Yes, you can claim the Section 54 exemption in a return filed after a Section 148 reassessment notice, even if you never filed an original return under Section 139(1). The ITAT Jaipur said so in a recent NRI case, and it's good news for anyone who sold a home in India and skipped filing.

In Margaret Smith v. DCIT (International Taxation), ITA No. 266/JPR/2026, decided on 3 November 2026, the Jaipur Bench held that Section 54 doesn't make the exemption depend on a return filed by the original due date. It told the Assessing Officer (AO) to allow the exemption on a long-term capital gain of Rs 10,53,992.

Let's walk through what happened, why the Tribunal ruled this way, and what it means for you.

Why This Question Comes Up So Often With NRIs

Here's a common story. An NRI sells an old family flat in India and puts all the money into a new flat. No tax is due, so they figure there's nothing to report.

Years later, the department spots the property registration and sends a reassessment notice. The officer's first question is, "Why didn't you file a return?" The next argument follows quickly: no original return, no exemption.

The Jaipur Tribunal has now firmly rejected that argument. If you've got an unreported property sale anywhere in your past, its reasoning is worth knowing.

The Case at a Glance

Here's the quick snapshot before we get into the details.

What Actually Happened in the Margaret Smith Case

The taxpayer, a non-resident, sold an old residential flat in Jodhpur on 17 April 2015. On 3 December 2015, she bought a new flat in the same city for Rs 62,27,500. Both deals fell in financial year 2015-16, and she filed no return for that year.

Acting on information about the new purchase, the AO issued a Section 148 notice on 6 April 2023. She filed a return on 18 May 2023 showing income of Rs 3,240. The draft assessment then proposed two additions:

• Rs 34,89,500 under Section 69, treating part of the new flat's cost as unexplained investment.
• Rs 16,50,000 as short-term capital gain, which was the full sale price of the old flat, because its purchase deed hadn't been produced.

She objected before the Dispute Resolution Panel (DRP) and filed more evidence. That changed things a lot. The DRP accepted that the money for the new flat was explained and deleted the Section 69 addition.

The old flat's purchase deed, dated 2 November 1996, was also traced and filed. With the cost on record, the AO's remand report recomputed the gain as a long-term capital gain of Rs 10,53,992.

She accepted that number and claimed it was fully exempt under Section 54, since all the sale money went into the new flat. The DRP agreed with the computation but refused the exemption. Its view was blunt: filing a return is compulsory to claim Section 54, and she hadn't filed one. The AO followed and added the full Rs 10,53,992.

Timeline of the Key Events

Why Did the Tribunal Allow the Section 54 Exemption?

The Tribunal allowed it because nothing in the law ties the exemption to an original return. It framed one narrow question: can Section 54 be denied only because there was no Section 139(1) return and the claim came in a Section 148 return? Its answer was no, for four reasons.

1. Section 54(1) Says Nothing About Filing a Return

The main conditions in Section 54(1) are about the deal itself. The asset sold must be a residential house held long term. The new house must be bought within one year before or two years after the sale, or built within three years. No condition mentions a return of income.

The only mention of Section 139 is in Section 54(2). That part covers gains not yet reinvested by the return due date, which must go into the Capital Gains Account Scheme (CGAS). Here, the new flat was bought in the same year as the sale, so there was nothing left to deposit. Section 54(2) never came into play.

2. "Section 139" Doesn't Only Mean Section 139(1)

Even where Section 54(2) applies, the Tribunal said the reference isn't limited to the original due date. It relied on the Rajasthan High Court in PCIT v. Shankar Lal Saini [2018] 89 taxmann.com 235. That case dealt with Sections 54B and 54F and held the same thing. Since it's the jurisdictional High Court for the Jaipur Bench, it carries real weight in Rajasthan.

3. A Section 148 Return Counts as a Return Under Section 139

The DRP's starting point, that no return was filed, was wrong on the record. She did file one, on 18 May 2023. Section 148(1) says the Act applies to a return filed in response to a notice as if it were a return required under Section 139.

The Tribunal also agreed with the Mumbai Bench in Sanjay Gopaldas Bajaj v. ITO [2026] 182 taxmann.com 747. That case, on identical facts, held the exemption can be claimed in a Section 148 return if the substantive conditions are met.

4. The Department Can't Use the Same Investment Both Ways

This is the part we expect practitioners to quote most. The AO had treated the Rs 62,27,500 flat as her investment when proposing the Section 69 addition. The DRP itself recorded that she bought a new property in time and for more than the capital gain.

Having accepted the investment as hers for one purpose, the Revenue couldn't ignore it when she claimed the exemption. The Tribunal observed that refusing the deduction for lack of a return the law doesn't require would let procedure overshadow the substance of the law.

Do the Section 54 Conditions Depend on Filing a Return?

Mostly no. Here's how each condition lines up against the return-filing argument.

Are Other Tribunals Taking the Same View?

Yes. The Jaipur order isn't a one-off. Through 2026, several benches have moved the same way:

• Sanjay Gopaldas Bajaj v. ITO (ITAT Mumbai, 2026): Section 54 can be claimed in a Section 148 return if the substantive conditions are met. The Jaipur Bench relied on it directly.
• Mohd Azam Hasan Sheikh v. ITO (ITAT Mumbai, AY 2017-18, order dated 9 April 2026): A Section 54 claim in a reassessment return couldn't be refused just because no original return was filed. The matter went back to the AO to verify the conditions.
• ITAT Hyderabad (2026, Section 54F): A claim not made in the Section 148 return and raised first before the DRP was sent back to the AO for verification, not rejected outright.

The common thread is clear. Tribunals are treating reinvestment exemptions as real, substantive relief, and a missing original return isn't, by itself, a reason to deny them. What still matters is proof: dates, deeds, and the money trail.

What Should NRIs Take Away From This Ruling?

The exemption can survive a missed return, but several practical points still apply.

The Exemption Survives, but Paperwork Decides the Case

This taxpayer came close to a much bigger tax bill. Without the 1996 purchase deed, the AO treated the whole Rs 16.5 lakh sale price as short-term gain. Without proof of how the new flat was funded, Rs 34.9 lakh sat as unexplained investment.

Both additions fell away only because the documents were finally produced before the DRP. If you're an NRI with property in India, keep the old purchase deed, the sale deed, the new purchase deed, and the bank trail for both sides of the deal somewhere you can actually find them.

Not Filing Still Has a Cost

Winning the exemption isn't the same as getting off free. The challenge to penalty proceedings under Section 271(1)(c) was dismissed as premature, so that question wasn't decided. She also spent more than three years in reassessment, DRP and appeal over a gain that would have been fully exempt from day one. A return filed on time would have avoided all of it.

Claim Early, at the First Chance You Get

She made the claim in her Section 148 return and pressed it before the DRP. That's the strongest position. If you get a reassessment notice for an unreported property sale, put the full capital gains computation and your Section 54 or 54F claim into your response return, with documents. Don't wait for the appeal stage.

TDS Is Usually the Trigger

When an NRI sells property, the buyer deducts TDS on the sale price. That's often far more than the tax actually owed after indexation and Section 54. The only way to get that TDS back is to file a return, so many NRIs who skip filing lose the refund and invite scrutiny too. We cover this in our guide to TDS on sale of property by NRIs.

Does the Section 54 Exemption Still Apply Under the Income-Tax Act, 2025?

Yes, in a new form. The Income-tax Act, 2025 came into force on 1 April 2026. For sales from tax year 2026-27 onwards, the equivalent of Section 54 is Section 82, titled "Profit on sale of property used for residence."

The basic relief carries over: reinvest in a residential house within the time limits, and deposit unused gains in a capital gains account.

The Jaipur ruling interprets the 1961 Act, and no tribunal has yet tested this question under Section 82. Since the structure is the same, we'd expect the reasoning to carry over. Until a ruling confirms it, the safer move for any sale after April 2026 is still to file on time.

Common Mistakes With NRI Property Sales

These are the slip-ups we see most often:

• Assuming no return is needed because the gain was fully reinvested and no tax is payable.
• Losing the original purchase deed, which turns a modest long-term gain into an inflated short-term one.
• Leaving the new flat's funding undocumented, which invites a Section 69 addition on the investment itself.
• Filing the reassessment return without computing capital gains or claiming the exemption, then raising the claim only at appeal.
• Forgetting that TDS deducted by the buyer can only be refunded through a return.

Facing a Reassessment Notice Over a Property Sale?

Our team handles NRI reassessments from start to finish. We review the notice, rebuild the capital gains computation from old deeds, prepare the Section 148 return with the right exemption claim, and represent you before the AO, DRP and Tribunal.

If you've sold property in India and aren't sure your filings are in order, talk to us before the department gets in touch. Explore our Sale of Property in India and NRI & OCI services.

*Disclaimer: This article summarises a Tribunal decision for general information and isn't legal or tax advice. Outcomes depend on individual facts. Please consult a qualified advisor before acting.*