ITAT Upholds Denial of Exemption u/s 54, Citing Failure to Invest in New Asset Within Specified Timeframe [Read Order]

The Income Tax Appellate Tribunal (ITAT) Lucknow Bench has upheld the denial of exemption under Section 54 of the Income Tax Act, 1961, to the appellant for failing to invest in a new residential asset within the prescribed time-frame. The appeal was filed against the order of the Commissioner of Income Tax (Appeals) CIT(A), which confirmed the Assessing Officer’s (AO) decision to reject the exemption claim on the grounds that the investment was made beyond the due date specified under Section 139(1) of the Act.

Sita Khandelwal, appellant-assessee had filed her income tax return for Assessment Year 2015-16, declaring a total income of Rs. 14,92,910.

The assessment was completed under Section 143(3), determining her total income at Rs. 1,02,51,530. She had jointly sold a residential house for Rs. 2,06,96,000, with her share amounting to Rs. 1,03,48,000. After deducting the indexed cost of acquisition and improvement, she disclosed a net capital gain of Rs. 87,58,620 and claimed an exemption under Section 54 by showing an investment in a new house property worth Rs. 88,00,000. However, the AO observed that the investment in the new property was not made before the due date of filing the return under Section 139(1), which was 30/09/2015. The investment in the flat was made in two installments—Rs. 10,00,000 on 27/09/2015 and Rs. 78,00,000 on 15/12/2015.

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Since a major portion of the investment was made after the due date, and the capital gains amount was not deposited in a Capital Gains Account Scheme before this deadline, the AO denied the exemption.

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The CIT(A) upheld the AO’s decision, stating that the provisions of Section 54 require either the investment in the new residential asset or the deposit of unutilized capital gains in a designated bank account before the due date under Section 139(1). Since Smt. Khandelwal failed to comply with this requirement, her claim for exemption was invalid

The tribunal referred to the Humayun Suleman Merchant vs. CCIT Mumbai [Bombay High Court], which held that exemption under Section 54 is available only if the taxpayer fulfills all statutory conditions, including timely investment or deposit in CGAS. The tribunal also cited Smt. Basaribabu Mohd. Rafiq Latiwal vs. ITO [ITAT Mumbai], which ruled that failure to deposit the unutilized capital gain in CGAS before the due date disqualifies the taxpayer from claiming the exemption.

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Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The matter was brought before the ITAT, where appellant argued that the investment in the new property was completed before filing her income tax return and should be considered valid for exemption. However, the tribunal, consisting of Subhash Malguria (Judicial Member) and Anadee Nath Misshra (Accountant Member), ruled that the exemption under Section 54 is subject to strict compliance with the provisions of the Act. They noted that the assessee neither deposited the capital gain amount in a designated account nor completed the property purchase within the specified timeframe.

Concluding the order, the tribunal affirmed the decisions of the AO and CIT(A), holding that the addition of Rs. 87,58,620 was justified and legally sustainable. Consequently, the appeal of Smt. Sita Khandelwal was dismissed.

To Read the full text of the Order CLICK HERE

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