In a landmark ruling, the Income Tax Appellate Tribunal, Mumbai has allowed a taxpayer to claim zero tax on long-term capital gains after selling two Mumbai flats worth ₹6 crore—originally gifted by her husband. The exemption was denied by the tax authority citing intra-family transaction and clubbing provisions. However, the tribunal ruled that proper gift documentation, ownership transfer, and timely reinvestment into a residential property (even if purchased from her spouse) met all criteria under Section 54, making the exemption legally valid.
The Case: Why No Tax Was Levied
Kavita Damani’s claim for exemption under Section 54 of the Income Tax Act, 1961 was challenged by the assessing officer, who alleged that the series of transactions—including the purchase of a new flat from her husband—was a colourable device to evade taxes.
However, ITAT ruled in her favour, noting:
The flat sold was in her individual ownership, after her husband gifted his share through a registered gift deed in 2017.
She was receiving rental income from the property post-gift and sold it in her own capacity.
The sale proceeds were deposited into her own bank account, and the capital gains were declared and taxed in her name.
She then purchased a new residential property from her husband through a properly documented sale agreement, including TDS deduction and stamp duty, satisfying the exemption conditions under Section 54.
What the Law Says
Under Section 54, if a person sells a long-term residential property and reinvests in another home within the stipulated timeline (1 year before or 2 years after sale), they are eligible for exemption on capital gains tax.
Key point:
There is no bar on purchasing the new property from a relative, including a spouse, as long as the transaction is genuine and duly documented.
An tax expert explains:
Kavita Damani won the case before the Income Tax Appellate Tribunal (ITAT), Mumbai, because she fulfilled the legal conditions required to claim exemption from capital gains tax under section 54 of the Income Tax Act . Section 54 clearly defines that if an individual or HUF sells a residential property and invest in another residential property , exemption can be claimed under Section 54 of the Income Tax Act, 1961 within a particular time:
Purchase within 1 year before or 2 years after the sale, or Construct a house within 3 years after the sale. If the gains are not utilized before filing the return, the amount must be deposited in a Capital Gains Account Scheme (CGAS).
In this particular case, the tribunal found no basis in the Revenue’s claim that the transaction was a tax avoidance device.
He further explains Why her claim was upheld:
She was the legal and beneficial owner of the property sold. The flat was originally in joint name with her husband, but he gifted his share to her in 2017 via a registered gift deed. Since then, she received the rental income and sold the property in her individual capacity, receiving the entire sale proceeds in her bank account. The capital gains were assessed in her hands, and hence she was eligible to claim exemption under Section 54.
The new flat was purchased from her husband via a registered agreement dated 18 March 2021 for ₹3.85 crore. Although the husband was the seller, Section 54 does not bar purchases from relatives, and the transaction was genuine, with proper TDS deduction and stamp duty payment. The consideration was paid by 12 March 2021, well before the extended deadline under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA).
The Assessing Officer alleged that there was just rotation of funds between the assessee, her husband, and their private company. But the ITAT found that the sale consideration was actually paid, and the timing and flow of funds were explained, showing no intent to evade taxes.
Transaction Structuring Best Practices
Another tax expert advises:
Undertake gift and sale transactions in separate financial years to maintain transactional hygiene.
Always register gift deeds to affirm legal sanctity—even if not mandatory.
Income (e.g., rent) from gifted property must be taxed in the hands of the donee after transfer.
Keep a significant time gap between the gift and sale to avoid being deemed a tax avoidance arrangement.
Maintain detailed documentation of fund flows for all transactions.
Joint Ownership Dos and Don’ts
In cases of joint ownership, ensure that:
Each person pays for their share from their independent income source, with clear bank statement proof.
Ownership stakes are economically genuine, not merely for formality.
These practices help establish clear beneficiary ownership and support exemption claims.
Section 54 Exemption Conditions
He outlines:
The old property must be a long-term residential asset.
The sale proceeds must be reinvested in a new residential property within 2 years.
Buying from a relative—including a spouse—is permissible if the transaction is genuine and properly documented.
Unused gains at filing date must be deposited into a Capital Gains Account Scheme (CGAS).
Expert Checklist: How to Ensure a Clean, Tax-Exempt Real Estate Transaction
Register gift deeds – Confirms legal ownership and avoids future disputes.
Time gift and sale in separate financial years – Prevents tax authorities from questioning the intent.
Invest capital gains within the Section 54 timeline – Buy another property within 2 years or construct within 3 years.
Maintain complete bank statements and transaction records – Proves genuine fund movement and ownership.
In joint ownership, pay from individual sources – Use separate bank accounts to establish economic ownership.
Use CGAS (Capital Gains Account Scheme) if reinvestment isn’t immediate – Keeps exemption claim valid even if property purchase is delayed.
Document rental income shift post-gift – Helps reinforce the done as the real income owner.
Avoid parking funds temporarily just to rotate them – Use them meaningfully to show genuine reinvestment.
While gifting properties within families is not uncommon, this case highlights how timing, paperwork, and legal intent make all the difference. For taxpayers engaging in high-value property deals with relatives, this judgment serves as a crucial blueprint to ensure exemptions are upheld and tax liabilities avoided.
