Taxman Challenges Section 54F Exemption as ITAT Mumbai Grants Relief to Woman After Share Sale and Property Purchase
A woman who used her long-term capital gains to purchase a property from her husband has faced scrutiny from the Income Tax Department. The department issued a notice after deeming the transaction a potential tax avoidance scheme. The case has raised questions about the legitimacy of such family transactions in the context of tax regulations.
Case Background
The woman reported long-term capital gains of Rs 8.31 crore after selling unlisted shares. In June 2021, she invested Rs 6.91 crore in a residential property located on Juhu Tara Road, Mumbai, claiming an exemption under Section 54F of the Income Tax Act. However, the property was owned by her husband and purchased through his sole proprietorship, HP Trading. She stated that the property was intended as an investment for future security and not for her residence, as she continues to live in her husband’s parental home.
The Income Tax Department completed its assessment on December 30, 2022, denying the Section 54F exemption on approximately Rs 6.92 crore and adding that amount to her total income. The Assessing Officer argued that the transaction was linked to her husband’s short-term capital gains of Rs 4.85 crore, which he offset against business losses. The department viewed the transactions as a coordinated effort to reduce the family’s tax liability.
Understanding Section 54F
Section 54F of the Income Tax Act provides an exemption from long-term capital gains for individuals when the gains arise from the transfer of a capital asset other than a residential house. To qualify for this exemption, the proceeds must be invested in a new residential property within specified timeframes. The new property must be located in India, and the exemption does not apply if the reinvestment is made in two residential properties.
Tribunal’s Ruling
The Mumbai bench of the Income Tax Appellate Tribunal ruled in favor of the woman on July 17, 2026. The tribunal found that the Income Tax Department failed to prove that the transaction was not genuine or was prearranged to avoid tax. The documentation for the purchase was complete, and the payment for the property was verified. The tribunal noted that the business loss reported by her husband occurred months after the property purchase, undermining the department’s argument that the two transactions were planned together.
The tribunal also clarified that there is no statutory prohibition against purchasing a residential property from a spouse while claiming the Section 54F exemption, provided all other conditions are met. The ITAT ultimately allowed the woman’s claim for the exemption, dismissing the department’s disallowance of approximately Rs 6.92 crore.
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