ITAT Agra Remands Section 54 Dispute: Need to Correlate Construction Spend, Valuation Report & Bank Flow

Background of the Appeal

The dispute in Chandra Pal Singh Vs ITO (ITAT Agra) concerns the assessee’s eligibility for exemption under Section 54 of the Income Tax Act 1961 in respect of long-term capital gains arising from sale of an immovable property. The Agra Bench of the ITAT has not finally ruled on the allowability of the exemption; instead, it has restored the matter to the file of the Assessing Officer (AO) for a fresh examination of the evidence.

The appeal was filed against the order dated 30.12.2025 passed by the CIT(A), Agra-2 under Section 250 for AY 2014-15, wherein the first appellate authority had upheld a disallowance of ₹16,19,133 claimed as exempt under Section 54.

Facts: Sale of Property and Claim under Section 54

Return and Scrutiny Selection

  • The assessee filed the return of income for AY 2014-15 on **28.08.2014`.
  • The return was filed after the due date prescribed under Section 139(1).
  • The case was picked up for limited scrutiny, specifically to verify the capital gains from transfer of an immovable property.

Details of Property Transfer

The AO recorded the following facts:

  • The assessee sold an immovable property at 6/7, Barah Gali, Belaganj, Agra to three purchasers.
  • The sale was effected through a registered sale deed dated 06.06.2013.
  • Declared sale consideration: ₹61,00,000.
  • Value adopted by stamp valuation authority: ₹91,27,000, which, according to the AO, was accepted by the assessee.
  • Indexed cost of acquisition claimed: ₹28,17,000.
  • Resultant capital gain computed: ₹63,10,000.

Investment in New Residential House

The assessee claimed to have invested the capital gains in construction of a residential house at:

  • Address: 3/281, MG Road, Dhakran Crossing, Agra.
  • Total investment stated: ₹64,67,940 (as per claim before the AO).
  • To substantiate the investment, the assessee filed a valuation report dated 30.09.2014 issued by Shiromany Architects.

The claim was that the above investment qualified for exemption under Section 54 as construction of a new residential house.

Assessment Proceedings: Disallowance of ₹16,19,133

AO’s Examination of Utilisation

The AO examined:

  • The timing of construction expenditure,
  • The aggregate amount claimed to be invested in the new house, and
  • The manner in which the capital gains were appropriated.

On this basis, the AO concluded:

  • An amount of ₹16,19,133 out of the capital gains had not been utilised for construction of the new residential property up to the due date for filing the return under Section 139(1).
  • This amount had also not been deposited in any account under the Capital Gains Accounts Scheme as contemplated by Section 54(2).

Consequence: Partial Denial of Section 54 Relief

The AO therefore held:

  • Exemption under Section 54 could not be allowed for ₹16,19,133.
  • This amount was added back as long-term capital gain in the hands of the assessee.

The assessee contested both:

  1. The quantum and basis of the disallowance, and
  2. The AO’s jurisdiction to travel into this issue in a limited scrutiny case.

First Appeal before CIT(A): Disallowance Confirmed

Findings of the CIT(A)

The CIT(A) upheld the AO’s action with detailed reasoning. In substance, the first appellate authority held:

  • The assessee failed to utilise ₹16,19,133 either for:
    • purchase or construction of a new residential house before the due date under Section 139(1), or
    • deposit in a Capital Gain Account Scheme as required by Section 54(2).
  • On facts, the construction of the new property had commenced in 2010, which was well before the transfer of the original asset on 06.06.2013.
  • The CIT(A) considered construction starting that far earlier as a non-compliance with the statutory time limits prescribed under Section 54 for purchase or construction.

Case Law Relied Upon by CIT(A)

To support the conclusion, the CIT(A) referred to judicial precedents that emphasise strict adherence to the statutory conditions for Section 54 relief, particularly the requirement to deposit any unutilised capital gains:

  • **CIT v.