2025 (7) TMI 585 - AT - Income Tax

Assessee wins appeal after tax officer denied section 54F deduction for missing deposit deadline without checking actual investment compliance

ITAT Chennai allowed assessee's appeal regarding denial of deduction under section 54F. AO denied deduction solely because assessee failed to deposit net ... Denial of deduction u/s 54F - assessee did not deposit the net consideration in specific bank account within the specified time u/s 139(1) - HELD THAT:- We note that as rightly pointed out by the ld. AR, there was no examination with regard to compliance under sub-section (1) of section 54 - AO denied deduction under section 54F of the Act only on the sole reason that the assessee did not comply with the condition provided under sub-section (4) of section 54F of the Act. On perusal of the case law provided in the case of ITO v. Vinod Gugnani [2022 (11) TMI 196 - ITAT DELHI] we note that it was held that non-compliance of the same, the assessee cannot be denied the benefit under section 54(1) of the Act. Admittedly, there was no verification by the AO whether the assessee substantiated complying with the net consideration in investing of new asset. Since there is no verification, we deem it proper to remand the matter to the file of the AO for his verification. Grounds raised by the assessee are allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered by the Appellate Tribunal was whether the Assessing Officer was justified in denying the deduction claimed under section 54F of the Income Tax Act, 1961, based on the assessee's failure to deposit the net consideration from the sale of property into a capital gains account within the prescribed time under section 139(1) of the Act. Specifically, the Tribunal examined:Whether non-deposit of net sale consideration in the capital gains account within the due date for filing the return under section 139(1) of the Act disentitles the assessee from claiming deduction under section 54F.The applicability and interpretation of procedural compliance under sub-section (4) of section 54F vis-`a-vis substantive conditions under sub-section (1) of section 54F.The relevance of the assessee's timely application for opening the capital gains account and whether delay caused by the bank in opening the account can be attributed to the assessee.Whether the Assessing Officer conducted a proper verification of the assessee's compliance with the substantive conditions under section 54F(1) before denying the deduction.2. ISSUE-WISE DETAILED ANALYSISIssue: Justification for denial of deduction under section 54F on account of delay in depositing net consideration in capital gains accountRelevant legal framework and precedents: Section 54F of the Income Tax Act provides for exemption from capital gains tax on sale of a long-term capital asset if the net sale consideration is invested in acquiring a new residential house within the prescribed period. Sub-section (1) of section 54F stipulates substantive conditions for such exemption, including investment of the net consideration in a new asset. Sub-section (4) deals with the requirement of depositing the net consideration in a capital gains account before the due date for filing the return under section 139(1), as a procedural safeguard.The Tribunal referred to the decision of the Delhi Bench in ITO v. Vinod Gugnani, where it was held that a delay in depositing the net consideration in the capital gains account (31 days beyond the due date) does not disentitle the assessee from claiming exemption under section 54F, emphasizing the primacy of substantive compliance under sub-section (1) over procedural lapses under sub-section (4).Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer denied the deduction solely on the ground of non-compliance with the procedural requirement under section 54F(4), i.e., failure to deposit the net consideration in the capital gains account within the due date under section 139(1). However, the Assessing Officer did not examine whether the assessee fulfilled the substantive conditions under section 54F(1), namely, investment of the net consideration in a new asset within the prescribed time.The Tribunal accepted the assessee's submission that the delay in opening the capital gains account was attributable to the bank's internal processes and not due to any fault of the assessee, who had applied for opening the account within the prescribed time. It was noted that the assessee transferred the net consideration to the capital gains account immediately after its opening.Key evidence and findings: The assessee's application for opening the capital gains account was dated 28.07.2022, within the due date for filing the return under section 139(1). The bank, however, opened the account only on 03.10.2022, beyond the due date. The assessee's transfer of net consideration from savings bank account to the capital gains account occurred immediately after account opening. The Assessing Officer's order (para 6 & 7) focused solely on the timing of deposit and did not verify the actual investment of the net consideration in a new asset as required under section 54F(1).Application of law to facts: The Tribunal applied the principle that procedural lapses under section 54F(4) should not override substantive compliance under section 54F(1). The Tribunal relied on the precedent that delay caused by factors beyond the assessee's control, such as bank procedures, should not disentitle the assessee from claiming exemption if the substantive conditions are met. Since the Assessing Officer did not verify the substantive compliance, the Tribunal found it necessary to remit the matter for fresh verification.Treatment of competing arguments: The Assessing Officer's argument was that strict compliance with the procedural requirement under section 54F(4) was mandatory and non-compliance warranted denial of deduction. The Tribunal rejected this rigid approach, holding that the procedural requirement is a safeguard but cannot be a ground for denial if substantive conditions are met. The Tribunal also considered the assessee's argument supported by case law that the delay in deposit due to bank's internal process is beyond the assessee's control and should not prejudice the assessee's claim.Conclusions: The Tribunal concluded that the Assessing Officer erred in denying the deduction solely on the ground of delay in deposit without verifying substantive compliance under section 54F(1). The matter was remanded to the Assessing Officer for verification of whether the assessee invested the net consideration in a new asset as required. The appeal was allowed for statistical purposes, setting aside the final assessment order.3. SIGNIFICANT HOLDINGSThe Tribunal established the following core principles and determinations:'Non-compliance of the procedural requirement under sub-section (4) of section 54F of the Act cannot disentitle the assessee from claiming exemption under sub-section (1) of section 54F, if the substantive conditions are otherwise fulfilled.''Delay in depositing the net consideration in the capital gains account caused by the bank's internal process, where the assessee has applied within the prescribed time, cannot be attributed to the assessee and should not result in denial of deduction.''The Assessing Officer must verify compliance with the substantive conditions under section 54F(1) before denying exemption on the ground of procedural non-compliance.''The impugned order denying deduction under section 54F solely on the basis of delay in deposit under section 54F(4) is not justified and requires remand for fresh verification.'In conclusion, the Tribunal set aside the final assessment order and remanded the matter to the Assessing Officer for verification of the assessee's compliance with the substantive conditions under section 54F(1), allowing the appeal for statistical purposes. This judgment underscores the importance of distinguishing between substantive and procedural requirements in capital gains exemption claims and ensuring fair treatment where procedural delays are beyond the assessee's control.