Benefit under section 54 could not be denied merely because the amount was not invested in capital gains scheme account

Recent judgement passed by the Hon'ble Madras High Court

Benefit under section 54 could not be denied merely because the amount was not invested in capital gains scheme account.

What is relief under section 54?

Under Income Tax Law, if you sell a capital asset and earn a gain out of the transactions, you are bound to pay income tax on the capital gain. Residential house property is also a capital asset by definition, hence if you sell a residential property and earn a profit on it, you will be liable to pay income tax. But there is a relief given by the law under section 54 which says that if you buy another residential property in the period of one year before or two year after the sale or invest in construction of residential property in the period of one year before or three years after the sale, then the capital gain would be exempted upto the amount of fresh investment done, provided that the new property is held for at least 3 years from the date of its purchase.

What is capital gains scheme account?

The catch is that you are given time (2 years / 3 years) after the sale to invest, but you need to file your income tax return on or before 31st July of the financial year which succeeds the financial year in which property is sold. So, if you have made the fresh investment by that date, you will mention the fact in your return and take the exemption. But if you have not done so and need more time for purchasing/constructing new property, you need to deposit the capital gains amount in a special bank account opened with a nationalised bank called "Capital Gain Scheme Account" before the due date of filing your income tax return. The amount from this account can be withdrawn only in 2 ways - either for purchase of a new residential house property or after payment of capital gains tax. This way you can avail the exemption and still have time to invest, whilst Income Tax department is sure that the money is kept aside for intended usage

What is the judgement now we are talking about?

In the case presented before the Madras High Court, the taxpayer had not deposited the amount in the capital gains scheme account and yet availed the exemption in the return, although later he invested the amount in construction of new residential house property in the given time of 3 years. The assessing officer disallowed the benefit and asked him to deposit the tax since the procedure laid down by law (of depositing money in CGSA) was not done.

HIGH COURT allowed the benefit to taxpayer stating that the basic condition is that the amount should be invested in the manner and in the time given by law, which is fulfilled by the taxpayer. The procedural requirement of depositing the money in the separate bank account is to ensure that the exemption is not availed in a false manner. Since the basic condition is fulfilled and is apparent, the benefit should not be denied.

What should you do now? Ignore depositing of money in CGSA if you sell property and want to avail benefit?

Not at all, you should follow procedural requirements prescribed by law. This case law is of help to you for quoting and benefitting in case you have missed to do so in the past or inadvertently miss to do so in future and may face a litigation.