What if you use your proceeds from long-term capital gains to buy a property owned by your spouse? Is that tax avoidance? In one such case a woman bought her husband’s property from her long-term capital gains and the Income Tax Department served her a notice.The department did not accept the transaction at face value. The Assessing Officer treated the arrangement as a colourable device intended to reduce the family’s tax liability.
What the case is about
When a woman sold her unlisted shares, she reported long-term capital gains of Rs 8.31 crore. In June 2021, she put Rs 6.91 crore into a residential property on Juhu Tara Road, Mumbai, and claimed exemption under Section 54F.There was, however, one detail that caught the attention of the Income Tax Department. The property belonged to her husband, and the purchase was made through his sole proprietorship, HP Trading.The woman told the tax authorities that the property was bought as an investment for future security and could also be rented out. It was not meant to be her residence. She continues to live on her husband’s parental property.The department’s assessment was completed on December 30, 2022, under Section 143(3) read with Section 144B. The Section 54F exemption on around Rs 6.92 crore was denied and the amount was added to the woman’s total income.The AO’s reasoning was also linked to the tax treatment in her husband’s hands. He had earned short-term capital gains of about Rs 4.85 crore from the transaction and subsequently set off around Rs 3.56 crore against business losses. According to the AO, the two transactions were connected and had effectively helped the family avoid tax.When the dispute reached the Mumbai bench of the Income Tax Appellate Tribunal, it ruled in the woman’s favour on July 17, 2026.
What is Section 54F?
First let’s understand the section under which the woman claimed the exemption.Section 86 of the Income Tax Act, 2025 corresponds to Section 54F of the Income Tax Act, 1961. It provides an exemption from long-term capital gains for an individual or HUF when the gains arise from the transfer of a capital asset other than a residential house and the prescribed amount is invested in a new residential property, subject to the conditions in the law.For the exemption to apply, the asset sold has to be a long-term capital asset other than a residential house. The new house has to be in India.The purchase can be made within one year before the transfer of the original asset or within two years after it. Where the taxpayer constructs the property, the construction has to be completed within three years.Section 54F does not provide the benefit where the reinvestment is made in two residential properties.
Why the woman won the case
The central issue was not simply that the property had been bought from her husband. The department had to establish that the transaction itself was not genuine or had been arranged in advance as a device for avoiding tax.The tribunal did not find any such evidence.The documents supporting the purchase were in place, the consideration had been paid and the property transaction itself was not disputed. The subsequent business loss in the husband’s hands arose months after the purchase, which weakened the argument that the two events had been planned together from the outset.The tribunal also found no statutory bar on purchasing a residential property from a spouse and claiming the Section 54F exemption, provided the other conditions of the provision were met.On these facts, the ITAT deleted the disallowance of approximately Rs 6.92 crore and allowed Motwani’s Section 54F claim.Chartered accountant Suresh Surana told ET that the woman had sold unlisted or unquoted equity shares in AY 2021-22 and earned LTCG of around Rs 8.31 crore.She subsequently invested Rs 7.50 crore in a residential property purchased from HP Trading, the sole proprietorship of her husband. The Section 54F exemption claimed on the investment was approximately Rs 6.92 crore.The purchase was not an undocumented arrangement. There was a registered transfer deed, stamp duty had been paid and the consideration for the property was paid. The woman also explained the source of the money used for the purchase.The property itself was separate from the house where she lived. Her explanation was that it was being acquired as an investment and for future security, with the possibility of renting it out.Her husband had reported short-term capital gains of about Rs 4.85 crore from the sale. He subsequently adjusted approximately Rs 3.56 crore against business losses.For the tax department, this was significant. The AO viewed the transactions between the husband and wife as a family arrangement involving rotation of funds. The woman could claim the Section 54F exemption on the property purchase, while her husband could reduce the taxable capital gain by using business losses.The tribunal found a problem with the department’s chronology.The property had been transferred in June 2021. The business loss relied upon by the department arose only on March 31, 2022. In other words, the loss had not arisen when the property transaction took place and, on the facts before the tribunal, could not reasonably have been anticipated at that point.That left the question of whether buying a property from a spouse, by itself, could prevent a taxpayer from claiming Section 54F.The ITAT held that the Income-tax Act does not impose such a restriction.Surana explained the point this way: “A genuine transaction cannot be disregarded merely because it takes place between related parties or results in a tax benefit. Legitimate tax planning carried out within the framework of law cannot, by itself, be treated as tax evasion or a colourable device.”
