Section 54 exemption sustained where capital gains were invested in a new home within time despite no deposit in the account scheme.

Section 54 exemption cannot be denied solely because the unutilised sale consideration was not deposited in the capital gains account scheme before the section 139(1) due date, where the assessee actually invested the capital gains in a new residential house within the prescribed period. The provision was treated as substantive, meant to encourage acquisition of residential property, while the deposit requirement under section 54(2) was viewed as a procedural safeguard. On the facts, purchase of the new house within one year and proof of investment during assessment entitled the assessee to the exemption, and the disallowance was unsustainable.

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Issues: Whether exemption under section 54 of the Income-tax Act, 1961 could be denied merely because the assessee did not deposit the unutilised sale consideration in the capital gains account scheme before the due date under section 139(1), when the new residential house was purchased within the stipulated period.

Analysis: The exemption provision in section 54(1) is substantive and is intended to promote purchase or construction of residential houses. The deposit requirement in section 54(2) was treated as an enabling and procedural safeguard to verify the assessee's intention, not as a condition that can defeat the substantive exemption where the assessee has in fact invested the capital gains in the new residential house within the permitted period. Since the assessee purchased the new house within one year of sale and established the investment during assessment, the absence of deposit in the notified account could not, by itself, disentitle the claim.

Conclusion: The exemption under section 54 was allowable and the disallowance was unsustainable. The appeal was decided in favour of the assessee.

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