Section 54 exemption granted despite late return filing and failure to deposit capital gains separately

ITAT Ahmedabad allowed the assessee's appeal, granting exemption under section 54 despite failure to deposit unutilized capital gains in a separate account and late filing of return under section 139(4). The tribunal held that utilizing funds other than sale consideration for constructing a new residential house does not disqualify the exemption claim. The court clarified that section 54 only requires completion of residential house construction, not commencement date, and that belated return filing under section 139(4) does not preclude section 54 benefits. The addition made by the assessing officer was deleted.

---

---

Issues Involved:
1. Delay in filing the appeal.
2. Denial of exemption under Section 54 of the Income Tax Act, 1961.
3. Validity of the appellate order by CIT(A).
4. Eligibility for exemption under Section 54 for investments made prior to the transfer of the original asset.
5. Impact of filing the return of income belatedly under Section 139(4).

Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal was delayed by 672 days. The assessee explained the delay through a notarized affidavit, citing that the appellate order was served during the Covid-19 pandemic, which hindered timely filing. The Assessing Officer's report confirmed no proof of service date. The Tribunal accepted the explanation and condoned the delay.

2. Denial of Exemption under Section 54:
The Assessing Officer denied the exemption under Section 54 because the assessee did not deposit the unutilized amount of capital gain in a separate account and filed the return belatedly under Section 139(4). The CIT(A) partially allowed the appeal, directing a recalculation of the exemption under Section 54, considering only the investments made after the sale of the original property.

3. Validity of the Appellate Order by CIT(A):
The assessee contended that the CIT(A)'s order was vague and did not properly address the allowability of the exemption under Section 54. The Tribunal found that the CIT(A) correctly observed that the investment in a residential house includes the cost to make it habitable and directed the Assessing Officer to consider investments made after the sale of the original property.

4. Eligibility for Exemption under Section 54 for Investments Made Prior to the Transfer of the Original Asset:
The Tribunal noted that Section 54 does not mandate that only the sale consideration from the original property must be used for the new investment. Investments made within one year before or two years after the transfer, or construction completed within three years, are eligible for exemption. The Tribunal cited various judicial precedents supporting this interpretation, including decisions from the Karnataka and Allahabad High Courts.

5. Impact of Filing the Return of Income Belatedly under Section 139(4):
The Tribunal referred to the case of Manilal Dasbhai Makwana and the Madras High Court's decision in C. Aryama Sundaram, which held that the exemption under Section 54 is available even if the return is filed under Section 139(4), provided the investment in the new asset is made within the stipulated period. The Tribunal concluded that the assessee is eligible for the exemption under Section 54, as the construction was completed within three years from the date of transfer, and the return was filed within the extended period under Section 139(4).

Conclusion:
The Tribunal allowed the appeal, directing the Assessing Officer to grant the deduction under Section 54 and delete the addition made. The decision emphasized that the assessee's investments in the new property, including those made before the sale of the original asset, are eligible for exemption, and the belated filing of the return under Section 139(4) does not disqualify the assessee from claiming the exemption.

Order Pronounced:
The appeal filed by the Assessee is allowed. The order was pronounced in the open court on 07-08-2024.

---