2025 (9) TMI 1495 - AT - Income Tax

Deduction under s.54 allowed despite unutilized sale proceeds not deposited into CGAS before filing under s.139(1)

ITAT CHENNAI allowed the appeal and upheld deduction under s.54. The Tribunal held that failure to deposit unutilized sale proceeds into CGAS before ... Disallowing the claim of deduction u/s. 54 - Unutilized sale proceeds of the original asset were not invested in the capital gains account scheme (CGAS) before the due date of filing of return of income u/s. 139(1) HELD THAT:- The Chennai Bench of the Tribunal in the case of Avanasiyappan Eswaran [2025 (9) TMI 1437 - ITAT CHENNAI] by following the judgment of Venkata Dilip Kumar [2019 (11) TMI 416 - MADRAS HIGH COURT]had held that non-deposit of unutilized sale consideration of the old asset before filing of return u/s. 139(1) of the Act in the capital gain account scheme is not fatal and deduction u/s. 54F of the Act cannot be denied solely for the said reason. In the instant case, the original asset has been sold on 01.04.2019. The new asset has been purchased on 19.01.2012 (i.e., undivided share of land) and assessee had entered into the construction agreement on 11.01.2012. The three years from the date of sale of original asset ends on 31.03.2012. In the instant case, the assessee had invested a sum in purchase of undivided share of land and entered into construction agreement of an apartment. The builder has acknowledged receipt of payment which was paid by way of cheque drawn on ICICI Bank. Since, in this case, assessee had made investment / utilized the sale proceeds of the original asset in purchase of a new asset within the stipulated period i.e, three years from the date of sale of original asset, assessee is entitled to claim deduction u/s. 54 - Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether non-deposit of unutilised sale proceeds in the Capital Gain Account Scheme (CGAS) before the due date for filing return under section 139(1) is fatal to a claim of exemption under section 54 (and by parity section 54F) where the assessee has in fact utilised the sale proceeds for purchase or construction of a new residential asset within the statutory period. 2. Whether the First Appellate Authority and Assessing Officer were justified in denying deduction under section 54 solely on the ground that no deposit was made in CGAS before the due date for filing the return, despite evidence of subsequent investment in the new asset within three years from date of sale. 3. What is the appropriate standard of proof and the consequence where the revenue objects only to non-deposit in CGAS but not to the substantive fact of reinvestment within the prescribed period. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework governing exemption under section 54/54F and the CGAS mechanism Legal framework: Section 54/54F provides exemption from long-term capital gains if capital gains are utilised for purchase or construction of a residential house within the prescribed time (purchase within one year before or two years after transfer or construction within three years). Where the assessee has not immediately utilised the gains, section 54/54F permits deposit of the unutilised amount in the Capital Gain Account Scheme (CGAS) as a mechanism to preserve the exemption until utilisation. Precedent treatment: Jurisdictional High Court decisions (referred to in the judgment) have held that CGAS deposit requirement is not intended to be a rigid, procedural bar to exemption where utilisation is in fact effected within the statutory period; revenue's objection on non-deposit must give way to proof of utilisation within time. The Tribunal follows those High Court pronouncements. Interpretation and reasoning: The Court treats the CGAS requirement as a protective mechanism to secure funds for intended reinvestment, not as a substantive precondition that nullifies the underlying statutory requirement of actual utilisation within the time limit. The statutory purpose of sections 54/54F - to encourage reinvestment in housing - requires a purposive and liberal construction rather than a technical forfeiture of exemption where the assessee ultimately complies with the time-bound substantive condition. Ratio vs. Obiter: Ratio - CGAS non-deposit before the due date of filing return under section 139(1) is not by itself fatal to a claim under section 54/54F where the assessee proves utilisation of sale proceeds for purchase or construction within the statutory period. Obiter - observations regarding the benevolent or purposive nature of the provision provide interpretive support but are not dispositive beyond the factual matrix. Conclusion: Non-deposit in CGAS before the due date for filing under section 139(1) cannot, standing alone, justify denial of exemption under section 54/54F when there is evidence of utilisation/purchase/construction within the prescribed period. Issue 2 - Application of the legal principle to the facts: sufficiency of proof of reinvestment within prescribed period Legal framework: The statutory time-limit for construction/purchase (three years from date of sale for construction) is the determinative substantive condition for entitlement to exemption; documentary proof of purchase, payment and construction within that period is relevant and decisive. Precedent treatment: Following the High Court's direction to verify actual utilisation rather than mechanically deny benefit for non-deposit, the Tribunal examines documentary evidence (sale deed, purchase deed, construction agreement, payment acknowledgements) to determine whether the substantive requirement is met. Interpretation and reasoning: On the record the assessee produced sale deed of original asset, purchase deed (undivided share dated 19.01.2012) and construction agreement dated 11.11.2012 together with bank cheque/payment acknowledgement showing payment of Rs.34,15,040/-. The AO acknowledged the investment date in his assessment notes. The Tribunal reasons that these materials establish utilisation/purchase within three years from date of sale (sale dated 01.04.2009 as per record) and thus satisfy section 54's substantive proviso despite earlier non-deposit. Ratio vs. Obiter: Ratio - where documentary proof establishes that the sale proceeds were invested in the new asset within the statutory period, the entitlement to deduction must be recognized even if deposit into CGAS was not made prior to the due date for filing the return. Obiter - comments on remand practice in other cases and the revenue's request for further proof (which was not necessary here given admitted facts) are ancillary. Conclusion: On the facts, the assessee satisfied the substantive condition by investing the sale proceeds in the new asset within the three-year period; the denial of deduction solely for non-deposit in CGAS was erroneous and the claimed deduction of Rs.10,27,558/- is allowed. Issue 3 - Evidentiary burden, remedial steps and scope of appellate intervention Legal framework: The assessing authority bears the duty to verify whether the unutilised amount has been applied to purchase or construction within the statutory period when denial is premised on non-deposit; the assessee must produce relevant documents to prove utilisation. Precedent treatment: Authorities cited indicate that where revenue's objection is limited to the technicality of non-deposit, the matter should be directed back for verification of utilisation if the record is incomplete; if the record affirmatively shows utilisation, appellate authority can allow the claim. Interpretation and reasoning: The Tribunal considered the revenue's submission for remand (requesting details of construction cost and completion) but found the record contained adequate proof (purchase deed, construction agreement, payment acknowledgements and AO's own note acknowledging investment date). Given that, further remand was unnecessary and appellate allowance was appropriate. The Tribunal follows appellate discretion to admit and evaluate documentary evidence and to correct assessment where the legal entitlement is shown on the record. Ratio vs. Obiter: Ratio - where adequate documentary proof of reinvestment within statutory time exists on record, appellate authority may allow exemption without remand; where record is deficient, remand for verification is appropriate. Obiter - procedural preferences for remand in other factual matrices. Conclusion: The evidentiary burden was met on the record; remand was not required; the Tribunal properly exercised appellate jurisdiction to grant the exemption. Overall Disposition and Legal Outcome The denial of deduction under section 54 based solely on non-deposit in CGAS before the due date for filing return under section 139(1) was reversed. Applying binding jurisdictional precedent and on the facts (documentary proof of purchase and construction within the three-year period and AO's acknowledgment), the Court allowed the deduction of Rs.10,27,558/- and set aside the impugned disallowance. The principle established is that CGAS non-deposit is not an absolute bar where actual utilisation within the statutory period is demonstrated; revenue is to verify utilisation rather than rely on procedural default alone.