CGAS Non-Deposit Bars Residual Section 54 Exemption: ITAT Mumbai Affirms Mandatory Nature of Deposit Condition

Background and Overview

The Mumbai Bench of the Income Tax Appellate Tribunal, in the matter of Biswaranjan Sen Vs ITO (ITAT Mumbai) for Assessment Year 2017-18, has delivered a significant ruling reinforcing the mandatory nature of the Capital Gains Account Scheme (CGAS) deposit requirement under Section 54(2) of the Income-tax Act, 1961. The Tribunal dismissed the assessee's appeal, holding that where unutilised capital gains are not deposited in the CGAS before the due date of filing the return under Section 139(1), the exemption under Section 54 cannot be extended to cover such amounts — irrespective of whether the funds were eventually deployed in a qualifying residential property.

This ruling carries meaningful implications for assessees who invest long-term capital gains in new residential properties in a phased manner and fail to park the yet-to-be-utilised portion in the designated CGAS account within the prescribed timeline.

Factual Matrix

Sale of Properties and Capital Gain Declared

The assessee, a salaried employee of a multinational corporation, sold two residential properties for an aggregate consideration of ₹3 crore during the relevant previous year. He declared long-term capital gains (LTCG) of ₹2,27,85,907 in his return of income for AY 2017-18, against which he claimed exemption under Section 54 of the Income-tax Act, 1961 for the entire amount, resulting in nil taxable LTCG.

Investment in Two Adjacent Units — CH-1 and CH-2

The assessee contended that the capital gains were re-invested in two adjacent residential units — CH-1 and CH-2 — at Tata Avenida, Kolkata, which were intended to be physically conjoined and used as a single residential dwelling. Supporting documentation — including a combined layout plan and a confirmation certificate from Tata Housing Development Company Ltd. — was submitted in support of this claim.

Assessing Officer's Treatment

The Assessing Officer (AO) took note of the following:

  • The assessee had filed his return of income on 01.08.2017.
  • The unutilised portion of the capital gains had not been deposited in the Capital Gains Account Scheme before filing the return.
  • Accordingly, only the amount actually paid towards the purchase up to the date of return filing could be considered for deduction under Section 54.
  • The AO further declined to treat CH-1 and CH-2 as a single residential unit, holding that insufficient evidence had been placed on record.

Based on these findings, the AO:

  • Restricted the deduction under Section 54 to ₹1,38,47,601 (payments towards CH-1 only up to the return filing date).
  • Disallowed the balance claim of ₹89,38,316.
  • Determined the total income at ₹93,59,140 as against the returned income of ₹4,20,830.

First Appellate Stage — CIT(A) Order

Partial Relief on the "One Residential Unit" Question

Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee successfully demonstrated — through the combined layout plan and the developer's written confirmation — that CH-1 and CH-2 were adjacent duplex flats, physically conjoined and structurally designed to function as a single residential unit. The CIT(A) accepted this position, placing reliance on:

  • CIT vs. Devdas Naik, (2014) 366 ITR 12 (Bom.)
  • CIT vs. Raman Kumar Suri, (2013) 255 CTR 257 (Bom.)

Accordingly, the CIT(A) directed the AO to allow deduction in respect of payments made towards both CH-1 and CH-2 up to 01.08.2017 — amounting to ₹1,38,47,601 (CH-1) + ₹57,21,138 (CH-2) = ₹1,95,68,739 in aggregate.

CGAS Condition — CIT(A)'s View Sustained

However, the CIT(A) did not extend relief for the remaining ₹32,17,168, holding that since this amount had neither been invested by the return filing date nor deposited in the CGAS as mandated by Section 54(2), it could not qualify for exemption. He relied on the binding jurisdictional precedent in:

Humayun Suleman Merchant v. Chief Commissioner of Income-tax, [2016] 73 taxmann.com 2 (Bombay High Court)

The CIT(A) also noted that the Mumbai ITAT coordinate bench had followed the same principle in Rajan Gumba Telang vs PCIT, [2019] 112 taxmann.com 94 (ITAT Mumbai).