Is deposit of sale consideration in Capital Gain Deposit Scheme is a Mandatory condition for claiming Capital Gain Exemption?

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amount of capital gains is required to be invested temporarily in the Capital Gains Account Scheme which can be easily withdrawn at the time of investment in the specified instrument.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:

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
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

Let us refer to the case of Nandkishore Ramanlal Parikh vs ITO, where Assessee was in appeal before the Income Tax Appellate Tribunal (ITAT) against order of the Commissioner of Income Tax (Appeals) [CIT(A)], where the issue under consideration was whether deposit of sale consideration in Capital Gain Deposit Scheme is a Mandatory condition for claiming Capital Gain Exemption or not

Facts of the Case:

Assessee filed her return of income electronically and her case was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee.
On scrutiny, it was revealed to the AO that the assessee was having 1/8th share in a property.
She has sold her 1/8th share for a sum of Rs.90.00 lakhs. She invested Rs 80 lakhs in Bank of Baroda under capital gain account scheme as per section 54F.
Thereafter, she purchased a residential flat on 18.10.2014 for a sum of Rs.1,25,00,000.
This purchase was made within the prescribed time limit of two years as provided under section 54F(1).
She claimed that no capital gain tax is leviable upon the assessee.
The AO did not accept this contention of the assessee, and he allowed the deposits made in the capital account at Rs.80 lakhs. He made addition of Rs.8,01,740.
Appeal to the CIT(A) also did not bring any relief to the assessee.

What was the contention of the assessee?

The stand of the assessee was that since she made investment in purchase of a new flat and utilised the total capital gain.
In other words, she invested the amount more than the sale consideration, therefore, no capital gain was taxable in her hands under section 54F(1), and she was entitled for exemption in total.

What was the contention of the AO?

The case of the AO was that since she had not deposited the sale consideration in a capital account before the due date of filing of return under section 139(1) of the Act, therefore, she could not claim exemption as contemplated under section 54F(4).
In other words, according to the AO, benefit of section 54F should be available to the assessee, if she had purchased new residential flat within one year before the sale of house or two years after the sale, but in such condition, she had to make deposit of consideration/capital gain in a bank account maintained under the capital gains scheme.
She failed to make such deposits before the date of filing of return, therefore, she was not entitled for exemption under section 54F.

Reference to an older case before the ITAT

Before ITAT, the assessee made reference to the decision of ITAT, Ahmedabad Benches in the case of Ashok Kapasiawala vs. ITO.

Division Bench of the ITAT had considered this aspect and after putting reliance upon the decision of Karnataka High Court, allowed the claim of the assessee in an identical ITA situation. The reason recorded by the Court was:

The Karnataka HC in the case of K. Ramachandra Rao (supra) answered the question in favour of assessee i.e., when the assessee had invested the entire sale consideration in construction of a residential house within the 3 years from the date of transfer.
Could he be denied exemption under section 54 F on the ground that he did not deposit the said amount in capital gain account scheme before the due date prescribed u/s.139(1) of the Act.
The Karnataka HC held that:
1. It was clear from Sub-section (4) in the event of the assessee not investing the capital gains either in purchasing the residential house or in constructing a residential house within the period stipulated in Section 54F(1), if the assessee wants the benefit of Section 54F, then he should deposit the said capital gains in an account which is duly notified by the Central Government.
2. In other words, if he wants to claim exemption from payment of income tax by retaining the cash, then the said amount is to be invested in the said account.
3. If the intention was not to retain cash but to invest in construction or any purchase of the property and if such investment was made within the period stipulated therein, then Section 54F(4) was not at all attracted and therefore the contention that the assessee had not deposited the amount in the Bank account as stipulated and therefore, he was not entitled to the benefit even though he had invested the money in construction was also not correct.
In the present case, the assessee purchased new asset on 05/10/2009 and had transferred the original asset on 8/01/2008.
As per Section 54F (1), the exemption would be available if the assessee purchased the residential house within 2 years after the date when transfer took place.
As per the judgment of the HC, the provisions of section 54F(4) would not be attracted in the event if the assessee has purchased or constructed the residential house within the period prescribed under section 54(1).
In the case in hand, there was no dispute with regard to the fact that the assessee had purchased within 2 years [the period prescribed u/s.54(F(1)] a new asset on 05/10/2009 from the date of transfer of the original asset.
Therefore, following the ratio laid down by the HC in the case of K. Ramachandra Rao (supra), ITAT set aside the impugned order and directed the AO to re-compute the assessed income after granting the benefit of section 54F of the Act to the assessee

Observations of ITAT in the current case

ITAT found no disparity on the facts.
In the case of Ashok Kapasiawala (supra) also the assessee did not deposit the sale consideration in the bank account before the due date of filing of return.
But otherwise purchase of house was within two years stipulated in section 54F(1).
It was not the case of the assessee that she had purchased beyond the period as contemplated in section 54F(1).
The only failure was that she had not deposited the sale consideration in capital account.
This condition was not considered as mandatory by the Karnataka High Court.
In the decision of Tribunal in the case of Ashok Kapasiawala (supra) Division Bench had followed this decision.
No contrary decision was brought to ITAT’s notice by the department.
Therefore, respectfully following the decision of Karnataka High Court and decision of ITAT (supra), ITAT allowed the appeal of the assessee and direct the AO to grant exemption under section 54F to the assessee. In the result, appeal of the assessee was allowed.

In simple words, deposit of sale consideration in Capital Gain Deposit Scheme is not a Mandatory condition for claiming Capital Gain Exemption

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