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The Income-tax Appellate Tribunal (ITAT), Delhi bench, recently ruled in favour of taxpayers, stating that failure to deposit long-term capital gains (LTCGs) in a designated account will not lead to denial of tax benefits, under section 54 of the Income-tax (I-T) Act, for the purchase of a new house.
Section 54 of the Income-tax Act exempts long-term capital gains arising from the sale of a residential property if the gains are reinvested in buying or constructing a new residential house within the specified time frame. According to the provisions of section 54, individuals can invest their LTCGs in a new residential property either one year before or within two years after selling the original property. Alternatively, they can construct a new house within three years from the date of selling the original property.
Taxpayers failing to invest in a new property before the tax return's due date for the financial year in which the original property was sold have the option to deposit the LTCGs into a designated 'capital gains account' in a bank. This amount must be utilised for the purchase or construction of a new residential house within the prescribed period under section 54 to claim the tax benefit.
The case that prompted this ITAT ruling involved S Gupta, who realised capital gains of Rs. 14.59 lakh from the sale of a co-owned residential property during the financial year 2011-12. While she had invested the entire amount in a new residential property within the stipulated time, the Principal Commissioner noticed a failure to deposit the funds in the capital gains account during the interim period. Consequently, a revisionary order was issued to disallow the claimed deduction under section 54, leading Gupta to appeal the decision before the ITAT.
The ITAT has now overturned the revisionary order issued by the Principal Commissioner of Income-tax, emphasising that the non-deposit of LTCGs into a 'capital gains account' during the interim period cannot be the sole reason to not allow deductions claimed under section 54.
Representing Gupta, advocate Sankalp Malik highlighted that the ITAT's decision underscores that if the primary conditions of section 54(1) are met, the taxpayer retains the right to claim the deduction, even if the amount is not deposited in the 'capital gains account' during the interim period. However, adherence to the prescribed two-three year time frame for investment in the new residential property is crucial.
The ITAT bench criticised the Principal Commissioner's hyper-technical approach while annulling the revisionary order, signalling a more lenient interpretation of the law in favour of taxpayers. This ruling provides relief and clarity to taxpayers, emphasising the importance of meeting the fundamental conditions of section 54 for claiming deductions, notwithstanding the failure to deposit LTCGs in the designated account in the interim period.
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