The Mumbai Income Tax Appellate Tribunal (ITAT) has ruled in favor of a taxpayer who claimed ₹6.92 crore exemption under Section 54F after purchasing a residential property from her spouse. According to The Economic Times, the tribunal found no evidence supporting the Income Tax Department's allegation that the transaction was a 'colourable device' to evade taxes. The ruling establishes that genuine property purchases between spouses cannot be denied tax exemption merely because they result in tax savings.
As reported by The Economic Times, Motwani, a resident of Juhu, Mumbai, earned ₹8.31 crore in long-term capital gains after selling unlisted shares during AY 2021-22. In June 2021, she purchased a residential property on Juhu Tara Road, Santacruz (West), Mumbai, from her husband's sole proprietorship HP Trading for ₹7.50 crore and claimed the ₹6.92 crore exemption under Section 54F. The Assessing Officer denied the exemption on December 30, 2022, adding nearly ₹6.92 crore to her taxable income, which was upheld by the Commissioner of Income Tax (Appeals) before the ITAT appeal. The property was purchased for her future security and possible renting out, different from the house she was residing in.
According to The Economic Times, Section 54F of the Income Tax Act, 1961, allows individuals or Hindu Undivided Families to claim exemption from long-term capital gains arising from sale of assets other than residential houses, provided proceeds are invested in residential property in India. The exemption requires purchase within one year before or two years after transfer, or construction within three years. Where only part of net sale consideration is invested, exemption is available proportionately. The main conditions include the asset transferred must be a long-term capital asset, the new residential property must be located in India, and three years after transfer, construction of a residential house in India must commence.
As reported by The Economic Times, the Assessing Officer argued the transaction was a pre-planned arrangement between husband and wife to reduce family tax liability. The department contended that while Motwani claimed exemption under Section 54F, her husband reported around ₹4.85 crore as short-term capital gains and adjusted part against business losses of ₹3.56 crore. However, the ITAT found the department's allegation based largely on suspicion rather than evidence, noting that business losses arose only on March 31, 2022, after the property purchase in June 2021. The tribunal observed that the department failed to dispute the registration of the transaction, payment of stamp duty, payment of actual consideration, valuation of the property, or the taxpayer's source of funds. The subsequent set-off of business loss against short-term capital gains was regarded as arising in the normal course, as the husband had not set off the entire capital gain against his business losses.
According to The Economic Times, Chartered Accountant Suresh Surana noted the taxpayer succeeded because the transaction was genuine, properly documented, and complied with law. He emphasized there is no statutory restriction under Section 54F on buying residential property from family members, and the department failed to prove the transaction was fictitious or merely an accommodation entry. The ITAT relied on decisions in Nidhi Siddharth Kejriwal v. DCIT and Kavita Manoj Damani v. ITO, where exemption under sections 54/54F was allowed in respect of residential properties purchased from relatives or family members. The ruling acknowledged that the McDowell & Co. Ltd. v. CTO case doesn't make every legal transaction that lowers a taxpayer's tax burden unacceptable. The Mumbai ITAT has directed the Assessing Officer to delete the disallowance of approximately ₹6.92 crore and allowed Motwani's Section 54F exemption claim, setting a precedent for spouse property purchases under tax exemption provisions.
