Section 54 exemption was allowed even with ₹0 invested in Capital Gain Account Scheme.

Section 54 is a beneficial provision intended to encourage investment in residential housing by granting exemption from LTCG tax. However, taxpayers often face disallowance due to procedural lapses, particularly non-deposit of unutilized gains in the CGAS before the due date under section 139(1). 

In a taxpayer-friendly ruling, the ITAT Hyderabad reaffirmed that procedural non-compliance cannot override substantive compliance where the capital gains are actually invested in a new residential house within the prescribed time limits. 

Brief Facts of the Case- 

1. The assessee and his spouse sold a jointly owned residential property,
2. LTCG attributable to the assessee (50%) amounted to ₹66.91 lakh,
3. The assessee entered into an agreement to purchase a new residential house for ₹4.44 crore,
4. ₹44.40 lakh was paid before the due date under section 139(1),
5. The balance consideration was paid later through housing loan and own funds,
6. The unutilized amount was not deposited in the CGAS.

Action by the Tax Authorities- 

The AO:

1. Allowed deduction u/s. 54 only to the extent of ₹44.40 lakh (amount paid before due date u/s 139(1)). 
2. Disallowed the balance ₹22.51 lakh, solely on the ground that it was not deposited in the CGAS as required under section 54(2). 

The CIT(A) upheld the AO’s view. 

Core Legal Issue–

Can deduction under section 54 be denied merely because the un-utilized capital gain was not deposited in CGAS, even though the entire capital gain was invested in a new residential house within the time prescribed under section 54(1)? 

Tribunal’s Analysis and Findings- 

The ITAT undertook a detailed examination of the interplay between sections 54(1) and 54(2). 

Key observations: 

1. Section 54(1) ➜ substantive and mandatory condition of investment in a residential house within the prescribed period, 
2. Section 54(2) ➜ procedural and directory in nature,
3. Section 54(2) comes into operation ➜ when the assessee fails to utilize capital gains within the period specified under section 54(1),
4. Actual investment within time ➜ exemption cannot be denied for mere procedural lapses.

The Tribunal noted that in the present case: 

✔ House purchased within 2 years;
✔ Investment exceeded capital gains.

• Therefore, the substantive requirement of section 54(1) stood fully satisfied. 

CGAS – Clarified Position 

The ruling reinforces an important principle: 

Deposit in CGAS is not mandatory where the capital gain is actually utilized for purchase or construction of a residential house within the period prescribed under section 54(1). 

CGAS is only a temporary parking mechanism, not a condition precedent to exemption. 

Final Order- 

• • Appeal allowed in favor of the assessee
  • Full deduction under section 54 allowed 
  • Disallowance of ₹22.51 lakh deleted 

For downloading full judgment visit- https://counselvise.com/direct-tax/judgements/nitin-bhatia-hyderabad-ito-ward-12-1-hyderabad-ita-1472-hyd-2025

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