funds for reinvestment in a residential property.

Where the assessee has actually utilized the capital gains for purchasing or constructing a residential house within the statutory period, denial of exemption merely due to non-deposit in the scheme would defeat the purpose of the beneficial provision under Section 54 of the Income Tax Act.

Link to download the order -  https://itat.gov.in/public/files/upload/1703235453-2746-2018-Nilanjan%20Chaudhari%20_1_.pdf

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