A Mumbai woman successfully avoided paying income tax after selling two residential properties worth ₹6 crore, and the Income Tax Appellate Tribunal (ITAT) Mumbai ruled in her favor.
The case became significant because she claimed Section 54 Long-Term Capital Gains (LTCG) exemption after reinvesting the sale proceeds into another residential property owned by her husband — a transaction initially challenged by the Income Tax Department.
Here’s how the case unfolded and why the tribunal ruled the transaction completely legal.
Case Summary
- Two flats were originally purchased in 2002 for ₹34 lakh and ₹17 lakh.
- The properties were later gifted by the husband to his wife through a legal gift deed.
- In 2020, the wife sold both flats for approximately ₹6 crore.
- After indexation benefits, the long-term capital gain (LTCG) was calculated at just over ₹4 crore.
- She reinvested the proceeds into another residential property owned by her husband and claimed Section 54 exemption.
As a result, she paid no income tax on the capital gains.
Why the Income Tax Department Objected
The Assessing Officer (AO) raised several objections.
1. Clubbing Provision Argument
The AO argued that since the husband was the deemed owner earlier, the capital gains should be treated as the husband’s income. According to the officer, exemption under Section 54 could not be claimed by purchasing one’s own property.
2. Rotation of Funds Allegation
The AO examined bank transactions and observed:
- ₹70 lakh was transferred between company accounts, wife, and husband on the same day.
- A similar rotation occurred for ₹3 crore.
- The officer claimed these were circular transactions designed to evade tax and that no real ownership change occurred.
ITAT Mumbai’s Decision
The Income Tax Appellate Tribunal rejected the objections raised by the Assessing Officer.
The tribunal confirmed that:
- The wife legally owned the properties through a valid gift deed.
- Sale agreements and purchase documents were properly executed.
- Consideration was received in her bank account.
- Stamp duty was fully paid.
- Ownership title transfer was genuine.
Therefore, her Section 54 exemption claim was valid, and no tax was payable on the capital gains.
Tribunal’s Observation on Fund Rotation
The ITAT noted that the AO focused only on transactions dated March 12, 2021 and ignored earlier transactions.
The tribunal observed that:
- Funds were initially parked in fixed deposits and company accounts.
- The money was later used to pay the husband for purchasing the property.
- The reinvestment fell within the legally allowed time period.
Since the purchase occurred within two years after the sale, the exemption conditions under Section 54 were satisfied.
Timeline of Events
| Date | Event |
|---|---|
| March 14, 2002 | Two flats purchased in Hiranandani Gardens, Powai |
| March 27, 2015 | Husband bought Lodha Estrella property |
| April 1, 2017 | Husband gifted his share via registered gift deed |
| January 9, 2020 | Wife sold both flats for ₹5.98 crore |
| March 18, 2021 | Wife purchased husband’s Lodha property using sale proceeds |
| June 9, 2025 | ITAT Mumbai judgment issued |
How Section 54 LTCG Exemption Works
According to Chartered Accountant Suresh Surana:
Section 54 allows individuals to claim tax exemption on long-term capital gains arising from the sale of a residential property if the gains are reinvested into another residential property in India.
Time Limits
- Purchase: 1 year before or 2 years after sale
- Construction: Within 3 years after sale
Special Provision
If capital gains are up to ₹2 crore, a taxpayer may use a one-time lifetime option to invest in two residential houses.
Lock-In Period
The new property must not be sold within 3 years. Otherwise, the exemption benefit will be withdrawn.
Exemption Calculation Rule
The exemption amount is the lower of:
- Capital gains arising from the sale, or
- Amount invested in the new residential property (including deposits under CGAS)
Investment Cap
Investment considered for exemption is capped at ₹10 crore under current rules.
Final Judgment
The ITAT directed the Assessing Officer to allow the exemption claimed under Section 54, confirming that the taxpayer was not liable to pay income tax on the ₹4 crore capital gains.
Key Takeaway
This case demonstrates that Section 54 exemptions remain valid when:
- Property ownership transfers are legally documented
- Transactions are genuine
- Reinvestment timelines are followed
- Proper stamp duty and legal procedures are completed
Even complex family transactions can qualify for tax exemption when executed within the framework of the Income Tax Act.