Income Tax Law not require needless formalism when substantive compliance is manifest

Law does not require needless formalism when substantive compliance is manifest – ITAT deleted disallowance of exemption made under section 54 – ITAT 

In a recent judgment, ITAT Mumbai has deleted disallowance of exemption made u/s 54 of the Income Tax Act on the premise that the assessee had failed to furnish the mode of payment in respect of the purchase of house when sale deed itself recorded mode of payment holding that the law does not require needless formalism when substantive compliance is manifest.

ABCAUS Case Law Citation:
4767 (2025) (10) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the National Faceless Appeal Centre (NFAC) confirming denial of deduction/exemption under section 54 of the Income Tax Act, 1961 (the Act) in respect of reinvestment made in a residential property.

The appellant assessee was an individual. His return of income was selected for scrutiny to verify the genuineness of capital gains and the corresponding claim of deduction under section 54 of the Act.

The Assessing Officer (AO) issued a show-cause notice which went unanswered. Consequently, the assessee’s claim of deduction under section 54, arising from the investment in the new residential property, was summarily disallowed and the assessment came to be completed ex parte.

Before the CIT(A) NFAC, the assessee explained that he had sold a residential flat and purchased another residential flat. He submitted the computation of long-term capital gain and claim of exemption under section 54 of the Act. In support of his claim, the assessee produced copy of the original purchase agreement, copy of sale deed and copy of purchase agreement.

However, the CIT(A) rejected the claim essentially on the premise that the assessee had failed to furnish the mode of payment in respect of the said purchase and, therefore, the exemption under section 54 could not be allowed.

Before the Tribunal, the assessee drew attention to the sale deed itself which contained details of cheque payments along with receipts annexed thereto. It was further explained that copies of bank statements were filed (even if as additional evidence) and that at no stage was any specific query raised by the CIT(A) regarding the mode of payment. Thus, the denial of deduction was wholly unwarranted.

The Tribunal observed that the reasoning adopted by the CIT(A) cannot stand judicial scrutiny. Once the sale deed itself recorded the sale consideration, acknowledged receipt of substantial part of the consideration by cheques, and annexed contemporaneous receipts, it was wholly incorrect to conclude that mode of payment was not disclosed.

The Tribunal opined that the law does not require needless formalism when substantive compliance is manifest. Moreover, it was never the case of the Revenue, either at the assessment stage or at the first appellate stage, that the source of purchase of the new property was doubtful or unexplained. The controversy was confined only to the claim of deduction under section 54. The assessee’s sale deed and supporting documents had already put the matter beyond doubt.

The Tribunal further noted that bank statements produced reflected the payments made through regular banking channels. These statements corroborated the recitals in the registered sale deed and receipts, and established beyond cavil that the entire purchase consideration was discharged through identifiable and explained sources.  In this factual matrix, to disallow the claim by alleging absence of disclosure of payment details is not only unwarranted but also contrary to the very purpose of section 54.

Accordingly, the Tribunal held that the assessee was entitled to exemption under section 54 and the disallowance sustained by the lower authorities was directed to be deleted.

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