Section 54F Deduction Cannot Be Denied When Sale Proceeds Are Timely Deposited in Capital Gains Account Scheme: ITAT Varanasi

Case Overview

Case Name: Vikesh Garg Vs DC-ACIT(2) (ITAT Varanasi)
Appeal Number: ITA No. 13/VNS/2024
Date of Order: 22/10/2024
Assessment Year: 2017-18
Forum: Income Tax Appellate Tribunal, Varanasi

Background of the Dispute

In a significant ruling concerning the correct interpretation of Section 54F of the Income Tax Act, 1961, the Varanasi bench of the Income Tax Appellate Tribunal (ITAT) ruled in favour of the assessee and directed the Assessing Officer (AO) to grant the exemption claimed under Section 54F for Assessment Year 2017-18.

The matter arose from the assessee's sale of unlisted securities of three companies on 30.03.2017, generating a long-term capital gain of Rs. 3,84,93,237/-. With the intention of availing exemption under Section 54F of the Income Tax Act, 1961, the assessee deposited the entire sale proceeds of Rs. 4,00,43,410/- into a Capital Gains Deposit Account maintained with UCO Bank, Gorakhpur. This deposit was made within the extended due date of 31.10.2017 applicable for filing the return of income for that assessment year.

In accordance with the deeming provision under Section 54F(4) of the Income Tax Act, 1961, the assessee treated this deposited amount as the "cost of new asset" and claimed the exemption accordingly in the return of income filed for AY 2017-18.

How the Dispute Arose

Assessing Officer's Position

During the course of assessment proceedings, the AO observed that the assessee had purchased land admeasuring 1,000 sq. mtrs. on 16.08.2019. The land in question also contained a small structure of approximately 500 sq. ft. The AO characterised this small structure as a residential house and treated the entire transaction as a purchase of a new house property.

Applying the conditions prescribed under Section 54F of the Income Tax Act, 1961, the AO noted that exemption is available only when a new house property is purchased within two years or constructed within three years from the date of transfer of the original asset. Since the original unlisted securities were transferred on 30.03.2017 and the land was purchased on 16.08.2019 — a period exceeding two years — the AO took the position that the assessee had failed to comply with the prescribed time limit for purchase.

On this basis, the AO rejected the claim for deduction under Section 54F of the Income Tax Act, 1961 entirely.

CIT(A)'s Stance

The assessee challenged the AO's order before the Commissioner of Income Tax (Appeals) — National Faceless Appeal Centre (NFAC), Delhi. However, the CIT(A), vide order dated 07.12.2023, confirmed the AO's findings and upheld the disallowance of the Section 54F deduction. This led the assessee to file an appeal before the ITAT Varanasi.

Arguments Placed Before the Tribunal

Assessee's Contentions

The Authorised Representative (AR) of the assessee advanced the following arguments before the Tribunal:

  1. Compliance with deposit requirement: The assessee had deposited the entire sale consideration in the Capital Gains Account Scheme with UCO Bank, Gorakhpur, well within the due date prescribed for filing the return of income. This was an undisputed factual position.

  2. **Deeming fiction under Section 54F(4)😗* As per the express language of Section 54F(4) of the Income Tax Act, 1961, once the sale proceeds are deposited in the Capital Gains Account Scheme before the due date for filing the return, such deposited amount is deemed to be the cost of the new asset for the purposes of Section 54F(1). Accordingly, the deduction must be allowed in the year of transfer itself.