Husband & Wife Allowed Section 54 Exemption for Buying Joint Property from Two Sales
This case brings relief and clarity to taxpayers involved in joint property transactions and challenges the conventional interpretation of Section 54.
What Is Section 54 of the Income Tax Act?
Section 54 provides exemption from long-term capital gains tax when an individual or HUF sells a residential property and reinvests the gains into another residential house property in India.
Key conditions under Section 54:
- Seller must be an individual or HUF
- Sold property must be a long-term capital asset (held > 24 months)
- Gains must be reinvested in 1 residential property in India
- New house must be purchased within 1 year before or 2 years after the sale (or constructed within 3 years)
- Exemption is proportional to the amount invested
Case Overview: ITAT Mumbai, 2024 (Gauri Parulekar & Husband)
- Facts:
- The couple sold two separate flats (owned individually)
- They jointly invested in a new house property
- Also argued that joint purchase doesn’t satisfy the condition of investment by a single assessee
- Ruling:
The ITAT allowed the exemption, stating: “Exemption under Section 54 cannot be denied solely on the ground that more than one property was sold to invest in a single residential property.” It held that substance over form must prevail and that both assessees had separately invested their capital gains in a single residential house, which satisfied the intent of the provision.
Why This Matters: Legal & Practical Implication
Legal Angle:
- This ruling builds upon earlier liberal interpretations by Delhi HC and Madras HC on ‘one or more houses’ and joint ownerships
- ITAT focused on “intention of reinvestment” over technical formalities
Practical Insight:
- Couples owning assets separately can club investments for a new home without fear of exemption denial
Expert View:
“This judgment upholds the spirit of Section 54 – to encourage home reinvestment – not limit it with hyper-technical conditions.”
– CA Vikas Sharma, Capital Gains Advisor
Key Takeaways for Taxpayers
- Section 54 doesn’t restrict the number of sold properties, as long as reinvestment is in one new home
- Investment must be traceable from the sale proceeds to the new asset
Summary
ITAT Mumbai rules in favour of substance over form.
FAQs: Section 54 Capital Gains Exemption
Q1. Can two sold houses qualify for one new house exemption?
Yes, as per ITAT Mumbai, if reinvestment is genuine and proportional.
Q2. Is joint ownership allowed under Section 54?
Yes, if each co-owner invests their respective capital gains.
Q3. What if the new house is in both names but only one sold the old house?
Exemption can still apply, but only to the extent of that individual’s investment.
Final Words
This ITAT ruling is a big win for taxpayers looking to consolidate real estate. For any capital gains planning.