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Facts
The assessee sold agricultural land and claimed deduction under Section 54F for the construction of a new house. The Assessing Officer (AO) denied the deduction for lack of evidence of construction, and the First Appellate Authority (FAA) denied it for non-deposit of sale proceeds in a Capital Gains Account Scheme (CGAS).
Held
The Tribunal held that non-deposit of sale consideration in the CGAS before filing the return under Section 139(1) is not fatal to the claim for deduction under Section 54F. The issue regarding the utilization of sale proceeds for construction within the stipulated time needs to be examined by the AO.
Key Issues
Whether non-compliance with the mandatory requirement of depositing sale proceeds in CGAS before filing the return is fatal to the claim of deduction under Section 54F, and whether the sale proceeds were utilized for construction within the stipulated time.
Sections Cited
54F, 250, 143(2), 143(3), 139(1), 50C, 139(4)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI S.R. RAGHUNATHA
आदेश/ O R D E R
PER GEORGE GEORGE K, VICE PRESIDENT:
This appeal filed by the assessee is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 19.05.2025, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2016-17.
Brief facts of the case are as follows: The assessee is an individual deriving agricultural income and income from other sources. For the assessment year 2016-17, the return of income was filed on 15.09.2017 declaring income of Rs.1,84,120/- and agricultural income of Rs.50,000/-. The assessment was selected for scrutiny and notice u/s.143(2) of the Act was issued on 11.08.2018. The assessee had sold an agricultural land and disclosed capital gains thereon in the return filed for the assessment year 2016-17. The assessee had also claimed deduction u/s.54F from the Long-Term Capital Gains arising from sale of land for the construction of new asset i.e., residential building. The claim of deduction u/s.54F of the Act was denied by the AO in the assessment concluded u/s.143(3) of the Act (order dated 28.12.2018) and the AO added Long Term Capital Gains to the returned income. The relevant finding of the AO reads as follows:- 3. The assessee has not submitted any evidences for the construction of residential house viz. Copy of construction approval from the competent authority, period of construction of house, date of completion of house construction and valuation report from an approved valuer. Therefore, the claim of deduction u/s 54F is denied.
3 -: 4. Further, the assessee has explained that the source for the cash deposits made in the bank account during demonetisation period (08.11.2016 to 31.12.2016) was from the sale of lands and for the same land the deduction u/s 54F was claimed. The amount received from sale of lands during the A.Y.2016-17 was explained as source for the cash deposits during demonetisation period i.e A.Y.2017-18. Therefore, it is evident that the net consideration from the sale of lands was not utilised for the construction of new asset before filing of return of income u/s 139(1) i.e 31.07.2016.
After examining the AIR information and the details filed by the assessee, it is clear that the assessee is not eligible to claim deduction u/s 54F. Accordingly, the assessment is completed as under. Returned income : Rs.1,84,120 + 50,000(Agri) Add: Long Term Capital Gain : Rs.91,47,514 Assessed Income : Rs.1,84,120 + 91,47,514 (LTCG) + 50,000(Agri)
3. Aggrieved, assessee filed appeal before the First Appellate Authority. Before the First Appellate Authority (FAA), the assessee admitted that the sale proceeds of the agricultural land was not deposited in a separate capital gains account scheme (‘CGAS’) as required u/s.54F(4) of the Act. However, it was contended that the investment in the new house was eventually completed and the sale proceeds of the agricultural land was utilized in the construction of new house within the stipulated time (i.e., 3 years from date of sale of original asset). The FAA however rejected the contention of the assessee. The FAA held that the assessee ought to have deposited the unspent capital gains in the CGAS account before the due date of filing the return u/s.139(1) of the Act. In support of his conclusion, the FAA relied 4 -: on judicial pronouncements which he extracted at para 6.3.4 of the impugned order. As regards assessee’s contention that deduction u/s.54F of the Act should be determined on the actual consideration received and not on the deemed consideration u/s.50C of the Act was not adjudicated by the FAA since the entire claim of deduction u/s.54F of the Act was denied for the reason that sale proceeds of the agricultural land sold was not deposited in the capital account scheme. The relevant finding of the CIT(A) regarding denial of deduction u/s.54F of the Act reads as follows:- 6.3.3. Examination of Facts and Appellant’s Contention: The appellant has admitted that they did not deposit the unspent capital gains in a CGAS account before the due date for filing the return under Section 139(1). • Instead, the appellant claims to have directly utilized the funds for house construction, which is argued to be substantive compliance. • However, substantive compliance cannot override a specific statutory requirement. The law mandates CGAS compliance, and failure to adhere to this requirement disqualifies the appellant from claiming the exemption. • The appellant’s reliance on the concept of "substantial compliance" is misplaced, as the Supreme Court in CIT v. Hemsons Industries [(2001) 251 ITR 693 (SC)] has held that procedural requirements cannot be ignored even if the ultimate objective is achieved.
6.3.4. Judicial Precedents Supporting Mandatory CGAS Compliance: CIT v. Ms. Jagriti Aggarwal [(2011) 339 ITR 610 (P&H HC)]: The court emphasized that deposit in CGAS is a statutory requirement for claiming exemption under Section 54F. • Bharati C. Kothari v. ITO [(2016) 69 taxmann.com 69 (Mumbai Trib.)]: It was held that failure to deposit unutilized capital gains in 5 -: CGAS disentitles the assessee from exemption, regardless of actual construction. • CIT v. Sugamchand C. Shah [(2012) 211 Taxman 19 (Guj HC)]: The court reiterated that non-compliance with CGAS provisions is fatal to the exemption claim.
6.3.5. Conclusion and Decision on Issue 3: The appellant has failed to comply with the mandatory requirement of depositing unspent capital gains in CGAS before the due date under Section 139(1). • The argument of "substantial compliance" cannot override the clear statutory requirement of Section 54F(4). • Accordingly, the AO has rightly disallowed the claim of exemption under Section 54F.
Aggrieved by the order of the FAA, assessee has filed the present appeal before the Tribunal raising the following grounds:- 1) The Order of the Ld. CIT(A), NFAC is unsustainable, both on law and on the facts of the case. 2) The Ld. CIT(A) failed to appreciate that the Assessee has constructed a house within the time period of 3years and has complied with the substantive provisions of Sec.54F. 3) The Ld. CIT(A) erred in not understanding that the deposit into the Capital Gains Account Scheme (CGAS) is only a Directory provision and not a Mandatory provision. 4) The Ld. CIT(A) failed to notice that are plethora of case laws, including the decisions of the H’ble Jurisdictional Madras High Court, cited before him, in favour of the assessee’s claim for deduction u/s 54F. 5) The Ld. CIT(A) has made the following observation (para 6.4.4 Analysis and Conclusion – page 23 of 24) without giving a clear adjudication on a ground of appeal: “While the appellant’s contention that section 54F should be calculated on actual consideration has legal merit, this becomes irrelevant because the exemption itself has been denied due to CGAS non-compliance” For these and other grounds that may be adduced at the time of hearing, it is humbly prayed that H’ble ITAT may be pleased to direct the Ld. ITO to allow the deduction u/s 54F claimed by the Assessee.
6 -: 5. The Ld.AR reiterated the submissions that since assessee had utilized the sale proceeds of agricultural land for construction of new house within the stipulated period, non-deposit of sale proceeds in CGAS is not fatal and is entitled to deduction u/s.54F of the Act. In support of his contention, the Ld.AR relied on the following judicial pronouncements:- i. Hon’ble Madras High Court in the case of CIT vs. Venkat Dilip Kumar reported in [2021] 124 taxmann.com 198 (Madras) Dt.15.10.2020 ii. Hon’ble Madras High Court in the case of CIT vs. Umayal Annamalai reported in [2020] 118 taxmann.com 80 (Madras) Dt.22.07.2020 iii. Hon’ble Madras High Court in the case of CIT vs. Sardarmal Kothari reported in [2008] 302 ITR 286 (Mad) Dt.17.06.2008 iv. Hon’ble Karnataka High Court in the case of CIT vs. K. Ramachandra Rao reported in [2015] 56 taxmann.com 163 (Madras) Dt.14.07.2014 v. ITAT, Chennai Bench in the case of Seetha Subramaniam vs. ITO reported in [1996] 59 ITD 94 (Mad) dt. 25.04.1996 vi. ITAT, Kolkata Bench in the case of Sunayana Devi vs. ITO reported in [2017] 86 taxmann.com 72 (Kol) dt. 13.09.2017
As regards the claim of deduction u/s.54 of the Act should be calculated on the actual consideration and not on the deemed consideration u/s.50C of the Act, the Ld.AR relied on the Jaipur Bench order of the Tribunal in the case of ITO vs. Shri Raj Kumar Parashar in (order dated 28.09.2017).
The Ld.DR on the other hand submitted that the impugned order is legally sustainable. The Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] has undertaken a detailed examination 7 -: of the facts, submissions, and applicable legal provisions and rendering a reasoned finding that non-compliance with the mandatory requirement under Section 54F(4) of the Act, relating to deposit in the Capital Gains Account Scheme (CGAS), is fatal to the assessee’s claim. It was contended by Ld.DR that the assessee has unequivocally admitted non-deposit of the unutilized capital gains in the CGAS within the stipulated period, though a plea of substantive compliance was raised on the ground of subsequent investment in construction. However, Section 54F(4) mandates that the unutilized portion of the capital gains must be deposited in the notified scheme before the due date of filing the return under Section 139(1), in order to avail the benefit of exemption. The Ld.DR submitted that the assessee’s cash deposits made during the period of demonetization further corroborate the fact that the funds remained unutilized as on 31.07.2016. Consequently, the Ld. CIT(A) was correct in upholding the denial of exemption, applying the principle of strict interpretation of exemption provisions as enunciated by the Hon’ble Supreme Court in Commissioner of Customs v. Dilip Kumar & Co. [2018 SCC Online SC 747], wherein it was categorically held that exemption notifications are to be construed strictly.
8 -: 8. We have heard rival submissions and perused the material on record. Before we adjudicate the issues raised, it is necessary to bring on record the relevant dates, consideration received, deemed sale value u/s.50C of the Act, etc., as detailed below:- Date of sale of the Agricultural Land : 16.06.2015 Due date for filing the ITR u/s 139(1) : 31.07.2016 Due Date for filing the ITR u/s.139(4) : 31.03.2018 Date of filing of the ITR (within 139(4) : 15.09.2017 Due date for completion of the house - : 15.06.2018 (3 yrs from the date of Original Transfer) Period of construction (within the time) : 11.09.2016 to 31.03.2018 House-warming ceremony : 22.01.2018 Cost of construction : Rs.62,50,000 Actual Sale consideration of asset sold : Rs.60,00,000 Deemed Sale value u/s 50C : Rs.96,13,000 LTCG (before 54F) Returned & Accepted : Rs.91,47,514 Deduction claimed u/s 54F (not allowed) : Rs.91,47,514
The assessee’s claim of deduction u/s.54F of the Act was denied by the assessee solely for the reason that the details of construction of new asset were not furnished during the course of assessment proceedings. The FAA on the other hand denied the benefit of deduction u/s.54F of the Act only for the reason the assessee did not deposit the sale consideration of the old asset namely, the agricultural land into the bank account under CGAS scheme. The assessee has produced cost of construction of new asset certified from an approved valuer and also proof that the construction of the new house has been completed well within the 9 -: stipulated time namely three years from the date of sale of original asset. The Hon’ble Jurisdictional High Court in the case of Venkata Dilip Kumar vs. CIT reported in (2019) 419 ITR 298 (Madras) had held at para 17 of the judgment as under:- 17. The claim of the assessee for deduction of the disputed sum towards the additional construction cost was rejected only on the ground that the said sum was not deposited in the capital gain account. In view of my findings rendered supra, the Revenue is not justified in making such objection. On the other hand, it has to verify as to whether the said sum was utilised by the petitioner within the time stipulated under Section 54(1) for the purpose of construction. If it is found that such utilisation was made within such time, the Revenue is bound to grant deduction. Therefore, this Court is of the view that the matter needs to go back to the first respondent for considering the issue as to whether the disputed amount, claimed by the assessee as deduction, has been utilised by the petitioner towards the additional construction within the time limit prescribing under Section 54(1) and thereafter, to pass fresh order accordingly in the light of the findings and observations rendered supra. Accordingly, the writ petition is allowed and the matter is remitted back to the first respondent to pass a fresh order accordingly. Such exercise shall be done by the first respondent within a period of eight weeks. No costs.
The above judgment of the Hon’ble Madras High Court was taken up in Writ Appeal by the Revenue and the same was dismissed by the Division Bench in the case reported in 437 ITR 137. Similar view was held by the Hon’ble Madras High Court in the case of CIT vs. Smt.Umayal Annamalai and CIT vs. Sardarmal Kothari (supra). In light of the above judicial pronouncements of the Hon’ble Jurisdictional High Court, we hold that non-deposit of 10 -: sale consideration before filing of return u/s.139(1) of the Act in the capital gains account scheme is not fatal and deduction u/s.54F of the Act cannot be denied solely for the said reason.
In the present case the AO had denied claim of deduction u/s.54F of the Act solely for the reason that assessee has not produced the proof of incurring expenses for construction of new asset. Therefore, we deem it appropriate to restore the issue to the files of the AO. The AO shall examine the evidence placed on record by the assessee as regards the construction of new asset for claiming deduction u/s.54F of the Act. If the expenses have been incurred / utilized within the stipulated period prescribed u/s.54F(1) of the Act, then assessee would be entitled to deduction u/s.54F of the Act in respect of such expenses incurred.
The FAA in the impugned order at para 6.3.4 had relied on certain judicial pronouncements in support of his conclusion that it is mandatory for the assessee to deposit the sale proceeds in CAGS for getting the benefit of deduction u/s.54F of the Act. In this regard, it is to be mentioned that the first case law relied on by the FAA namely CIT vs. Ms. Jagriti Aggarwal (supra), is actually in favour of assessee. The other two case laws namely 11 -: Bharati C. Kothari vs. ITO and CIT vs. Sugamchand C. Shah (supra) is not on the subject of capital gains and claiming deduction u/s.54F of the Act. Therefore, the FAA’s reliance on the aforementioned judgments are misplaced. Moreover, the case laws relied on by assessee before the FAA has not referred too in the impugned order.
Further, the assessee contended that the deduction u/s.54 of the Act should be calculated on actual consideration and not on the deemed consideration u/s.50C of the Act. In support of his contention, the Ld.AR had relied on the Jaipur Bench of the Tribunal’s order in the case of ITO vs. Raj Kumar Parashar (supra). Since the issue has been remanded back to the files of the AO to examine the cost of construction of the new asset, this aspect of the matter is also restored to the files of the AO.
Before concluding it is to be mentioned that the Ld.DR had relied on the judgment of the Hon’ble Bombay High Court in the case of Humayun Suleman Merchant vs. CCIT reported in (2016) 387 ITR 421. The judgment of the Hon’ble Bombay High Court had stated if the capital gains has not been utilized for the purpose of construction of new house nor if unutilized amounts 12 -: deposited in the bank account in terms of section 54F(4) of the Act before filing of return of income, the assessee is not entitled to deduction of unspent amount u/s.54F of the Act. In the present case, assessee had filed belated return u/s.139(4) of the Act on 15.09.2017 (within the due date for filing Return of income u/s.139(4) of the Act). Before 15.09.2017, assessee claims that he has utilized the sale proceeds of original asset in the construction of the new asset. The AO is directed to examine the claim of assessee and shall follow the dictum laid down by the Hon’ble Jurisdictional High Court judgment in the cases cited supra. It is ordered accordingly.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 8th September, 2025 at Chennai.