Section 54 Win: Substantive Investment Beats CGAS Technicality

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The Principle: Timely Reinvestment is Paramount.

The essential question for every capital gains taxpayer: If you sell your house and plan to reinvest the proceeds under Section 54 of the Income-tax Act, but fail to deposit the unutilized sum into the Capital Gains Account Scheme (CGAS) before the return filing deadline—is your deduction lost?

This authoritative Chennai ITAT ruling confirms a vital principle: When the taxpayer utilizes the full sale consideration for purchasing or constructing a new house within the statutory period, the deduction cannot be denied merely due to the **technical lapse** of non-deposit into the CGAS.
Case Summary: Facts & Disallowance
  • The Action: Assessee sold a residential house (AY 2010-11).
  • The Compliance: Assessee purchased land and entered a construction agreement **before the 3-year statutory deadline** (31-3-2012).
  • The Lapse: Unutilized sale proceeds were **not deposited** into the CGAS before the Section 139(1) return filing due date.
  • The Outcome: Assessing Officer (AO) and CIT(A) **denied** the full Section 54 exemption solely based on the CGAS non-deposit.

ITAT's Decisive Rationale

Substantive vs. Procedural

Section 54’s **substantive requirement** is the investment in a new asset within the prescribed time limit (3 years for construction). The CGAS rule is merely a **procedural step** to ensure the amount is preserved for future investment, *if* the taxpayer hasn't spent it by the return due date.

The Tribunal highlighted that since the assessee successfully **utilized the sale proceeds** within the three-year period (before 31-3-2012), the core objective of the law was met. Relying on the Madras High Court precedent (Venkata Dilip Kumar v. CIT), the ITAT ruled:

Non-deposit of unutilized sale consideration in the Capital Gains Account Scheme before the due date of return filing under Section 139(1) is **not fatal** where the investment is completed within the statutory three-year period.

Key Takeaway | Professional Insight 💡

For finance professionals and taxpayers, this is a clear victory for judicial pragmatism. While strict compliance (depositing in CGAS) is always the **safest route** to avoid litigation, this ruling ensures that **genuine, timely investment** in a new residential asset will be honored. Ensure you maintain impeccable documentation proving the dates and amounts of all investments made before the end of the 2-year (purchase) or 3-year (construction) period.

Case Citation: Krishnamoorthy Vijayaraghavan v. Income-tax Officer [2025] 178 taxmann.com 621 (Chennai - Trib.)

Statutory Reference: Section 54 of the Income-tax Act, 1961.

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