Exemption u/s 54 allowed despite failure to deposit in Capital Gains Accounts Scheme

ITAT allows exemption u/s 54 allowed despite failure to deposit the amount in Capital Gains Accounts Scheme and new asset having a shop

In a recent judgment, ITAT Lucknow has allowed exemption u/s 54F holding that the requirement to invest in Capital Gains Accounts Scheme is merely procedural and has been provided in the Statute as a safeguard for ensuring compliance with the basic condition that the entire net consideration received by the assessee is utilized for investment in a new assets within the prescribed time.

ABCAUS Case Law Citation:
5134 (2026) (04) abacus.in ITAT

In the instant case two important questions related to capital gain exemption u/s 54F of the Income Tax Act, 1961 (the Act) arose for consideration by the ITAT.

The AO denied the exemption claimed by the assessee under section 54F of the Act on the ground that the assessee did not deposit the Capital Gains in Capital Gains Accounts Scheme with specified banks before the due date of filing the return of income u/s 139(1) and also that the assessee had purchased new assets which was not a residential property but was rather a semi-residential property which was having a shop within and, thus, the investment would not fall within the meaning of residential house..

The CIT(A)/NFAC confirmed the addition.

Before the Tribunal, the assessee submitted that though he did not use the sale proceeds for the purposes other than the purchase of immovable property (residential house) and the investment in mutual funds would be as good as investment in Capital Gains Accounts Scheme. It was further submitted that for enjoying exemption under section 54F of the Act without depositing the unutilized sale consideration into a Capital Gains Accounts Scheme, the assessee can utilize the same upto any time before the expiry of the time to file the return under section 139(4) of the Act

The Tribunal observed that the assessee had invested the entire amount prior to the due date for filing of return under section 139(4) of the Act.  That there are numerous judicial precedents wherein it has been held that the disallowance under section 54F of the Act cannot be made where the purchase of a new assets has been completed before the due date of filing the return of income in terms of the provisions of section 139(4) of the Act.

The Tribunal noted that Hon’ble Madras High Court had held that where the assessee had invested the sale proceeds of old assets in a new property before the due date of filing of belated return and had taken possession within three years, the assessee was entitled to exemption under section 54F of the Act though she had not invested the sale proceeds in Capital Gains Accounts Scheme before the due date of filing of return of income under section 139(1) of the Act.

The Tribunal further observed that similarly, the Ahmedabad Bench of the ITAT had held that where the assessee had fulfilled the basic condition for claim of exemption under section 54F of the Act by investing the net consideration received on sale of original assets in a new assets/residential house within the prescribed period of two years from the sale of original assets, the exemption could not be denied merely for the reason that majority of investment was made subsequent to due date of filing of return of income under section 139(1) of the Act. Similar findings were given by ITAT Chandigarh and ITAT Bangalore.

The Tribunal observed that he crux of the above stated judicial precedents is that where the assessee had fulfilled the basic condition for claiming exemption under section 54F of the Act of investing net consideration received on sale of original assets in a new assets/residential house within the prescribed period of two years of the sale of original assets, having fulfilled this basic condition, it will be highly illogical to deny the claim of exemption merely for the reason that majority of the investment was made subsequent to the due date of filing of return of income under section 139(1) of the Act and which was not deposited in the Capital Gains Accounts Scheme of the prescribed Bank  as required by law.  Thus, it flows that the requirement to invest in Capital Gains Accounts Scheme is merely procedural and has been provided in the Statute as a safeguard for ensuring compliance with the basic condition that the entire net consideration received by the assessee is utilized for investment in a new assets within the prescribed time.

The Tribunal further noted that the area of the shop was only 6.87% of the total area.  And the new assets was never used for commercial purposes nor was ever let out for commercial purposes.

The Tribunal observed that Hon’ble High Court of Rajasthan had held that the language of section 53 comprehends that the assets should be pre-dominantly residential building, and may have land appurtenant thereto, and not that it be a open plot of land, having some insignificant structure which might under some constrains, be used for residence or which might be actually used by some employee, as a person taking care of protection of the plot and, therefore, the impugned property is to be considered a residential property only. 

The Tribunal also noted that decision of ITAT Cochin which dealt with an identical issue where the assessee had purchased a property comprising of four units of which only one unit was residential property and claimed deduction under section 54F of the Act. The Tribunal, allowed the deduction under section 54F of the Act, placed reliance on the decision of the ITAT Delhi that if a property is capable of being used for the purpose of residence, then the requirement of the section 54F is satisfied.

Similarly, Jaipur Bench of the ITAT relying on the judgment of the Hon’ble Supreme Court had held that section 54F of the Act is a beneficial provision and is applicable to an assessee when the old capital assets is replaced by a new capital assets in form of a residential house. Once an assessee falls within the ambit of beneficial provisions, then the said provision should be liberally interpreted. 

Accordingly, the Tribunal held that assessee was eligible for granting of exemption in terms of section 54F of the Act and the assessee’s failure to deposit the amount in Capital Gains Accounts Scheme and the act of depositing in Mutual Funds would not bar the assessee’s right to claim exemption under section 54F of the Act. It was also held that second objection of the Department that the new assets having a shop within its premises would be the basis for denying the claim of the assessee for exemption under section 54F of the Act will not hold ground.

In the final result, the appeal of the assessee was allowed.

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