ARTHUR JAGARAJ DEVAPRAGASAM,CHENNAI vs. DCIT NON CORPORATE CIRCLE 8(1), CHENNAI

Brief facts of the case are that the assessee is an individual filed his return of income on 04.08.2017 for the AY 2017-18. The assessee filed his revised return of income for the AY 2017-18 on 16.07.2018 declaring a total income of Rs.37,32,299/- including capital gain on the sale of his house property on 23.08.2016 for Rs.7.50 crores after claiming deduction of Rs.6.45 crores u/s.54 of the Act – for investment in another residential house property by investing the said Rs.6.45 crores in Capital Gain Account :-3-: ITA. No:710/Chny/2025 Scheme (CGAS) with SBI. The assessee’s case was selected for scrutiny and the order u/s.143(3) of the Act was finalized determining his total income as Rs.6,92,04,950/-.

During the assessment proceedings AO found that the assessee had purchased a flat for Rs.2.15 crores on 20.02.2019, which was beyond the two-year period stipulated u/s.54 for purchase of the residential property. Accordingly, for the AY 2017-18 the assessee did not claim exemption u/s.54 of the Act with respect to the flat acquired on 20.02.2019 as it fell outside the permitted time frame. Instead, the assessee claimed deduction u/s.54 in respect of the amount of Rs.6.45 crores deposited in the capital gain a/c. as per section 54(2) of the Act.

In line with the proviso to section 54(2), since the assessee could not utilise the amount lying in the capital gain account for acquisition or construction of the residential house within a period of 3 years, the entire unutilized balance of Rs.6.45 crores was correctly offered to tax as capital gains in AY 2020-21.

The AO, however misconstrued the provisions of Section 54 and wrongly concluded that the purchase of the residential property did not occur within 2 years from the date of transfer, the amount deposited in the capital gains account would also become taxable as capital gains in the year of deposit itself. On this basis the AO brought the Rs.6.45 crores to tax in the year of transfer itself.

Aggrieved by the order of AO, the assessee preferred an appeal before the ld.CIT(A), NFAC, Delhi. During the course of appellate proceedings, the assessee specifically contended that the amount of Rs.6.45 crores deposited in the CGAS cannot be brought to tax in the year of deposit i.e., AY 2017-18. Tax liability to the assessee arises only if the amount remains unutilized upon expiry of 3 years from the date of transfer, which would fall in FY 2019-20 (AY 2020-21). However, the ld. CIT(A) merely confirmed the order of the AO taxing the deposit into CGAS in the year of deposit :-4-: ITA. No:710/Chny/2025 ignoring the submissions of the assessee. Aggrieved by the order of ld.CIT(A), the assessee preferred an appeal before us.

The ld. AR for the assessee submitted that both the AO and ld.CIT(A) have incorrectly interpreted the provisions of section 54(2) of the Act and its proviso. He argued that their conclusion that the failure to purchase a residential property within 2 years or to construct within 3 years automatically renders the entire net sale consideration as taxable in the year of transfer is erroneous. He further contended that the department has over looked the specific exemption provided u/s.54(2) of the Act with respect to amounts deposited in CGAS.

A plain reading of Section 54(2) makes it evident that if the assessee deposits the unutilized portion of the capital gains in the CGAS before the due date of filing the return of income u/s.139(1) of the Act, the deposited amount is deemed to have been utilised towards the purchase or construction of new residential asset. This deeming fiction holds until the conditions under the proviso are triggered specifically, if the amount remains unutilized upon expiry of 3 years from the date of transfer, at which point the unutilized amount becomes chargeable as capital gains in the year in which the 3 year period lapses.

The legislative framework is unambiguous – once the amount is deposited in the CGAS, it is treated as being applied towards the acquisition or construction of a new house for the purpose of Section 54. If, however, the assessee fails to utilise the deposit within the stipulated period of 3 years, it becomes taxable as capital gains only in that subsequent year, not in the year of transfer.

It is pertinent to highlight that the funds deposited in the CGAS are strictly earmarked for purchase or construction of a residential house and cannot be withdrawn for any other purpose. Therefore, Section 54(2) read together with its proviso clearly :-5-: ITA. No:710/Chny/2025 provides a window of three years for the assessee to utilise the deposited amount for purchasing or constructing a residential property. The taxability of the unutilized amount arises only after the expiry of this period, not before.

Further, the ld.AR submitted that the assessee has duly reflected the unutilized deposit of Rs.6.45 crores as taxable capital gains in the return filed for AY 2020-21, without adjusting it against the Rs.2.15 crores spent towards the flat purchased beyond the permitted timeframe. Thus, the core issue whether the amount deposited in the CGAS should be excluded from capital gains computation in AY 2017-18 stands clearly resolved in favour of the assessee based on the explicit language of Section 54(2) and its proviso. The mere fact that the amount was not utilised within the two years for purchase of residential property, window does not accelerate the taxability of the deposited sum to AY 2017-18, as wrongly assumed by the AO and ld.CIT(A).

In conclusion, the ld.AR submitted that the claim of the assessee that the Rs.6.45 crores deposited in the CGAS should not form part of the taxable capital gains in AY 2017-18 is fully supported by the statutory provisions. This is further substantiated by the fact that the same amount has already been duly offered to tax in AY 2020-21 upon failure to utilise the deposit within the three-year period.

Per contra, the ld.DR relied on the orders of the lower authorities.

We have heard the rival parties and perused the material available on record and gone through the orders of the lower authorities. The assessee has filed his return of income disclosing the income from long term capital gains along with deduction u/s.54 of the Act by showing the deposit of Rs.6.45 crores in the CGAS before the due date for filing the return of income as per section 139(1) of the Act. The case was selected for limited scrutiny and the Assessing Officer has passed order by treating Rs.6.45 Crores as income for the A.Y. 2017-18 under the head capital gains on account of the CGAS :-6-: ITA. No:710/Chny/2025 made, even before the expiry of 3 years from the date of transfer of the capital asset. On appeal the ld.CIT(A) pleased to confirm the order of the AO.

We note that the assessee has rightly deposited the entire amount of capital gain of Rs.6.45 crores arising out of the sale of House property in CGAS in SBI. The assessee has sold the house property on 23.08.2016. We find that the assessee had time to purchase new house property within two years was 22.08.2018 (A.Y.2019-20) or to construct a house property within three years was 22.08.2019 (A.Y.2020-21) as per the proviso to section 54(2) of the Act. Since the assessee had not utilised the capital gain for purchase of new house property on or before 22.08.2018, he had left with the only option to build the house within 22.08.2019 or to offer the entire capital gain kept in the CGAS as long term capital gain by paying corresponding advance tax and filing the return of income for the A.Y.2020-21. On perusal of the records we note that the assessee has failed to utilise the CGAS amount to construct the new residential property on or before 22.08.2019 (3 years from the date of transfer of capital asset) and hence the assessee has rightly offered Rs.6.45 crores as long term capital gain and discharged the taxes by filing the return of income for the A.Y.2020-21 vide ITR ackt.No.148450650090121 dated 09.01.2021. Therefore, the assessee has complied with the conditions prescribed u/s.54 of the Act has been complied by keeping the entire long term capital gains to the tune of Rs.6.45 crores in CGAS at SBI before filing the return of income for the A.Y. 2017-18. Further, since the assessee has failed to purchase / construct within the period of 2 years or 3 years respectively, offered the long-term capital gain as income in the relevant A.Y.2020-21 and has discharged the taxes. Therefore, we are of the considered view that both AO and that of the ld.CIT(A) has erred in bringing the deposit amount of Rs.6.45 crores kept under CGAS in the impugned A.Y.2017-18.

In view of the above, we are setting aside the order of ld.CIT(A) and direct the AO to recompute the total income by deleting the addition made on account of long term capital gain of Rs.6.45 Crores, since the same has already been rightly offered to tax in the A.Y. 2020-21.

In the result, appeal filed by the assessee is allowed. Order pronounced in the court on 24th July, 2025 at Chennai.