December 25, 2025 : The Hyderabad Bench of the Income Tax Appellate Tribunal has ruled that exemption under Section 54 of the Income-tax Act, 1961 cannot be denied merely because the assessee failed to deposit unutilised capital gains in the Capital Gains Account Scheme, provided the investment in a new residential house is completed within the time prescribed by law.
The Bench comprising Ravish Sood (Judicial Member) and Madhusudan Sawdia (Accountant Member) held that once the substantive condition under Section 54(1), namely investment in a new residential house within the stipulated period, is fulfilled, the benefit of exemption cannot be rejected solely on procedural grounds under Section 54(2).
The case concerned an individual assessee who filed his return for Assessment Year 2018–19 declaring income of about ₹1.03 crore. During the relevant year, the assessee and his spouse sold a jointly owned residential property for ₹3.70 crore, resulting in long-term capital gains of ₹1.33 crore. The assessee’s 50 percent share of the gains worked out to ₹66.91 lakh.
To claim exemption under Section 54, the assessee entered into an agreement to purchase a new residential house for ₹4.44 crore. Before the due date for filing the return under Section 139(1), he paid ₹44.40 lakh towards the purchase. The remaining amount was paid later through a housing loan and personal funds. The registered sale deed for the new house was executed on 24 October 2019, well within two years from the date of transfer of the original property.
During assessment, the Assessing Officer allowed Section 54 deduction only to the extent of ₹44.40 lakh, being the amount paid before the return filing due date. The balance claim of ₹22.51 lakh was disallowed on the ground that the unutilised capital gains were not deposited in the Capital Gains Account Scheme as required under Section 54(2). This disallowance was upheld by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, prompting the assessee to approach the Tribunal.
The Tribunal noted that there was no dispute about the fact that the assessee had invested an amount exceeding the capital gains in the new residential house within the statutory time limit of two years. It held that Section 54(1) lays down the substantive requirement for exemption, while Section 54(2) is procedural in nature and comes into play only when the assessee fails to invest the capital gains within the prescribed period.
Relying on the Madras High Court decision in Venkata Dilip Kumar v. CIT (2021), the Bench observed that a procedural lapse such as non-deposit in the CGAS cannot defeat a valid exemption claim when the legislative intent of promoting investment in residential housing has been met. A hyper-technical interpretation, the Tribunal said, would go against the purpose of the provision.
Accordingly, the ITAT directed the Assessing Officer to grant full exemption under Section 54 for the assessee’s entire share of capital gains amounting to ₹66.91 lakh and deleted the addition of ₹22.51 lakh sustained by the lower authorities. The assessee’s appeal was allowed.
Case Title: Shri Nitin Bhatia v. ITO
Case No.: ITA No. 1472/Hyd/2025
Assessment Year: 2018–19
Date of Decision: 24 December 2025
