Section 54 Deduction Allowed Even Without CGAS Deposit: ITAT Hyderabad Prioritises Substance Over Procedure
One of the most common and costly mistakes assumed by tax authorities in capital gains cases is treating the Capital Gains Accounts Scheme (CGAS) as an inflexible and mandatory condition for claiming exemption under Section 54 of the Income-tax Act, 1961. A recent and taxpayer-friendly ruling of the Hon’ble Income Tax Appellate Tribunal, Hyderabad Bench has once again clarified that Section 54 is a beneficial provision and cannot be frustrated by procedural technicalities when substantive compliance is complete. This decision is particularly important for taxpayers who invest in a new residential house within the prescribed period but miss depositing the unutilised amount in CGAS by the due date under Section 139(1).
Facts of the Case
The assessee sold a residential house and earned long-term capital gains of ₹66,91,617. In order to claim exemption under Section 54, the assessee invested the entire capital gains in a new residential house within two years from the date of transfer, thereby fully satisfying the core requirement of Section 54(1). However, before the due date of filing return under Section 139(1), the assessee had paid only ₹44,40,000 towards the new property. The balance amount of ₹22,51,617 was neither paid nor deposited in the Capital Gains Accounts Scheme. On this basis alone, the Assessing Officer denied exemption to the extent of ₹22,51,617 by invoking Section 54(2).
Core Legal Issue
The pivotal question before the Tribunal was whether deduction under Section 54 can be denied merely because the unutilised capital gain was not deposited in CGAS by the due date under Section 139(1), even though the assessee ultimately invested the entire capital gain within the statutory period of two years.
ITAT’s Clear Finding: Section 54(2) Is Procedural, Not Substantive
The Tribunal categorically held that Section 54(2) is procedural and directory in nature, whereas Section 54(1) lays down the substantive condition for exemption. Once the assessee fulfils the substantive requirement by investing the capital gains in a new residential house within the prescribed period, the exemption cannot be denied on the ground of non-deposit in CGAS. The Tribunal observed that CGAS is only a mechanism to ensure that capital gains are ultimately invested and not diverted elsewhere. It is not an end in itself.
Reliance on Binding High Court Precedent
In reaching this conclusion, the ITAT placed strong reliance on the judgment of the Hon’ble Madras High Court in Venkata Dilip Kumar v. CIT (2021) 419 ITR 298, wherein it was held that when the assessee has invested the capital gains in a new residential property within the time permitted under Section 54(1), exemption cannot be denied merely because the amount was not deposited in CGAS before the due date of filing the return. The High Court had clearly ruled that beneficial provisions must be interpreted liberally to advance the object of the law, not to defeat it on technical grounds.
Why AO’s Mechanical Approach Was Rejected
The Tribunal strongly disapproved the mechanical approach of the Assessing Officer, who treated CGAS deposit as a rigid and mandatory condition, ignoring the fact that the Revenue had suffered no prejudice and the investment condition stood fully complied with. The ITAT reiterated that tax law does not permit taxation of genuine capital gains merely because of procedural lapses when the legislative intent has been honoured in substance.
Deletion of Disallowance and Full Relief Granted
Accordingly, the ITAT deleted the disallowance of ₹22,51,617 and allowed full deduction under Section 54. The ruling confirms that once the capital gains are actually invested in a residential house within the prescribed time, denial of exemption would amount to elevating form over substance, which is impermissible in law.
Why This Judgment Is Crucial for Taxpayers and Professionals
In practice, many genuine taxpayers face disallowance under Section 54 solely because they miss the CGAS deposit deadline, despite completing the investment within two or three years. This judgment is a powerful authority against such disallowances and will help prevent unnecessary litigation. It reinforces the principle that Section 54 is a relief provision and must be applied pragmatically, not punitively.
Practical Tax Planning Takeaway
While depositing unutilised capital gains in CGAS remains advisable to avoid disputes, this ruling makes it clear that failure to do so is not fatal if the investment is ultimately made within the statutory period. Tax professionals should strongly rely on this decision where exemption is denied on CGAS grounds alone.
Conclusion
The Hyderabad ITAT has once again upheld the settled principle that procedural lapses cannot defeat substantive tax relief. By recognising Section 54(2) as directory and not mandatory, the Tribunal has protected taxpayers from unjust denial of exemption and reaffirmed that capital gains exemption follows real investment, not rigid compliance rituals. This ruling is a must-read and must-cite authority for every capital gains assessment involving CGAS-related disputes.
The copy of the order is as under:
