ITAT Allows Full Section 54 Exemption Despite Non-Deposit in Capital Gain Account Scheme

The assessee, an individual, filed his return for AY 2018-19, declaring an income of Rs. 1.03 crore. During the year, he and his spouse sold a jointly owned residential house on 14.12.2017 for Rs. 3.70 crore, resulting in long-term capital gains of Rs. 1.33 crore. The assessee’s 50% share of capital gain amounted to Rs. 66.91 lakh, for which deduction under Section 54 was claimed.

The assessee entered into an agreement on 02.03.2018 to purchase a new residential house for Rs. 4.44 crore and paid Rs. 44.40 lakh up to the due date under Section 139(1). The balance consideration was paid later on through a housing loan and own funds. The sale deed was executed on 24.10.2019, within two years from the date of transfer.

The Assessing Officer restricted the Section 54 deduction to Rs. 44.40 lakh on the ground that the unutilized capital gain was not deposited in the Capital Gain Account Scheme as required under Section 54(2). The disallowance was upheld by the CIT(A).

Issue to be Decided: Whether Section 54 exemption can be denied merely for non-deposit of unutilized capital gains in the Capital Gain Account Scheme when the entire capital gain is invested within the prescribed period.

Tribunal’s Decision: The ITAT allowed the appeal and deleted the disallowance of Rs. 22.51 lakh. It held that Section 54(2) is procedural and applies only where the assessee fails to satisfy the substantive condition under Section 54(1). Since the assessee had invested an amount exceeding the capital gains in a new residential house within two years, the exemption could not be denied.

Relying on Venkata Dilip Kumar v. CIT (Madras High Court), the Tribunal held that non-deposit in the Capital Gain Account Scheme is a technical lapse and does not defeat the substantive benefit. The assessee was therefore held to be entitled to a full deduction of Rs. 66.91 lakh under Section 54.

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