Delhi ITAT: Section 54 Deduction Could’t Disallowed for Not Depositing LTCG In Capital Gain Account Scheme

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) clarified that failing to deposit long-term capital gains (LTCG) into a capital gain account scheme does not warrant disallowance of deduction under Section 54 of the Income Tax Act.

Saktijit Dey (Vice President) and M. Balaganesh (Accountant Member) took a meticulous approach in addressing the matter. They asserted that once the fundamental conditions of Section 54(1) are met, the taxpayer retains the right to claim the deduction as per Section 54 of the Income Tax Act.

The taxpayer in question, a resident individual, came under scrutiny when the Assessing Officer learned of the sale of an immovable property for Rs. 62,06,000. Subsequently, the assessment was reopened under Section 147. Responding to the notice issued under Section 148, the taxpayer filed an income return of Rs. 6,42,470, aligning with the original declaration.

During the assessment proceedings, the assessing officer requested details on the sold properties and resulting capital gains. The taxpayer complied, furnishing all pertinent information regarding the property sale and its associated capital gains.

The Assessing Officer discovered that the property in question was jointly owned by the assessee and another co-owner, bought for Rs. 20 lakhs, with the assessee’s share at Rs. 10 lakhs. Upon its sale for Rs. 62,06,000, the assessee’s portion amounted to Rs. 31,03,000. After factoring in acquisition costs and indexation benefits, the resultant long-term capital gain stood at Rs. 14,59,324. The entire gain had been reinvested in a new residential property, prompting a claim for exemption under Section 54. Upon meticulous examination, the assessing officer approved the income return submitted by the assessee, finalizing the assessment.

Post-assessment, the Principal Commissioner of Income Tax (PCIT) reviewed the assessment records. During this scrutiny, it came to light that the capital gain hadn’t been deposited in the capital gain account scheme during the interim period, leading up to its utilization for the purchase or construction of the new property. Consequently, the PCIT deemed these overlooked facts as grounds for declaring the assessment order as erroneous and detrimental to revenue interests.

Subsequently, the PCIT issued a show-cause notice to the assessee, prompting a response as to why the assessment order shouldn’t be deemed erroneous and prejudicial to revenue interests and be set aside. The assessee provided a comprehensive reply, contesting the proposed action under Section 263.

Despite the assessee’s objections, the PCIT upheld the decision to set aside the assessment order. Additionally, a directive was given to disallow the deduction claimed under Section 54 due to the failure to deposit the capital gain amount into the capital gain account scheme.

The tribunal ruled that the assessment order was deemed erroneous and against the Revenue’s interest solely because the capital gain wasn’t placed in the capital gain account scheme.

The tribunal states that practicing the power under section 263 to amend the assessment order is not valid.

Under section 263 the ITAT has quashed the passed order and restored the assessment order.