In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Mumbai has allowed a woman to claim complete tax exemption on long-term capital gains (LTCG) of over ₹4 crore from the sale of two residential flats, after she reinvested the sale proceeds to buy another property from her husband. Despite serious objections raised by the Income Tax Assessing Officer (AO), the Tribunal upheld her claim under Section 54 of the Income Tax Act, 1961.
Two Flats Gifted, Sold for ₹6 Crore
The dispute arose after the assessee, a woman taxpayer, sold two residential flats in Mumbai’s Hiranandani Gardens for ₹5.98 crore in January 2020. These flats were originally bought in 2002 for ₹34.51 lakh and ₹17.40 lakh. In April 2017, her husband had executed a registered gift deed transferring his 50% share in the properties to her, making her the sole owner.
Following the sale, she calculated long-term capital gains of ₹4.21 crore after applying indexation and claimed exemption under Section 54 by purchasing another flat from her husband for ₹3.85 crore in March 2021.
Assessing Officer’s Allegations: Colourable Device and Rotation of Funds
The AO denied the exemption on multiple grounds:
- The property was bought from her own husband, making it ineligible for Section 54 relief.
- The husband was the “deemed owner” of the sold properties, and hence, the gains should have been taxed in his hands.
- The purchase was allegedly a sham transaction, involving “rotation of money” between the couple and a private company where both were directors.
The AO pointed to specific transactions on March 12, 2021, where ₹70 lakh and ₹3 crore moved between the couple and their company within a single day, suggesting there was no real transfer of money or ownership.
Calling it a “colourable device”, the AO asserted that these were circular transactions intended solely to evade tax and that there was no genuine reinvestment.
ITAT’s Findings: Transaction Genuine, Exemption Valid
The ITAT bench, after analysing the evidence and financial records, disagreed with the AO’s conclusions. It observed:
“The sale of flats was executed by the assessee in her individual capacity and the consideration was received in her own bank account. The same has been duly offered to tax.”
Regarding the reinvestment in the new house from her husband, the Tribunal held:
“The agreement to sell was registered, stamp duty was paid, and consideration was discharged through banking channels. The transaction was genuine and falls within the two-year time limit prescribed under Section 54.”
On the alleged rotation of funds, the Tribunal stated that the AO selectively looked only at one date (March 12, 2021) and failed to consider prior transactions where the funds were originally placed in fixed deposits or with the company and then withdrawn for reinvestment. The ITAT ruled:
“The purchase was made within the stipulated two-year period after the sale of the original asset. Thus, the exemption under Section 54 cannot be denied.”
The Tribunal concluded:
“In light of the aforesaid discussion, the AO is hereby directed to allow the exemption claimed by the assessee under Section 54 of the Act.”
How Section 54 LTCG Exemption Works
Under Section 54, a taxpayer can claim exemption on long-term capital gains from sale of a residential property by investing in another residential property in India within:
- 1 year before or 2 years after the sale, or
- within 3 years if constructing a new house
Only one residential property is eligible unless the gain is up to ₹2 crore, in which case two properties can be purchased (once in a lifetime). If the new house is sold within 3 years, the exemption is withdrawn.
