The Income Tax Appellate Tribunal (ITAT), Mumbai, on April 17, 2025 held that long term capital gains (LTCG) tax exemption under Section 54 cannot be denied by the income tax department, merely because the property was purchased jointly in the name of a wife and her husband an both of them claimed Section 54 capital gains tax exemption.
The case being referred to here is about a woman who claimed to have purchased a Mumbai property for Rs 36.5 lakh in December 2004, which she sold for Rs 1.9 crore on November 22, 2011. She worked out the calculations after factoring indexation benefits and claimed Rs 1.3 crore as Section 54 Long Term Capital Gains (LTCG) tax exemption for this property sale.
Using the gains from this 2004 property sale, she along with her husband purchased another residential house property in Mumbai costing Rs 2.31 crore in 2010. Out of the Rs 2.31 crore, she herself paid Rs 1.76 crore and her husband paid Rs 55 lakh. For paying this money, her husband sold off another property which he acquired for an undisclosed amount and he too claimed Section 54 LTCG exemption for this same Rs 2.31 crore property as his wife.
The income tax department noted that she filed an ITR in 2012 declaring her annual income to be Rs 5.46 lakh. The tax department also pointed out that both she and her husband claimed Section 54 LTCG exemption for sale of two separate residential properties to purchase one property under their joint name. Hence in light of this difference in opinion of the interpretation of Section 54, a LTCG tax dispute case started between her and the income tax department.
After hearing the facts of the case and analysing what Section 54 allows, the Income Tax Appellate Tribunal (ITAT), Mumbai said that it is evident that benefit under Section 54 cannot be denied merely because the property was purchased jointly in the name of the assessee and her husband. The ITAT Mumbai said in such joint name property cases the capital gains are to be calculated for each owner in accordance with the funding and allocation of shares of the house properties for claiming tax benefits.
Hence in this context, the ITAT, Mumbai allowed the wife’s Rs 1.3 crore Section 54 capital gains tax exemption claim subject to the condition that the AO needs to verify whether double Section 54 deduction has been claimed by the husband wife duo or not.
Read below to understand the legal reason behind why the wife won in this case and how does this judgement impact homeowners in the present scenario where husband and wife purchased a home under joint ownership.
How did this Section 54 capital gains tax exemption case start?
According to the judgement of ITAT, Mumbai dated April 17, 2025, here is a timeline:
- December 3, 2004: A woman purchased a property in Mumbai for Rs 36.5 lakh.
- December 6, 2010: She purchased another property in Andheri (West), Mumbai for Rs 2.31 crore out of which she paid Rs 1.76 crore and her husband paid Rs 55 lakh. The purchase agreement mentioned she and her husband as co-owners of this residential property.
- November 22, 2011: She claimed that she sold off the 2004 bought Mumbai property for Rs 1.9 crore. She worked out the long-term capital gain (LTCG) to be Rs 1.3 crore (1,30,30,729) after reducing the indexed cost of acquisition to be Rs 59 lakh (59,69,271).
- December 20, 2012: The wife filed her income tax return (ITR) for FY 2011-12 (AY 2012-13) with income at Rs 5.46 lakh (5,46,104) and Section 54 capital gains tax exemption for Rs 1.3 crore (1,30,30,729).
- 2013: The income tax department issued her a scrutiny notice under Section 143 (2) and notice under Section 142 (1) as the tax officer noticed both she and her husband claimed Section 54 LTCG exemption separately for buying a new residential property in Andheri West, Mumbai. Further the AO also observed that her husband had sold off some other property and also claimed Section 54 LTCG exemption.
- 2013-2024: She filed an appeal against this order in the National Faceless Appeal Centre and CIT (A) Delhi was chosen by the system. CIT (A) on May 30, 2024 dismissed her appeal on the ground that she had failed to substantiate her case by cogent documentary evidence.
- 2024: She filed an appeal against the order of the CIT (A) in ITAT, Mumbai.
CIT (A) Delhi rejects her Rs 1.3 crore Section 54 LTCG claim as she and husband sold two house properties in total
ITAT Mumbai noted: “The reason for denial of the claim of deduction under Section 54 by the lower authorities (CIT (A) is that the assessee has purchased the old property along with her husband where she has failed to establish that the sale consideration was paid by her and not her husband. Also, there has been a sale of two residential houses by the assessee and her husband and has invested the consideration for purchase of one residential house which the tax department claims to be a violation of the conditions prescribed under Section 54.”
Tax dept says before ITAT: She and her husband violated Section 54 LTCG exemption by claiming it against sale of two residential houses
The income tax department representative said before the ITAT, Mumbai:
- The assessee has violated the conditions of Section 54 where exemption has been claimed against sale of two residential houses one by the assessee (wife) and by her husband where they have invested in a single residential property.
- It is further stated that the assessee has failed to establish that the old property which was sold was purchased by the assessee, where from the sale agreement it is evident that the assessee’s husband’s name is mentioned first as the purchaser.
ITAT Mumbai says: There is nothing to stop a taxpayer from claiming Section 54 LTCG exemption as a co-owner on sale of one or two property
The ITAT Mumbai analysed Section 54 prior to the April 1, 2015 amendment and said:
- It is observed that the capital gains which arises from the transfer of a long term capital asset being buildings or lands appurtenant thereto and the same being a residential house where the assessee has within a period of one year before or two years after the transfer purchased or within a period of 3 years after the date of transfer constructed a residential house is entitled to claim deduction under this provision.
- Upon considering the same, we do not find any embargo for the assessee (wife) to claim deduction under this provision either as a co-owner, or on sale of one or two residential properties or on purchase of a residential property as a co-owner. We do not find any express bar for the assessee to claim the said deduction on a property which has been jointly purchased by the assessee.
- Further, the AO’s (tax department) contention that the old property was purchased jointly by the assessee’s husband and the assessee is to be taken into view only to find out if the assessee’s husband has also claimed deduction under Section 54 pertaining to the sale of this property and purchase of the new residential house.
- If as per the contention of the tax department, the old property belongs to the assessee and the sale consideration received out of the transfer was invested by the assessee in the new property, the assessee is entitled to claim deduction under Section 54 to the extent of her investment in the new residential property.
- The AO (tax department) has also not brought on record any fact to show that the assessee (wife) has sold more than one property and merely because the assessee’s husband has transferred his other property, which detail is not before us, it cannot be said that the assessee has transferred two properties.
- Even otherwise, assuming that the old property which was sold belonged to the assessee’s husband then the assessee’s husband was entitled to claim the entire benefit under Section 54, though the property was purchased jointly.
- In the present case in hand, it is not the case of the revenue that both the assessee and her husband has claimed benefit under Section 54 twice for the entire sale consideration but it is a case where they have claimed proportionately to the extent of investment made by either of them in the purchase of the new property.
- Pertinently, courts have taken a liberal view with regard to the claim of Section 54 and Section 54F which are beneficial provisions that are to be interpreted liberally in favour of the assessee and deduction should not be merely denied on hyper-technical ground.
ITAT Mumbai final judgement
ITAT Mumbai in its final judgement said that Section 54 capital gains tax exemption cannot be denied by the income tax department merely because the property was purchased in joint name.
The ITAT Mumbai’s judge said: “It is evident that benefit under Section 54 cannot be denied merely because the property was purchased jointly in the name of the assessee and her husband, where in case of property held jointly the capital gain shall be calculated for each owner in accordance with the funding and allocation of shares of the house properties for claiming tax benefits. We find justification in allowing ground no. A with the direction that the AO shall verify that there has been no double deduction claimed by the assessee and her husband on the capital gain arising out of the sale of property claimed by the assessee and to allow deduction under Section 54 to the extent of the investment made by the assessee on the purchase of the new property. Ground is hereby allowed.”
S. Sriram, Partner, Lakshmikumaran & Sridharan Attorneys, says: “This judgement is significant as it lays down the principle that exemption under Section 54 can be claimed by the co-owners for their proportion of capital gains by re-investment of their proportion of sale proceeds. In my view, the principle laid down in the judgement should apply even post FY 2014-15 (AY 2015-16) if the facts are similar.”
What is the significance of this ITAT judgement for homeowners?
Vishwas Panijar, Partner, Nangia Andersen LLP, says: “In the instant case, the spouse of the taxpayer had sold a separate property and used the proceeds to jointly invest in the subject residential house along with the taxpayer. The spouse had claimed exemption for his investment under section 54. The judgment is significant as the ITAT chose to promote the purpose of provision and refused to deny benefit to the taxpayer because of minor technical ground (the property sold by the taxpayer had also listed the spouse to also be the owner) and held that capital gains exemption will be available to the taxpayer as long as the exemption is claimed only to the extent of the individual’s investment. The ITAT emphasized that there is no legal bar that prevents an Assessee from claiming deduction and what matters is the source of funds used in the purchase of the new house, not the names listed on property documents or the fact that two properties were sold by different individuals. The ITAT has taken purposive interpretation of the provisions — which is to incentivize reinvestment in residential housing — rather than denying relief on minor technical grounds.”
Panijar added: “The ITAT relied on prior High Court rulings, to reinforce that joint ownership does not disqualify exemption, as long as the investment and the capital gain are correctly matched. Ultimately, her win stemmed from the Tribunal’s view that tax laws must be interpreted fairly and beneficially, especially when the facts and documentary support align with the spirit of the provision.”
Sriram from Lakshmikumaran & Sridharan Attorneys says: “The case deals with interpretation of Section 54 of the Income Tax Act, 1961 as it stood before amendment vide Finance (No.2) Act, 2014 with effect from 1 April 2015. Section 54 provides for a rollover relief on capital gains arising on sale of a residential house. Exemptions are granted is the amount equal to the capital gains is re-invested for purchasing a residential house within 1 year before or within 2 years after the sale of the residential house. In the facts of the case, the assessee (wife) and her husband had purchased a residential house jointly in 2004. The said old residential house was sold on 22 November 2011 and capital gains arising on the said sale were claimed as exempt in view of re-investment of the sale proceeds jointly by the assessee and her husband in new residential house purchased on 06 December 2010.”
Sriram adds: “The Tribunal upon examining Section 54 held that there is no embargo for the assessee to claim deduction under this provision either as a co-owner, or on sale of one or two residential properties or on purchase of a residential property as a co-owner. The Tribunal noted that exemption provisions have to be construed liberally and remanded the matter to AO to verify that no double deduction claimed by the assessee and her husband on the capital gain arising out of the sale of property claimed by the assessee and to allow deduction under Section 54 to the extent of the investment made by the assessee on the purchase of the new property.”
Chartered Accountant (Dr.) Suresh Surana says: “The ruling of the ITAT Mumbai in [TS-435-ITAT-2025(Mum)] is significant for its liberal interpretation of Section 54 of the Income-tax Act, 1961, particularly in cases involving joint ownership and proportional investment in residential property. The Mumbai Tribunal allowed the assessee’s claim for capital gains exemption under Section 54 even though the sale transactions involved two different residential houses – one owned by the assessee and the other by her husband and the investment was made jointly in a single residential property.”
Surana adds: “The ITAT ruled in favour of the assessee, holding that Section 54 being a beneficial provision should not be interpreted rigidly or denied on hyper-technical grounds. The Tribunal noted that there was no allegation of double benefit or misuse of exemption and that both the husband and wife had claimed proportionate exemption based on their respective contributions. The decision reinforces the principle that bona fide claims backed by actual investment should be respected, and procedural or documentary imperfections should not outweigh the substantive compliance with the law.”
Surana says: “This judgment serves as a precedent for taxpayers who face scrutiny for claiming exemption in joint investment scenarios and affirms that proportional exemption can be validly claimed by co-owners, even if the investment is made in a single new property.”
What does Section 54 say about sale of house properties and reinvesting the LTCG prior to April 1, 2015?
Since this case relates to the period before Section 54 was amended, the ITAT Mumbai reposted the old Section 54 LTCG provisions relevant for prior to April 1, 2015 cases:
“54 (1) Subject to the provisions of sub-section (2), where, in the case of an assessee, being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head “income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then instead of the capital gains being charged to income-tax as income of previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section………”
