ARTHUR JAGARAJ DEVAPRAGASAM,CHENNAI V. DCIT NON CORPORATE CIRCLE 8(1), CHENNAI

ITA 710/CHNY/2025

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The case revolves around the taxation of long-term capital gains arising from the sale of a house property by the assessee, Arthur Jagaraj Devapragasam, in Chennai. The assessee sold his property and deposited a significant amount in the Capital Gains Account Scheme (CGAS) to claim exemption under Section 54 of the Income Tax Act. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) misinterpreted the provisions, leading to the taxation of the deposited amount in the year of transfer instead of the year when the amount remained unutilized beyond the stipulated period. The Tribunal found that the AO and CIT(A) erred in their interpretation and application of Section 54(2) and its proviso, leading to the decision to allow the assessee's appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 711791 (ITAT-CHENNAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Assessment Year: 2017-2018
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GOUTHAMI MANIVASAGAM; J. C.I.T
• Assessee Lawyers: R. VIJAYARAGHAVAN
• Keywords: Capital asset; Revised return; Reasonable cause; Capital Gains
• Section: 54

Judgement Text

" आयकर अपीलीय अिधकरण, ‘बी’ Ɋायपीठ, चेɄई IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH, CHENNAI ŵी मनु क ुमार िगįर, Ɋाियक सद˟ एवं ŵी एस. आर. रघुनाथा, लेखा सद˟ क े समƗ BEFORE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND SHRI S.R.RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.:710/Chny/2025 िनधाŊरण वषŊ / Assessment Year: 2017-18 Arthur Jagaraj Devapragasam, No.C-5, Marble Arch Apartments, No.2 Valliammal Street, Vepery, Chennai-600 007. vs. The Deputy Commissioner of Income Tax, Non-Corporate Circle-8(1) Chennai. [PAN: ACYPA-9529-J] (अपीलाथŎ/Appellant) (ŮȑथŎ/Respondent) अपीलाथŎ की ओर से/Appellant by : Shri. R.Vijayaraghavan, Advocate (Virtual) ŮȑथŎ की ओर से/Respondent by : Ms. Gouthami Manivasagam, J.C.I.T. सुनवाई की तारीख/Date of Hearing : 26.06.2025 घोषणा की तारीख/Date of Pronouncement : 24.07.2025 आदेश /O R D E R PER S. R. RAGHUNATHA, AM : This appeal by the assessee is filed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, for the assessment year 2017-18, vide order dated 06.08.2024. 2. At the outset, we find that there is a delay of 155 days in appeal filed by the assessee, for which the assessee has filed affidavit stating the reasons for delay, wherein, it is submitted that the assessee is 84 years old, did not have help of professionals on regular basis and was unaware of the receipt of the order of the ld.CIT(A) on 06.12.2024 since he was not watching emails regularly. Only when he was Printed from counselvise.com :-2-: ITA. No:710/Chny/2025 aware of the order of the ld. CIT(A) approached a CA on 01.03.2025 and immediately initiated for filing of appeal. After considering the Affidavit filed by the assessee and also hearing both the parties, we find that there is a reasonable cause for the assessee in not filing appeal on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit the appeal filed by the assessee for adjudication. 3. The grounds raised by the assessee are as follows: 1) The order of the CIT(A), NFAC is contrary to the law facts and circumstances of the case. 2) The NFAC erred in confirming the taxable long term capital gains at Rs.6,69,04,286/- and confirming the tax thereon Rs.2,05,77,117/-. 3) The NFAC ought to have appreciated that the Appellant had deposited a sum totalling Rs.6.45 Crores in the Capital Gains scheme 1988 with the State Bank of India on 01.10.2016 and 04.10.2016. 4) The NFAC ought to have appreciated that long-term capital gains should be reduced by the amount deposited under the capital gains Scheme act under section 54/54F and hence that amount is not taxable to capital gains in the present assessment year under appeal. 5) The NFAC has completely ignored the Ground No 5 raised before him as well as the document evidencing the deposit of Rs.6.45 Crores on 01.10.2016 and 04.10.2016 with SBI and decided the issue on the basis of irrelevant material. 6) The NFAC ought to have appreciated that the assessee had offered the sale consideration to capital gains in the A.Y.2020-21, by which time he was not able to acquire a residential property. 7) The assessee craves leave to adduce additional grounds. 4. Brief facts of the case are that the assessee is an individual filed his return of income on 04.08.2017 for the AY 2017-18. The assessee filed his revised return of income for the AY 2017-18 on 16.07.2018 declaring a total income of Rs.37,32,299/- including capital gain on the sale of his house property on 23.08.2016 for Rs.7.50 crores after claiming deduction of Rs.6.45 crores u/s.54 of the Act – for investment in another residential house property by investing the said Rs.6.45 crores in Capital Gain Account Printed from counselvise.com :-3-: ITA. No:710/Chny/2025 Scheme (CGAS) with SBI. The assessee’s case was selected for scrutiny and the order u/s.143(3) of the Act was finalized determining his total income as Rs.6,92,04,950/-. 5. During the assessment proceedings AO found that the assessee had purchased a flat for Rs.2.15 crores on 20.02.2019, which was beyond the two-year period stipulated u/s.54 for purchase of the residential property. Accordingly, for the AY 2017-18 the assessee did not claim exemption u/s.54 of the Act with respect to the flat acquired on 20.02.2019 as it fell outside the permitted time frame. Instead, the assessee claimed deduction u/s.54 in respect of the amount of Rs.6.45 crores deposited in the capital gain a/c. as per section 54(2) of the Act. 6. In line with the proviso to section 54(2), since the assessee could not utilise the amount lying in the capital gain account for acquisition or construction of the residential house within a period of 3 years, the entire unutilized balance of Rs.6.45 crores was correctly offered to tax as capital gains in AY 2020-21. 7. The AO, however misconstrued the provisions of Section 54 and wrongly concluded that the purchase of the residential property did not occur within 2 years from the date of transfer, the amount deposited in the capital gains account would also become taxable as capital gains in the year of deposit itself. On this basis the AO brought the Rs.6.45 crores to tax in the year of transfer itself. 8. Aggrieved by the order of AO, the assessee preferred an appeal before the ld.CIT(A), NFAC, Delhi. During the course of appellate proceedings, the assessee specifically contended that the amount of Rs.6.45 crores deposited in the CGAS cannot be brought to tax in the year of deposit i.e., AY 2017-18. Tax liability to the assessee arises only if the amount remains unutilized upon expiry of 3 years from the date of transfer, which would fall in FY 2019-20 (AY 2020-21). However, the ld. CIT(A) merely confirmed the order of the AO taxing the deposit into CGAS in the year of deposit Printed from counselvise.com :-4-: ITA. No:710/Chny/2025 ignoring the submissions of the assessee. Aggrieved by the order of ld.CIT(A), the assessee preferred an appeal before us. 9. The ld. AR for the assessee submitted that both the AO and ld.CIT(A) have incorrectly interpreted the provisions of section 54(2) of the Act and its proviso. He argued that their conclusion that the failure to purchase a residential property within 2 years or to construct within 3 years automatically renders the entire net sale consideration as taxable in the year of transfer is erroneous. He further contended that the department has over looked the specific exemption provided u/s.54(2) of the Act with respect to amounts deposited in CGAS. 10. A plain reading of Section 54(2) makes it evident that if the assessee deposits the unutilized portion of the capital gains in the CGAS before the due date of filing the return of income u/s.139(1) of the Act, the deposited amount is deemed to have been utilised towards the purchase or construction of new residential asset. This deeming fiction holds until the conditions under the proviso are triggered specifically, if the amount remains unutilized upon expiry of 3 years from the date of transfer, at which point the unutilized amount becomes chargeable as capital gains in the year in which the 3 year period lapses. 11. The legislative framework is unambiguous – once the amount is deposited in the CGAS, it is treated as being applied towards the acquisition or construction of a new house for the purpose of Section 54. If, however, the assessee fails to utilise the deposit within the stipulated period of 3 years, it becomes taxable as capital gains only in that subsequent year, not in the year of transfer. 12. It is pertinent to highlight that the funds deposited in the CGAS are strictly earmarked for purchase or construction of a residential house and cannot be withdrawn for any other purpose. Therefore, Section 54(2) read together with its proviso clearly Printed from counselvise.com :-5-: ITA. No:710/Chny/2025 provides a window of three years for the assessee to utilise the deposited amount for purchasing or constructing a residential property. The taxability of the unutilized amount arises only after the expiry of this period, not before. 13. Further, the ld.AR submitted that the assessee has duly reflected the unutilized deposit of Rs.6.45 crores as taxable capital gains in the return filed for AY 2020-21, without adjusting it against the Rs.2.15 crores spent towards the flat purchased beyond the permitted timeframe. Thus, the core issue whether the amount deposited in the CGAS should be excluded from capital gains computation in AY 2017-18 stands clearly resolved in favour of the assessee based on the explicit language of Section 54(2) and its proviso. The mere fact that the amount was not utilised within the two years for purchase of residential property, window does not accelerate the taxability of the deposited sum to AY 2017-18, as wrongly assumed by the AO and ld.CIT(A). 14. In conclusion, the ld.AR submitted that the claim of the assessee that the Rs.6.45 crores deposited in the CGAS should not form part of the taxable capital gains in AY 2017-18 is fully supported by the statutory provisions. This is further substantiated by the fact that the same amount has already been duly offered to tax in AY 2020-21 upon failure to utilise the deposit within the three-year period. 15. Per contra, the ld.DR relied on the orders of the lower authorities. 16. We have heard the rival parties and perused the material available on record and gone through the orders of the lower authorities. The assessee has filed his return of income disclosing the income from long term capital gains along with deduction u/s.54 of the Act by showing the deposit of Rs.6.45 crores in the CGAS before the due date for filing the return of income as per section 139(1) of the Act. The case was selected for limited scrutiny and the Assessing Officer has passed order by treating Rs.6.45 Crores as income for the A.Y. 2017-18 under the head capital gains on account of the CGAS Printed from counselvise.com :-6-: ITA. No:710/Chny/2025 made, even before the expiry of 3 years from the date of transfer of the capital asset. On appeal the ld.CIT(A) pleased to confirm the order of the AO. 17. We note that the assessee has rightly deposited the entire amount of capital gain of Rs.6.45 crores arising out of the sale of House property in CGAS in SBI. The assessee has sold the house property on 23.08.2016. We find that the assessee had time to purchase new house property within two years was 22.08.2018 (A.Y.2019-20) or to construct a house property within three years was 22.08.2019 (A.Y.2020-21) as per the proviso to section 54(2) of the Act. Since the assessee had not utilised the capital gain for purchase of new house property on or before 22.08.2018, he had left with the only option to build the house within 22.08.2019 or to offer the entire capital gain kept in the CGAS as long term capital gain by paying corresponding advance tax and filing the return of income for the A.Y.2020-21. On perusal of the records we note that the assessee has failed to utilise the CGAS amount to construct the new residential property on or before 22.08.2019 (3 years from the date of transfer of capital asset) and hence the assessee has rightly offered Rs.6.45 crores as long term capital gain and discharged the taxes by filing the return of income for the A.Y.2020-21 vide ITR ackt.No.148450650090121 dated 09.01.2021. Therefore, the assessee has complied with the conditions prescribed u/s.54 of the Act has been complied by keeping the entire long term capital gains to the tune of Rs.6.45 crores in CGAS at SBI before filing the return of income for the A.Y. 2017-18. Further, since the assessee has failed to purchase / construct within the period of 2 years or 3 years respectively, offered the long-term capital gain as income in the relevant A.Y.2020-21 and has discharged the taxes. Therefore, we are of the considered view that both AO and that of the ld.CIT(A) has erred in bringing the deposit amount of Rs.6.45 crores kept under CGAS in the impugned A.Y.2017-18. Printed from counselvise.com :-7-: ITA. No:710/Chny/2025 18. In view of the above, we are setting aside the order of ld.CIT(A) and direct the AO to recompute the total income by deleting the addition made on account of long term capital gain of Rs.6.45 Crores, since the same has already been rightly offered to tax in the A.Y. 2020-21. 19. In the result, appeal filed by the assessee is allowed. Order pronounced in the court on 24th July, 2025 at Chennai. Sd/- Sd/- (मनु क ुमार िगįर) (MANU KUMAR GIRI) Ɋाियक सद˟/Judicial Member (एस. आर. रघुनाथा) (S.R.RAGHUNATHA) लेखासद˟/Accountant Member चेɄई/Chennai, िदनांक/Dated, the 24th July, 2025 SP आदेश की Ůितिलिप अŤेिषत/Copy to: 1. अपीलाथŎ/Appellant 2. ŮȑथŎ/Respondent 3.आयकर आयुƅ/CIT– Chennai/Coimbatore/Madurai/Salem 4. िवभागीय Ůितिनिध/DR 5. गाडŊ फाईल/GF Printed from counselvise.com "