Capital gains tax exemption under Section 54 was recently upheld in a unique case where a woman bought a flat from her own husband. The Mumbai Income Tax Appellate Tribunal (ITAT) ruled in her favour, clarifying that ownership from a spouse does not bar Section 54 relief, provided other conditions are met.
This ruling offers relief to many taxpayers, especially women purchasing property within the family, and clears confusion around capital gains exemption claims involving related parties.
What Was the Case About?
- Assessee: Individual woman taxpayer
- Transaction: She sold a flat and reinvested in another residential flat purchased from her husband
- Assessment Year: 2017–18
- Claim: Exemption under Section 54 for reinvestment in residential property
- AO’s Objection: Denied exemption stating purchase from husband was not a valid transfer
- Tribunal’s Verdict: Exemption allowed
Key Grounds for Allowing Capital Gains Exemption
1. Valid Transfer under Law
The Tribunal noted that:
- Full payment consideration was made via banking channels
- The transaction was genuine and not a sham
Legal Reference: Section 54 of the Income Tax Act, 1961 requires reinvestment in a residential house, but does not restrict purchase from a spouse or related person, as long as the purchase is genuine.
2. No Dual Ownership Conflict
- The husband had sold the flat and relinquished all rights
- The wife became the sole legal owner
- There was no joint ownership or co-ownership after transfer
3. Intent to Reinvest Capital Gains Fulfilled
- The transaction met the “substance over form” test — the real intent was to comply with tax rules
What Section 54 Says (Simplified)
| Condition | Requirement |
|---|---|
| Seller | Individual or HUF |
| Asset Sold | Long-term capital asset (residential property) |
| Exemption | Reinvest in another residential property |
| Timeline | Within 1 year before or 2 years after sale (or 3 years if constructed) |
| Holding | Must not sell new property for 3 years |
Important: Nowhere does the law say you cannot buy the new property from a relative, as long as it’s a genuine transaction.
Expert View: What Taxpayers Should Note
“What matters is substance and legal ownership, not who the seller is. If the transaction is genuine, Section 54 benefit cannot be denied just because it’s a spouse.”
— CA expert from Efiletax panel
This case reinforces that tax authorities must look at the real nature of the transaction, not just the relationship between buyer and seller.
Implications for Taxpayers
- You can claim Section 54 even if the new house is bought from your husband/wife
- Ensure proper documentation: registered deed, bank transaction proof, and possession letter
- Avoid entering into fake or circular transactions just to claim exemption
FAQs on Capital Gains Tax Exemption
Q1. Can I claim capital gains exemption if I buy a house from my father?
Yes, provided the transaction is genuine, legally registered, and not just to evade tax.
Q2. What if the seller is a co-owner in my previous property?
It depends. If the transaction leads to full and separate ownership and is not a colorable device, exemption may be allowed.
Q3. Is exemption under Section 54 available more than once?
Yes, there’s no bar on claiming it multiple times as long as each claim meets the required conditions.
Final Word
This ITAT ruling is a significant clarification for genuine family transactions. If you’re selling your property and planning to reinvest in another — even from your spouse — don’t hesitate to claim your capital gains tax exemption, as long as the deal is real and well-documented.
Need help with filing or defending your Section 54 claim?
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Summary
Mumbai ITAT allows Section 54 capital gains exemption to woman who bought house from her husband. Tribunal held transaction valid, clearing doubts on related-party sales.