In 2017, Mr Babulal from N.S. Road Vile Parle, Mumbai, offered 3 plots of land for Rs 5.03 crore and declared earnings tax exemption under Section 54 for his long-lasting capital gains (earnings) of Rs 3.68 crore. 2 of his actions drew examination from the Income Tax Department, leading to a legal disagreement that extended for more than 4 years.
Babulal missed out on the initial earnings tax return (ITR) due date for the evaluation year (AY) 2018-19. Even after the federal government extended the due date to October 31, 2018, Babulal submitted his ITR (belated) much later on– on December 28, 2018.
The second was declaring the Section 54 long-lasting capital gains tax exemption. For this, one requires to utilize the earnings (LTCG) from the sale of the old property/ies to purchase a brand-new home, and if you can’t do it within the ITR filing due date, you need to transfer the earnings (LTCG) in an unique savings account (capital gain plan account or CGAS).
Babulal neither transferred the earnings (LTCG) in CGAS nor submitted the initial ITR. He utilized the cash to purchase another home for Rs 8.45 crore on December 24, 2018, simply 4 days before submitting the belated ITR, and signed the sale arrangement on January 31, 2019.
Consequently, he was released a tax notification, and the Section 54 tax exemption claim was rejected. Following which, he chose to resolve this matter initially with CIT (A) and eventually with the ITAT Mumbai.
On April 22, 2026, the ITAT Mumbai ruled in favour of Babulal and enabled the Section 54 claim. It purchased the Assessing Officer (AO) to confirm the information of the brand-new domestic home purchase for minimal confirmation functions. Babulal is now exempt from paying any earnings tax on the sale of these 3 lands for Rs 5 crore.
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Under Section 54 of the Income Tax Act, if a specific or Hindu Undivided Family (HUF) makes long-lasting capital gains from the sale of a domestic home residential or commercial property (i.e., a structure or land appurtenant thereto, chargeable under the head earnings from home residential or commercial property), they can get complete earnings tax exemption. To declare this tax exemption, the taxpayer needs to reinvest the capital gains in a brand-new domestic home residential or commercial property positioned in India within the recommended timelines:
- Purchase of a brand-new home within 1 year before or 2 years after the date of transfer or
- Building and construction of a brand-new home residential or commercial property within 3 years from the date of transfer.
Babulal’s chartered accounting professional Anant Pai argued before the ITAT Mumbai that the Income Tax Assessing Officer (AO) had actually rejected the exemption declared by Babulal under Section 54 on the ground that the capital gains made by him from the sale of 3 homes were not transferred in the capital gain plan account before the due date of filing of ITR according to Section 54( 2 ).
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He competed that Babulal had actually used the sale factor to consider towards the purchase of a brand-new residential or commercial property within the due date defined under Section 139, though the sale contract was carried out consequently on a later date.
Pai even more competed that the Hon’ble Jurisdictional Bombay High Court when it comes to Humayun Suleman Merchant, trusted by the lower authorities (CIT (A) and AO), was appreciable on the realities of the case, and likewise the stated choice has actually authorized the choice of the Hon’ble Guwahati High Court when it comes to Rajesh Kumar Jalan (2006) 286 ITR 274.
Pai likewise counted on the choice of the Hon’ble Karnataka High Court when it comes to CIT vs. K. Ramachandra Rao 277 CTR 522 (Kar), where this concern stands covered in favour of the taxpayer.
The Income Tax Department’s senior representative Mr Annavaram Kosuri competed before the ITAT Mumbai that this problem stands covered in favour of the Income Tax Department by the choice of the Hon’ble Jurisdictional Bombay High Court when it comes to Humayun Suleman Merchant. Even more, Kosuri argued that in case of 2 various views of the high courts on a specific concern, just the jurisdictional high court’s choice should be followed.
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Mihir Tanna, associate director, S K Patodia LLP, stated that this judgement highlights a crucial distinction in 2 requirements supplied in earnings tax arrangements for declaring tax exemption.
Tanna stated that if the sale factor to consider is not utilized to purchase a brand-new home before the ITR due date, it needs to be transferred not behind the due date of providing the initial return of earnings in a defined checking account.
Tanna stated: “Word ‘initial’ is not discussed before the due date for using cash. In easy words, if you are fairly sure that quantity will be made use of in a brand-new home by the due date of belated return; no requirement to deposit cash in a defined bank account before the due date of initial earnings tax return.”
Tanna stated that just recently a comparable view was taken by the Hon’ble Delhi Tribunal in case Ashok Bansal (ITA No. 5568/Del/2025).
Summary of the judgement
Chartered accounting professional Suresh Surana informed ET Wealth Online that in this case the Mumbai ITAT handled the concern of whether a reduction under Section 54 of the Income-tax Act, 1961, might be rejected simply since the taxpayer had actually not transferred the unutilised capital gains in the Capital Gains Account Scheme (CGAS) before the due date recommended under Section 139( 1) of the Act.
Surana stated that the ITAT Mumbai, after evaluating Section 54( 2) and the judicial precedents, identified the realities of today case from the Humayun Suleman Merchant’s case.
The ITAT Mumbai observed that the Bombay High Court itself had actually identified a difference in between cases where the capital gains stay unutilised and cases where the whole quantity is in fact used before submitting the return under Section 139, consisting of a belated return under Section 139( 4 ).
According to Surana, the ITAT Mumbai kept in mind that if the taxpayer had actually currently made use of the whole capital gain for the purchase of the brand-new residential or commercial property before submitting the return, there would be no requirement to transfer the quantity into the CGAS, given that no unutilised quantity stayed.
Appropriately, the ITAT Mumbai held that the taxpayer would be entitled to a reduction under Section 54, based on confirmation by the Assessing Officer that the capital gains had actually in reality been used towards the purchase of the brand-new home before the date of filing of the return of earnings.
Surana states, “Since the information of the payments were not totally readily available on record, the matter was remanded to the evaluating officer for restricted confirmation.”
Therefore, the taxpayer prospered since the Tribunal accepted the concept that where the whole capital gains are made use of for the purchase or building of the brand-new house before submitting the return under Section 139( 4 ), exemption under Section 54 can not be rejected simply for non-deposit into the Capital Gains Account Scheme.
The Tribunal successfully held that the deposit requirement uses just where the capital gains stay unutilised as on the date of filing of the return.
Can LTCG be transferred before the belated ITR filing due date under Section 54?
Surana stated that based upon the abovementioned judgement of the ITAT Mumbai, it was held that tax exemption under Sections 54/54F might still be readily available where the taxpayer uses the whole LTCG towards the purchase/construction of a brand-new house before submitting a belated ITR under Section 139( 4 ).
“In such cases, deposit into the Capital Gains Account Scheme (CGAS) might not be needed, because no unutilised quantity stays,” Surana stated,
If any part of the capital gains stays unutilised as of the due date under Section 139( 1 ), such a quantity is usually needed to be transferred in the CGAS before that due date.
Surana stated: “Thus, the judgment supports postponed utilisation before belated return filing, however not postponed CGAS deposit beyond Section 139( 1 ).”