Sold your house and built another on land owned by your wife? ITAT ruling clarifies the tax treatment
A taxpayer who sold an inherited house and constructed a new one on a plot registered in his wife’s name has received partial relief on his capital gains tax claim.
The Chennai Income Tax Appellate Tribunal (ITAT) held that the taxpayer could not be denied the entire Section 54 exemption merely because the underlying plot had been bought earlier in his wife’s name. However, the cost of the plot itself was not eligible because it fell outside the prescribed purchase window.
The ruling is relevant for taxpayers who sell a residential property and use the proceeds to construct another house, particularly where the new property involves a spouse’s name or a plot bought before the sale of the old property.
ITAT allows ₹63 lakh of Section 54 claim
The case involved Dhanasekaran Palani, who along with his brother sold an inherited residential property for ₹1.46 crore. Palani’s 50% share was ₹72.91 lakh, and he calculated long-term capital gains of about ₹66.48 lakh.
He claimed Section 54 relief after constructing a residential house on a vacant plot costing ₹12.38 lakh. The plot, however, had been purchased in his wife’s name on 19 July 2013, around 17 months before the sale of the inherited property.
The assessing officer rejected the Section 54 claim in full, citing both the timing of the plot purchase and the fact that the land was registered in the wife’s name.
The taxpayer argued that the residential house itself had subsequently been constructed within the three-year period permitted under Section 54. He also produced a registered civil engineer’s valuation report separating the value of the land from the construction.
The ITAT accepted this distinction.
The tribunal found that the completed property was valued at ₹75.42 lakh. After excluding the ₹12.38 lakh land cost, it determined that the construction component was ₹63.04 lakh and allowed Section 54 deduction to that extent.
Why the timing of the plot mattered
Section 54 provides tax relief on long-term capital gains arising from the sale of a residential house when the taxpayer purchases or constructs another residential house within specified timelines.
For a purchase, the relevant window is generally one year before or two years after the sale. For construction, the house has to be constructed within three years after the sale.
In this case, the tribunal distinguished between the land and the house constructed on it.
The land had been purchased around 17 months before the original property was sold, putting it outside the one-year pre-sale window. The tribunal therefore did not allow the land cost.
But the house was constructed and completed within the three-year construction period. The tribunal held that this construction expenditure could still qualify.
The bench observed that once the taxpayer had constructed the residential house within the statutory period and the construction cost could be separately identified, the entire claim could not be rejected simply because the plot had been acquired earlier and stood in the wife’s name.
What property sellers should know
The ruling does not mean that any house constructed on a spouse’s plot will automatically qualify for Section 54.
The Chennai ITAT’s relief was based on the specific facts that the construction was completed within the prescribed period and the construction component could be separately established through valuation.
For taxpayers planning to use capital gains to construct a new home, the case highlights the importance of keeping a clear record of when the land was purchased, when construction began, when the house was completed and how much was actually spent on construction.
It also shows why the ownership structure should not be looked at in isolation. In this case, the tribunal did not allow the entire claim to fail merely because the plot was in the wife’s name. Instead, it separated the earlier land purchase from the qualifying construction expenditure.
