In 2017, Mr Babulal from N.S. Road Vile Parle, Mumbai, sold three plots of land for Rs 5.03 crore and claimed income tax exemption under Section 54 for his long-term capital gains (profit) of Rs 3.68 crore. However, two of his actions drew scrutiny from the Income Tax Department, leading to a legal dispute that stretched for more than four years.
First, Babulal missed the original income tax return (ITR) due date for the assessment year (AY) 2018-19. Even after the government extended the deadline to October 31, 2018, Babulal filed his ITR (belated) much later—on December 28, 2018.
The second was claiming the Section 54 long-term capital gains tax exemption. For this, one needs to use the profit (LTCG) from the sale of the old property/ies to buy a new property, and if you can’t do it within the ITR filing due date, you must deposit the profit (LTCG) in a special bank account (capital gain scheme account or CGAS).
However, Babulal neither deposited the profit (LTCG) in CGAS nor filed the original ITR. He used the money to buy another property for Rs 8.45 crore on December 24, 2018, just four days before filing the belated ITR, and signed the sale agreement on January 31, 2019.
Subsequently, he was issued a tax notice, and the Section 54 tax exemption claim was denied. Following which, he decided to address this matter first with CIT (A) and ultimately with the ITAT Mumbai.
On April 22, 2026, the ITAT Mumbai ruled in favour of Babulal and allowed the Section 54 claim. However, it ordered the Assessing Officer (AO) to verify the details of the new residential property purchase for limited verification purposes. Babulal is now exempt from paying any income tax on the sale of these three lands for Rs 5 crore.
Under Section 54 of the Income Tax Act, if an individual or Hindu Undivided Family (HUF) earns long-term capital gains from the sale of a residential house property (i.e., a building or land appurtenant thereto, chargeable under the head income from house property), they can get full income tax exemption. To claim this tax exemption, the taxpayer must reinvest the capital gains in a new residential house property situated in India within the prescribed timelines:
- Purchase of a new house property within 1 year before or 2 years after the date of transfer or
- Construction of a new house property within 3 years from the date of transfer.
Babulal’s chartered accountant Anant Pai argued before the ITAT Mumbai that the Income Tax Assessing Officer (AO) had denied the exemption claimed by Babulal under Section 54 on the ground that the capital gains earned by him from the sale of three properties were not deposited in the capital gain scheme account before the due date of filing of ITR as per Section 54(2).
He contended that Babulal had utilised the sale consideration towards the purchase of a new property within the due date specified under Section 139, though the sale agreement was executed subsequently on a later date.
Pai further contended that the Hon’ble Jurisdictional Bombay High Court in the case of Humayun Suleman Merchant, relied upon by the lower authorities (CIT (A) and AO), was distinguishable on the facts of the case, and also the said decision has approved the decision of the Hon’ble Guwahati High Court in the case of Rajesh Kumar Jalan (2006) 286 ITR 274.
Pai also relied on the decision of the Hon’ble Karnataka High Court in the case of CIT vs. K. Ramachandra Rao 277 CTR 522 (Kar), where this issue stands covered in favour of the taxpayer.
The Income Tax Department’s senior representative Mr Annavaram Kosuri contended before the ITAT Mumbai that this issue stands covered in favour of the Income Tax Department by the decision of the Hon’ble Jurisdictional Bombay High Court in the case of Humayun Suleman Merchant. Further, Kosuri argued that in case of two different views of the high courts on a particular issue, only the jurisdictional high court’s decision ought to be followed.
Mihir Tanna, associate director, S K Patodia LLP, said that this judgement highlights an important difference in two criteria provided in income tax provisions for claiming tax exemption.
Tanna said that if the sale consideration is not used to buy a new residential property before the ITR due date, it must be deposited not later than the due date of furnishing the original return of income in a specified bank account.
Tanna said: “Word ‘original’ is not mentioned before the due date for utilising money. So, in simple words, if you are reasonably sure that amount will be utilised in a new property by the due date of belated return; no need to deposit money in a specified bank account before the due date of original income tax return.”
Tanna said that recently a similar view was taken by the Hon’ble Delhi Tribunal in case Ashok Bansal (ITA No.5568/Del/2025).
Summary of the judgement
Chartered accountant Suresh Surana told ET Wealth Online that in this case the Mumbai ITAT dealt with the issue of whether a deduction under Section 54 of the Income-tax Act, 1961, could be denied merely because the taxpayer had not deposited the unutilised capital gains in the Capital Gains Account Scheme (CGAS) before the due date prescribed under Section 139(1) of the Act.
Surana said that the ITAT Mumbai, after analysing Section 54(2) and the judicial precedents, distinguished the facts of the present case from the Humayun Suleman Merchant’s case.
The ITAT Mumbai observed that the Bombay High Court itself had recognised a distinction between cases where the capital gains remain unutilised and cases where the entire amount is actually utilised before filing the return under Section 139, including a belated return under Section 139(4).
According to Surana, the ITAT Mumbai noted that if the taxpayer had already utilised the entire capital gain for the purchase of the new property before filing the return, there would be no requirement to deposit the amount into the CGAS, since no unutilised amount remained.
Accordingly, the ITAT Mumbai held that the taxpayer would be entitled to a deduction under Section 54, subject to verification by the Assessing Officer that the capital gains had in fact been utilised towards the purchase of the new residential property before the date of filing of the return of income.
Surana says, “Since the details of the payments were not fully available on record, the matter was remanded to the assessing officer for limited verification.”
Thus, the taxpayer succeeded because the Tribunal accepted the principle that where the entire capital gains are utilised for the purchase or construction of the new residential property before filing the return under Section 139(4), exemption under Section 54 cannot be denied merely for non-deposit into the Capital Gains Account Scheme.
The Tribunal effectively held that the deposit requirement applies only where the capital gains remain unutilised as on the date of filing of the return.
Can LTCG be deposited before the belated ITR filing deadline under Section 54?
Surana said that based on the aforementioned judgement of the ITAT Mumbai, it was held that tax exemption under Sections 54/54F may still be available where the taxpayer utilises the entire LTCG towards the purchase/construction of a new residential property before filing a belated ITR under Section 139(4).
“In such cases, deposit into the Capital Gains Account Scheme (CGAS) may not be required, since no unutilised amount remains,” Surana said,
However, if any portion of the capital gains remains unutilised as of the due date under Section 139(1), such an amount is generally required to be deposited in the CGAS before that due date.
Surana said: “Thus, the ruling supports delayed utilisation before belated return filing, but not delayed CGAS deposit beyond Section 139(1).”
