Denied Rs 91.45 lakh capital gains deduction after selling a plot, taxpayer challenges Income Tax Department’s order in ITAT and wins case

Feb 25, 2026

Synopsis
The Income Tax Appellate Tribunal (ITAT) Pune ruled that investing full capital gains into a new property qualifies for Section 54F exemption, even if the entire sale consideration wasn't deposited in the Capital Gains Account Scheme (CGAS) before filing the ITR. This decision favored a taxpayer from Pune who had sold a plot of land, bought a new property and claimed full tax exemption of the capital gains from the sale of land.

The Income Tax Appellate Tribunal (ITAT) Pune has ruled that even if an individual has failed to deposit the entire capital gains amount into the Capital Gains Account Scheme (CGAS) before filing their income tax return (ITR) they can still claim the Section 54F capital gains tax exemption, as long as they invested the full capital gains into buying a new property.

In this case, ITAT, has overtured the order from the Commissioner of Income Tax (Appeals) that had dismissed the taxpayer’s appeal and upheld the Income Tax Department’s decision.

This judgement came in the backdrop of a case filed by Mr Gugale from Pune who had sold a plot of land for Rs 3.21 crore on March 18, 2014 and bought a new property on February 25, 2015 for Rs 4 crore, claiming full tax exemption on the capital gains from the land sale.

The income tax department had denied this Section 54F capital gains tax exemption for Gugale on the technical ground that he had failed to deposit the entire amount from the sale of land into CGAS before submitting his ITR. Gugale had deposited Rs 2.25 crore. The Income Tax Department calculated capital gains of Rs 3.16 crore. As a result, he received a tax notice for Rs 91.45 lakh capital gains.

ITAT Pune said that the real intention of the legislature is to ensure that the sale proceeds get invested in a residential house within the prescribed period and not to get the amount deposited in the Capital Gain Accounts Scheme. So when Gugale invested the full capital gains from the sale of the land into buying a new property within one year from the date of sale of the land, he is eligible for Section 54F capital gains tax exemption.

ITAT Pune cited a relevant case which decided on similar terms: The Karnataka High Court ‘s decision in the case of K. Ramchandra Rao. Keep reading to know the full details of how and why Gugale won the case in ITAT Pune.

Let’s find out how the events panned out:

In Appeal No 1821/PUN/2025, Gugale vs ITO, Ward-14(5), Pune, Gugale filed his Income Tax Return (ITR) for Assessment Year 2014-15 on January 23, 2015, declaring an income of Rs 17.18 lakh.

The Income Tax Department picked Gugale’s case for scrutiny. The income tax assessing officer found that the taxpayer sold a plot of land for Rs 3.21 crore on March 18, 2014, and purchased a flat worth Rs 4 crore on February 25, 2015.

The taxpayer claimed capital gains deduction u/s 54F of the IT Act. Out of Rs 3.21 crore, the taxpayer could deposit only Rs 2.25 crore in capital gain account scheme (CAGS) in a specified bank account.

The Income Tax Department calculated capital gain of Rs 3.16 crore and taxed Rs 91.45 lakh.

The I-T Department determined a total income of Rs 1.08 crore as against Rs 17.18 lakh reported by Gugale. On the basis of it, they disallowed Gugale’s Rs 91.45 lakh capital gains deductions.

The Income Tax Department also issued notices under Section 143(2) and 142(1) to the taxpayer.

Case summary at a glance
   

What Gugale did after being disallowed Rs 91.45 lakh worth of capital gains?

Gugale filed an appeal at Commissioner of Income Tax (Appeals) under the National Faceless Appeal Centre (Ld. CIT(A)/NFAC).

The body dismissed Gugale’s appeal and confirmed the Income Tax Department’s order. Gugale challenged the order of Ld. CIT(A)/NFAC at ITAT, Pune, which pronounced an order in his favour, allowing him capital gains deductions of Rs 91.45 lakh.

What was ITAT, Pune’s findings in the case?

ITAT, Pune, found that the claim of the assessee (Gugale) is that since the whole of the consideration of Rs 3.21 crore has already been invested within one year from the sale of the original asset, in purchase of residential flat valuing for Rs 4 crore, the real intention of the legislature is fulfilled and the deduction under Section 54F needs to be allowed.

Citing a judgement passed by the Karnataka High Court in the case of K Ramchandra Rao (supra), the ITAT, Pune, said that in its opinion, the real intention of the legislature is to get the sale proceeds invested in buying a residential house within the prescribed period and not to get the amount deposited in CAGS.

ITAT, Pune, applied the precedent set by Karnataka High Court and gave the capital gains tax exemption

ITAT Pune cited a case of the High Court of Karnataka in the case of CIT vs. Ramchandra Rao [2015] 56 taxman.com 163 (Karnataka) wherein it was held that under Sub-section (4), in the event of the assessee not investing the capital gains either in purchasing the residential house or in constructing a residential house within the period stipulated in Section 54F(1), if the assessee wants the benefit of Section 54F, then he should deposit the capital gains in an account duly notified by the Central Government.

The High Court had said in the above mentioned case, if an individual wants to claim exemption from the payment of income tax by retaining cash, then the said amount is to be invested in the said account (CGAS).

The High Court had gone on to say in the above mentioned case (an extract): “If the intention is not to retain cash but to invest in construction or any purchase of the property and if such investment is made within the period stipulated therein, then Section 54F(4) is not at all attracted and therefore the contention that the assessee has not deposited the amount in the Bank account as stipulated and therefore, he is not entitled to the benefit even though he has invested the money in construction is also not correct."

What did ITAT, Pune, say in its order?

ITAT, Pune, it its order said: “We set aside the order passed by Ld. CIT(A)/NFAC and direct the assessing officer to allow the deduction of Rs 91.45 lakh claimed by the assessee under Section 54F of the IT Act. Thus, the ground No. 2 raised by the assessee is allowed.

“Since alternate ground No.2 has been allowed, ground no.1 becomes infructuous and is therefore not adjudicated.

“In the result, the appeal filed by the assessee is allowed.”

What are the two grounds of appeal?

The appellant (Gugale) had raised the following grounds of appeal-

On facts and circumstance prevailing in the case and as per provisions and scheme of the Act, it be held that the Ld. AO framed the assessment order without issuing show cause notice to the Appellant is violation of principles of natural justice and not in accordance with the provisions of law. The assessment so framed shall be treated as null and void. Appellant be granted just and proper relief in this respect.

Without prejudice to the above, on facts and circumstances prevailing in the case and as per provisions and the scheme of the Act it be held that the disallowance of deduction claimed under Section 54F of the Act amounting to Rs 91,45,450/- is not in accordance with the provisions of the Act. The disallowance so made be deleted. Just and proper relief be granted.

[The Economic Times]