Mumbai: In a taxpayer-friendly ruling, the Mumbai bench of the income tax appellate tribunal (ITAT) recently held that a claim for capital gains exemption under Section 54 of Income Tax (I-T) Act, for investing in a new house, cannot be denied solely on the ground that an I-T return was not filed at the outset. The claim should be allowed, if made pursuant to reassessment proceedings, the tax tribunal held.The case involved M Sheikh, an individual taxpayer, who had not filed an ‘original’ I-T return under Section 139(1) but filed it later in response to a notice for reassessment issued under Section 148. In this return, the taxpayer disclosed long-term capital gains arising from the sale of a residential property and claimed exemption of Rs 49 lakh under Section 54 on the basis of reinvestment in another residential property. Section 54 provides that any long-term capital gains arising to an individual on sale of a residential property shall be exempt to the extent that such capital gain is reinvested in the purchase of another residential property within the prescribed period. The assessing officer rejected the claim on the ground that no original I-T return had been filed. This view was upheld by the commissioner (appeals). However, the ITAT clarified that while reassessment proceedings cannot be used to revisit issues unrelated to escaped income, they do permit the taxpayer to make claims that are directly connected to such income. In the present case, the ITAT noted that the capital gains constituted the very income that had escaped assessment, and the Section 54 claim was intrinsically linked to the computation of that income. Therefore, it could not be treated as a fresh or unrelated claim barred in reassessment proceedings. The ITAT also referred to earlier judgments which held that Section 54 does not mandate filing of an I-T return by the prescribed due date. It emphasised that a claim made in a return filed pursuant to a reassessment notice cannot be rejected merely due to delay or absence of an original return. Accordingly, it set aside the orders of the lower authorities and remanded the matter back to the I-T officer for fresh adjudication. It directed that the taxpayer’s eligibility for exemption under Section 54 be examined on merits and allowed if the statutory conditions are satisfied. According to tax experts, ITAT’s order reinforces the principle that procedural lapses, such as non-filing of an original return, should not defeat substantive tax benefits where the claim is otherwise valid and directly linked to income brought to tax in the reassessment proceedings.
