ITAT Grants Relief to Taxpayers Claiming Deduction under Section 54 by Quashing Revisionary Order

The Delhi bench of the Income-tax Appellate Tribunal (ITAT) has overturned a revisionary order from the Principal Commissioner of Income-tax. The tribunal clarified that not depositing long-term capital gains into a designated 'capital gains account' during the interim period is not sufficient grounds to deny deductions under section 54. This decision is expected to benefit many taxpayers in similar situations.

Section 54 of the Income-tax Act exempts long-term capital gains from the sale of residential property if the gains are reinvested in a new residential house within the specified time frame. 

The new house can be purchased one year before or two years after selling the original property, or it should be constructed within three years from the date of the original property's sale.

The time limit for investment under section 54 extends beyond the income tax return due date. If a taxpayer can not invest in a new house before the return due date for the financial year when the original property was sold, they can deposit Long-Term Capital Gains (LTCGs) in a 'capital gains account' in a designated bank. 

This deposit must then be used for the purchase/construction of a new residential house within the prescribed period. In a specific case heard by the ITAT for the financial year 2011-12, S Gupta earned capital gains of Rs. 14.59 lakh from selling a co-owned residential property. 

Despite investing the entire amount in a new residential property within the specified time, a review by the Principal Commissioner raised concerns about non-deposit in the 'capital gains account' during the interim period. 

The Commissioner issued a revisionary order to disallow the deduction claimed under section 54, leading to an appeal filed before the ITAT.

The ITAT's finding underscores that when the basic conditions of section 54(1) are met, taxpayers are entitled to claim the deduction, even if the amount is not deposited in the 'capital gains account' during the interim period. 

The crucial aspect is ensuring the investment is made in the new residential house within the prescribed two-three-year timeframe. It's noteworthy that the ITAT bench while overturning the revisionary order, criticized the Principal Commissioner's hyper-technical approach.

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