In a noteworthy ruling that brings clarity and relief to taxpayers, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that exemption under Section 54 of the Income Tax Act, 1961 cannot be denied merely due to non-deposit of funds in the Capital Gains Account Scheme (CGAS), provided the entire capital gain has been invested in a new residential property before filing the income tax return.
Background of the Case
The case, titled Mr Mukesh Babulal Shah vs. Income Tax Officer (ITA No. 5882/Mum/2025), pertains to Assessment Year 2018–19. The assessee, Mr. Mukesh Babulal Shah, had sold multiple properties during the financial year 2017–18 for a total consideration of approximately ₹5.03 crore. Against this, he claimed an exemption of ₹3.69 crore under Section 54 on account of investment in a new residential property.
However, the Assessing Officer (AO) disallowed the exemption claim. The primary grounds for rejection were that the assessee neither deposited the unutilized capital gains in the CGAS before the due date prescribed under Section 139(1), nor completed the investment within the stipulated time frame. This disallowance was subsequently upheld by the first appellate authority.
Assessee’s Argument Before ITAT
Before the Tribunal, the assessee contended that although the return of income was filed belatedly under Section 139(4) of the Income Tax Act, the entire capital gain had already been invested in the purchase of a new residential property prior to the filing of the return. Therefore, there was no remaining unutilized capital gain that required deposit under the CGAS.
The assessee emphasized that the intention behind Section 54 is to promote investment in residential property, and once the full capital gain has been utilized for this purpose before filing the return, procedural requirements like CGAS deposit should not override substantive compliance.
Revenue’s Stand and Judicial Precedents
The Revenue relied heavily on the judgment of the Bombay High Court in the case of Humayun Suleman Merchant vs CIT. In that ruling, it was held that compliance with the requirement of depositing unutilized capital gains in the CGAS before the due date under Section 139(1) is mandatory for claiming exemption under Section 54.
However, the Tribunal carefully distinguished the facts of the present case from those in the cited judgment. It noted that in Humayun Suleman Merchant, there was indeed unutilized capital gain at the relevant time, which triggered the requirement of CGAS deposit.
The ITAT also referred to the decision of the Gauhati High Court in CIT vs Rajesh Kumar Jalan. In this landmark ruling, the court held that the term “due date” under Section 54 should be interpreted in the context of Section 139 as a whole, including Section 139(4), which allows for belated filing of returns. Accordingly, if the capital gain is invested before filing a return under Section 139(4), the exemption should still be available.
Tribunal’s Observations and Ruling
The ITAT Mumbai Bench observed that the core requirement under Section 54 is the investment of capital gains in a residential property within the prescribed period. The provision for deposit in the CGAS is merely a safeguard mechanism applicable when capital gains remain unutilized as of the return filing date.
In the present case, the Tribunal noted that the assessee had allegedly invested the entire capital gain in a new property on 24 December 2018, which was before the filing of the return. Although the formal agreement for purchase was executed later on 31 January 2019, the Tribunal emphasized the importance of actual investment over procedural formalities.
The bench categorically held that:
- If the entire capital gain has been utilized before filing the return of income (even if filed under Section 139(4)),
- And no unutilized amount remains as on the date of filing,
Then the requirement to deposit funds in the CGAS does not arise.
Thus, the Tribunal concluded that denial of exemption solely on the ground of non-deposit in CGAS is not justified when substantive conditions are fulfilled.
Direction to the Assessing Officer
While granting relief in principle, the ITAT remanded the matter back to the Assessing Officer for verification of the actual payments made towards the purchase of the new residential property. The Tribunal directed that if the investment is verified as claimed, the exemption under Section 54 must be allowed.
Key Takeaway for Taxpayers
This ruling reinforces a taxpayer-friendly interpretation of Section 54, emphasizing substance over procedural technicalities. It clarifies that:
- Deposit in CGAS is not mandatory if the entire capital gain is already invested before filing the return.
- The benefit of exemption can be claimed even in a belated return under Section 139(4), provided investment conditions are satisfied.
This decision will be particularly beneficial for taxpayers who, due to timing or practical constraints, are unable to comply with CGAS requirements but have nonetheless fulfilled the primary condition of reinvesting capital gains.
Overall, the judgment aligns with the legislative intent of encouraging residential investment while avoiding undue hardship due to procedural lapses.