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August 16, 2020

Section 54 benefit cannot be denied for Procedural Non- Compliance of Deposit in Capital Gains Account Scheme – ITAT

by Rubina Dsouza in Income Tax

Section 54 benefit cannot be denied for Procedural Non- Compliance of Deposit in Capital Gains Account Scheme – ITAT

Introduction

Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price.

The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemption/deductions are available under sections 54, 54B, 54D, 54F etc.

As per the provisions of these sections, the amount is required to be reinvested in specified investment types before the specified period. However, if the due date of filing income tax returns falls before the expiry of the specified period, the amount of capital gains is required to be invested temporarily in the Capital Gains Account Scheme which can be easily withdrawn at the time of investment in the specified instrument.

What is Section 54F of the Income Tax Act?

The income tax law provides for certain situations where such capital gains will not be subject to tax. Section 54F provides one such exemption. In the case of an assessee being an individual or a HUF, if the capital gain arises from the transfer of any long-term capital asset, not being a residential house (original asset) and the assessee has within a period of 1 year before or 2 years after the date on which the transfer took place purchased, or has within a period of 3 years after that date constructed, one residential house in India (new asset), the capital gain shall be dealt with in accordance with the following provisions of this section:

  1. if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45
  2. if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45

Due Date or Time for Filing Return of Income under normal circumstances is covered under Section 139(1). According to Section 139(1) an individual has to get his/her returns filed by 31st July. According to Section 139(4), any person who has not furnished a return within the time allowed to him under section 139(1) may furnish the return for any previous year at anytime —

  1. before the end of the relevant assessment year; or
  2. before the completion of the assessment,

whichever is earlier.

Can the benefit of section 54 of the Income Tax Act, being a beneficial provision, can be denied to the assessee due to non-compliance of procedural requirements?

Let us refer to the case of ITO Vs Smt. Rekha Shetty (ITAT Chennai) where the assessee was denied deduction under Section 54 as she had not deposited the amount in the Capital Gains Account before the return filing due date under Section 139(1).

Facts of the Case:-

  1. Assessee, an individual and a senior citizen, received her share from the sale of an immovable property.
  2. In her return of income filed, she claimed deduction under section 54, being the amount utilized towards a new house purchased
  3. During the assessment proceedings, the AO found that since the amount was not deposited in CGAS within the due date of filing of return under Section 139(1) of the Act, and the assessee had only utilized the amount in purchasing the new house after the date of filing return, the AO did not allow the assessee’s claim of deduction.
  4. Aggrieved against that order, the assessee filed an appeal before the Commissioner of Income Tax Appeals [CIT(A)].

Submissions before CIT(A) by assessee

  1. During the appellate proceedings before the CIT(A), the assessee explained , that she was negotiating with the owner of the new property during the year.
  2. But, the owners took considerable time and thus there was a delay on the owner’s part to come to the city of the assessee and register the property (the owner resided in another city in India)
  3. When it was getting delayed for too long, she decided to deposit the amount in CGAS and accordingly, did it after filing her ITR.
  4. A week later, the owner visited the assessee and registered the property in the name of assessee.
  5. Therefore, the assessee pleaded that the delay of 12 days in depositing the amount in CGAS was not intentional and she had not exploited the sale consideration received from the old property for any other purposes during the period.
  6. The deduction under Section 54F, being beneficial provisions, therefore, the exemptions available under the section should not be denied for the procedural lapses, if any, etc.

Observations of CIT(A)

  1. The CIT (A), after examining the relevant facts, held if the assessee utilizes the amount in purchasing (or constructing) the new residential house before the due date of filing the return under Section 139 of the Act, (which includes the due date mentioned at sub-section(4)), then , the assessee becomes eligible for the deduction under Section 54 /54F of the Act, irrespective of the fact whether the assessee deposited the amount in the specified schemes before investing it in the new house or not.
  2. Since in this case, the assessee has purchased the new property before the due date of filing the return under Section 139(4), the utilization of the amount in purchasing a new residential property is within the time limits permitted in the provisions of section 54(2) of the Act and accordingly, the assessee becomes eligible for the deduction under Section 54.
  3. Therefore, the CIT(A) directed the AO to allow the deduction under Section 54 to the assessee in respect of the new house purchased. Aggrieved against that order, the Revenue filed an appeal before the Income Tax Appellate Tribunal (ITAT).

Submissions before ITAT by Departmental Representative

  1. The Departmental Representative submitted that the CIT (A) ought to have considered the decisions of the Ahmedabad Tribunal in the case of Anitha Ajay Shad Vs. ITO and of the Chennai Tribunal in the case of ITO Vs. Chimanlal Kalidas Vankawala, which were in favour of Revenue.
  2. The Departmental Representative submitted that CIT (A) had erred in directing the AO to allow deduction under Section 54 by holding that the assessee is eligible to claim deduction under Section 54 as she had utilized the amount before the due date for filing the return of income under Section 139(4).
  3. This was not in accordance with Section 54(2) of the Act, as per which the assessee should have deposited the disputed amount in Capital Gains Accounts Scheme (CGAS) on or before the due date for filing the return under Section 139(1).

Observations of ITAT

  1. The issue in this case was whether the assessee was entitled for the benefit of deduction under Section 54 in respect of the disputed sum, when she had utilized such sum towards purchase of the new house and thus complied with the provisions of section 54(1), even though the said sum was not deposited in the capital gains account scheme as required under Section 54(2).
  2. It was clear that for seeking benefit of deduction under Section 54 of the Act, the assessee should have substantially complied with section 54(1).
  3. In this case, the assessee should have purchased the residential house within two years from the date of transfer.
  4. She has utilized such sum towards purchase of the new house. Further, she had explained the reasons for not-depositing the amount in Capital Gains Accounts Scheme which was also not disputed.
  5. Since the assessee has substantially complied with section 54(1), therefore, a mere non-compliance of a procedural requirement under section 54(2) itself cannot stand in the way of the assessee in getting the benefit under section 54.
  6. Therefore, ITAT did not find any reason to interfere with the order of the learned CIT (A).

Therefore the benefit of section 54 of the Income Tax Act, being a beneficial provision, cannot be denied to the assessee due to non-compliance of procedural requirements,  since the assessee has substantially complied with section 54(1), by investing the proceeds of sale into purchasing a new property.

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