ITAT Mumbai: Section 54 Exemption Valid in Reassessment Even Without Original Return Filing
Case Reference
Mohd Azam Hasan Sheikh Vs Ward 42(2)(4) (ITAT Mumbai)
Assessment Year: 2017-18 | Order Date: 09.04.2026
Background and Facts of the Case
The Income Tax Department received information indicating that the assessee had acquired an immovable property valued at Rs. 45,00,000/- during the relevant assessment year. Since no return of income had been filed voluntarily, the case was flagged for scrutiny and the proceedings were initiated by reopening the assessment under Section 147 of the Income Tax Act, 1961. A notice was duly issued on 24.03.2024 under Section 148 of the Act.
In response to this notice, the assessee filed a return of income on 04.04.2024, disclosing long-term capital gains arising from the sale of a jointly owned residential property. The property, held jointly with Ms. Binu Azmi (PAN No. GJEPS9367D), was situated at Sukhartha Cooperative Housing Society, Sector 42, Navi Mumbai, and was transferred through a sale agreement dated 04.05.2016. The assessee claimed exemption under Section 54 of the Act amounting to Rs. 49,00,000/-, on the grounds that the entire sale proceeds were reinvested in a new residential property jointly acquired with Ms. Binu Azmi at Thakur Residency, Ulwe, Navi Mumbai, on 05.07.2016, at a total consideration of Rs. 45,00,000/-.
Actions Taken by Lower Authorities
Assessing Officer's Decision
Although the Assessing Officer acknowledged and considered the assessee's claim, the exemption under Section 54 was ultimately denied. The AO's reasoning was narrow — since the assessee had not filed an original return of income, the exemption was deemed inadmissible. Relying on this single ground, the AO proceeded to make an addition of Rs. 31,38,256/- by disallowing the exemption claimed under Section 54 of the Act.
It is notable that the AO's order also made a reference to Section 54D, which was clearly inapplicable to the facts at hand, reflecting some degree of confusion in the reasoning.
CIT(A)'s Ruling
The assessee preferred an appeal before the National Faceless Appeal Centre (NFAC) / Commissioner of Income Tax (Appeals) under Section 250 of the Income Tax Act, 1961. However, the Ld. Commissioner upheld the AO's addition substantially on the same reasoning — i.e., the non-filing of an original return disqualified the assessee from claiming deduction under Section 54.
The Ld. Commissioner also placed reliance on the Supreme Court's ruling in Commissioner of Income Tax Vs. Sun Engineering Works (P.) Ltd. 198 ITR 297 (SC), interpreting it to mean that an assessee cannot use reassessment proceedings as a back-door mechanism to claim reliefs that were not claimed during original assessment proceedings.
Issues Before the ITAT
The singular question before the Mumbai Bench of the Income Tax Appellate Tribunal was:
Whether the exemption under
Section 54of the Income Tax Act, 1961, can be legitimately claimed in a return filed in response to a notice underSection 148, where no original return was filed underSection 139(1), and the claim is directly connected to the income brought to tax during reassessment?