Investment of LTCG in new residential house u/s54(1) despite non-deposit in CGAS u/s54(2) still allows full exemption

Whether non-deposit in CGAS under s.54(2) defeats exemption where the assessee purchased a new residential house within the period specified by s.54(1). Relying on Venkata Dilip Kumar (Madras HC), the Tribunal held that s.54(1) imposes the substantive, mandatory condition (investment of LTCG in new house within the prescribed period), whereas s.54(2) is procedural/directory and operates only when s.54(1) is not complied with. Because the substantive requirement of s.54(1) was fulfilled, failure to comply with s.54(2) did not bar the exemption; deduction under s.54 allowed for the entire amount.

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Issues: Whether the assessee is entitled to deduction under section 54 of the Income-tax Act, 1961 for the entire long-term capital gain of Rs. 66,91,617/- where the new residential property was purchased within two years of transfer but the unutilised amount was not deposited in the Capital Gain Account Scheme as required by section 54(2).

Analysis: The issue turns on the legal relationship between the substantive provision in section 54(1) and the procedural requirement in section 54(2). The assessee sold the original residential property and acquired the new residential property by registered sale deed within two years, and the full capital gain was invested in the new property though only part of the payment was made before the due date of filing the return under section 139(1). Precedent holds that compliance with section 54(1) is the substantive condition for grant of deduction, whereas section 54(2) prescribes a procedural requirement that operates when the substantive requirement is not met. Where the substantive condition of reinvestment within the statutory period is satisfied, mere non-deposit in CGAS under section 54(2) should not defeat the deduction; instead the tribunal/authority must verify actual utilisation within the time prescribed.

Conclusion: The assessee fulfilled the substantive condition under section 54(1) by acquiring the new residential property within two years and is therefore entitled to deduction for the full amount of Rs. 66,91,617/-. The disallowance of Rs. 22,51,617/- for non-deposit in CGAS under section 54(2) is not justified and is deleted.

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