Non-deposit in Capital Gains Account Scheme does not affect capital gains exemption if reinvestment made within stipulated time.

 The ITAT, Chennai in a recent ruling has held that the tax exemption under Section 54 (exemption of capital gains arising on sale of residential property) of the Income-tax-act, 1961 (‘the Act’), cannot be denied just because the unutilized sale proceeds were not deposited in the Capital Gains Account Scheme (‘CGAS’) by the due date for filing the return. The essential requirement is that the taxpayer must reinvest the gains from selling a residential property into buying or constructing a new residential property within the prescribed period of three years. Since this substantive condition was met, the exemption was allowed despite the technical lapse related to the deposit.

In the instant case, the assessee sold a residential house but did not file his income-tax return (‘ITR’) initially. The Assessing Officer (‘AO’), upon receiving information about the sale of the immovable property, issued a notice. Following this, the assessee filed its ITR and claimed a deduction under Section 54 of the Act, by showing investment in a new property within the period of three years from the date of sale of the immovable property. However, the AO denied the deduction on the ground that the unutilized sale proceeds were not deposited in the CGAS account on or before the due date for filing the ITR. The primary issue under consideration was whether this delay in depositing the sale proceeds in the CGAS account affected the eligibility for exemption.

The ITAT, Chennai held that the assessee was entitled to deduction under Section 54 of the Act, despite not depositing the unutilized sale proceeds in the CGAS account by the due date of filing the ITR. The assessee had sold a residential property and reinvested the sale proceeds by purchasing land and entering into a construction agreement for a new residential property within the prescribed three-year period. The Tribunal emphasized that the main condition for exemption is the reinvestment of capital gains within the stipulated time, not the technical requirement of depositing the amount in CGAS before the due date of filing ITR.

This ruling provides clarity that taxpayers who reinvest capital gains from the sale of a residential property within the prescribed time limit should not be denied exemption under Section 54 of the Act, simply due to procedural lapses like delayed deposit in the CGAS account. It reinforces the principle that the substance of the transaction ‘timely reinvestment’ is more important than technical formalities, ensuring that genuine taxpayers are protected from harsh consequences due to minor filing delays. This approach supports the legislative intent of encouraging investment in housing and provides relief to taxpayers who fulfil the core requirements but miss strict procedural deadlines.