Does Section 54F tax exemption apply if LTCG is used to buy property from spouse? Here’s what the ITAT ruling says

A woman who claimed a ₹6.92 crore exemption under Section 54F after purchasing a residential property from her husband has won significant relief from the Income Tax Appellate Tribunal (ITAT). The ruling reiterates that a genuine transaction between spouses cannot be treated as a tax avoidance arrangement merely because it results in a tax benefit.

According to The Economic Times, the Income Tax Department had alleged the transaction was a “colourable device” to evade taxes. However, the Mumbai ITAT found no evidence supporting the allegation and allowed the exemption.

What was the case?

As reported by The Economic Times, Motwani, a resident of Juhu, Mumbai, earned ₹8.31 crore in long-term capital gains (LTCG) 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 for ₹7.50 crore and claimed a ₹6.92 crore exemption under Section 54F.

She told the tax authorities that the property was purchased for her future financial security and could be rented out later.

However, on 30 December 2022, the AO completed the assessment under Section 143(3), read with Section 144B and denied the exemption, adding nearly ₹6.92 crore to her taxable income.

The Commissioner of Income Tax (Appeals) upheld the AO’s order, following which she approached the Mumbai ITAT.

What is Section 54F exemption?

Section 54F of the Income Tax Act, 1961, allows an individual or a Hindu Undivided Family (HUF) to claim exemption from long-term capital gains arising from the sale of any long-term capital asset other than a residential house, provided the proceeds are invested in a residential house in India.

To qualify for the exemption, the taxpayer must purchase a residential house within one year before or two years after the date of transfer, or construct one within three years. Where only part of the net sale consideration is invested, the exemption is available proportionately.

Why did the Income Tax Department object?

According to the report, the Assessing Officer argued that the transaction was a pre-planned arrangement between husband and wife to reduce the family’s overall 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 from the sale of the property and adjusted a part of those gains against business losses of about ₹3.56 crore.

The AO treated the arrangement as a colourable device and denied the Section 54F exemption.

What did the ITAT say?

According to the report, the tribunal found that the department’s allegation was based largely on suspicion rather than evidence.

It noted that the property transaction took place in June 2021, whereas the husband’s business loss arose only on 31 March 2022. Since the business loss did not exist at the time of the property purchase, it could not have been anticipated while entering into the transaction.

The tribunal also noted that the department had not disputed the sale deed, stamp duty payment, actual consideration, valuation of the property or the source of funds. Therefore, it found no evidence that the transaction was sham, fictitious or merely an accommodation entry.

The tribunal further held that the Income Tax Act does not prohibit a taxpayer from purchasing a residential property from a spouse or another family member to claim exemption under Section 54F.

Why did the taxpayer win?

Chartered Accountant Suresh Surana, quoted by The Economic Times, said the taxpayer succeeded because the transaction was genuine, properly documented and complied with the law.

He noted that there is no statutory restriction under Section 54F on buying a residential property from one’s spouse. The Income Tax Department also failed to prove that the transaction was fictitious or merely an accommodation entry.

Accordingly, the Mumbai ITAT directed the Assessing Officer to allow Motwani’s claim for exemption under Section 54F.

Mint has not been able to independently verify the authenticity of the report.

Disclaimer: This is only for informational and educational purposes. Please consult a qualified expert for the latest laws and regulations.