Utilizing Sale Proceeds for New Property Before Filing Revised Return Under S.139(4) Qualifies for S.54 Exemption: ITAT Delhi - 2025-08-30

ITAT Allows Section 54 Exemption for Property Purchase Before Filing Belated Return, Overturns AO's Denial

New Delhi - In a significant ruling providing relief to taxpayers, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, has held that an assessee is eligible for exemption under Section 54 of the Income Tax Act, 1961, if they utilize capital gains to purchase a new residential property before the due date for filing a belated return under Section 139(4), even if the amount was not deposited in the Capital Gains Account Scheme (CGAS).

The bench, comprising Judicial Member Shri Satbeer Singh Godara and Accountant Member Shri Amitabh Shukla, allowed the appeal filed by assessee Raj Kumar, setting aside the orders of the lower tax authorities who had denied multiple claims related to capital gains from a property sale.

Case Background

The case pertains to the Assessment Year 2017-18. The assessee, Mr. Raj Kumar, sold his residential house in Noida on February 6, 2017, for Rs. 1.60 crore. Subsequently, on October 13, 2017, he purchased a new residential flat in Preet Vihar, Delhi, for Rs. 94.50 lakh.

While the assessee initially filed his return on August 11, 2017, he later filed a revised return on March 27, 2018, claiming an exemption of Rs. 94.50 lakh under Section 54. However, the Assessing Officer (AO) disallowed the claim, along with deductions for brokerage commission and the indexed cost of construction, raising the total taxable income to Rs. 1.63 crore. The Commissioner of Income Tax (Appeals) [CIT(A)] largely upheld the AO's decision, prompting the assessee to appeal to the ITAT.

Arguments Presented

Appellant's Contentions (Raj Kumar): - Brokerage Commission: The assessee's counsel argued that a commission of Rs. 8 lakh was genuinely paid to a broker via RTGS, supported by bank statements and a confirmation certificate from the broker. This evidence was allegedly overlooked by the lower authorities. -

Cost of Construction: A claim for indexed cost of construction of Rs. 42.22 lakh was denied for lack of original bills. The counsel submitted that as the construction took place in 2010-11, it was unreasonable to expect bills to be available after eight years. A government-registered valuer's report was provided as substantial proof. -

Section 54 Exemption: The primary contention was that the new property was purchased on October 13, 2017, well within the two-year period stipulated in Section 54 and before the due date for filing a belated return under Section 139(4) (i.e., March 31, 2018). Citing several High Court and Tribunal judgments, the counsel argued that actual utilization of funds for purchasing a new asset before this extended deadline fulfills the statutory requirement, making the deposit into the CGAS a procedural formality that can be overlooked.

Respondent's Contentions (Income Tax Officer): The Departmental Representative relied on the orders of the AO and CIT(A), arguing that the assessee had failed to meet the procedural requirements. The key objections were the lack of documentary evidence for the commission and construction costs, and the failure to deposit the unutilized capital gains into the CGAS before the due date for filing the original return under Section 139(1).

Tribunal's Judgment and Reasoning

The ITAT systematically addressed and allowed all three grounds of appeal raised by the assessee.

On Brokerage Commission: The Tribunal observed that the payment was made through banking channels (RTGS), and the identity of the recipient was established via PAN and Aadhaar. It found the 2% commission rate to be reasonable and in line with market practice. The bench stated, "there cannot be any scope of doubt when the identity of recipient and genuineness of transaction is prima facie established." It directed the AO to delete the addition of Rs. 8 lakh.

On Indexed Cost of Construction: Accepting the assessee's argument about the practical difficulty of retaining bills for eight years, the ITAT gave weight to the registered valuer's report from 2011 and other supporting documents like the building plan and completion certificate. The Tribunal noted, "we find force in the argument of the assessee regarding the time lag on account of which respective bills and vouchers were not available." The AO was directed to allow the claimed indexed cost of acquisition.

On Section 54 Exemption: This was the most crucial part of the ruling. The Tribunal relied on a series of binding precedents, including judgments from the jurisdictional Delhi High Court and other High Courts. It cited the decision in Smt. Harminder Kaur vs ITO , which held that the due date for utilizing capital gains or depositing them in the CGAS should be considered as the extended date available for filing a return under Section 139(4).

The judgment emphasized that the purpose of Section 54 is to encourage investment in new residential housing. Since Mr. Kumar had purchased the new house before filing the revised return and within the extended timeframe, he had substantially complied with the law's intent. The Tribunal concluded that failure to deposit the funds in the CGAS was not fatal to his claim.

Final Decision and Implications

The ITAT allowed the assessee's appeal in its entirety, setting aside the orders of the lower authorities on all contested issues. This judgment reinforces the legal position that the extended timeline for filing returns under Section 139(4) is also applicable for fulfilling the investment conditions under Section 54. It serves as a significant precedent, favoring a substantive and purposive interpretation of tax laws over a strictly procedural one, thereby providing clarity and relief for taxpayers undertaking property transactions.