In a landmark ruling dated June 9, 2025, the Income Tax Appellate Tribunal (ITAT) Mumbai ruled in favor of a woman who sold two residential flats in Hiranandani Gardens, Powai, Mumbai, for Rs 5.98 crore in 2020. The properties, initially purchased jointly by her and her husband in 2002 for Rs 51 lakh, were later gifted entirely to her by her husband via a legal gift deed in 2017. The wife claimed a long-term capital gains (LTCG) exemption under Section 54 of the Income Tax Act, having reinvested Rs 3.85 crore of the proceeds into purchasing another flat from her husband, located in Lodha Estrella and originally bought by him in 2015.
The Assessing Officer (AO) denied the exemption, raising six objections, including allegations of circular transactions involving Rs 3.7 crore between the wife, husband, and a company where both served as directors, arguing it was a “colourable device” to evade tax. The AO also invoked clubbing provisions, asserting the capital gains should be taxed in the husband’s hands, as the exemption cannot be claimed for buying one’s own property.
However, the ITAT rejected the AO’s arguments, noting that the sale and reinvestment were genuine, supported by legal agreements, full stamp duty payment, and proper bank records. It emphasized that the transactions fell well within the legally prescribed two-year period for Section 54 exemption. The Tribunal held that the wife had legally acquired ownership through a valid gift deed and later sold the property in her individual capacity, thus qualifying for exemption under Section 54.
The Tribunal also dismissed the AO’s rotation of funds theory, clarifying that earlier transactions and legitimate fund sources were ignored in the AO’s assessment. The judgment highlights that under Section 54, LTCG tax exemption is valid when reinvestment in a residential property is made within two years, even if purchased from a spouse, provided the ownership is legally transferred. Accordingly, the ITAT directed the tax department to allow the claimed exemption of Rs 3.96 crore and ruled that the wife owed no income tax on the LTCG.
Source #ET
