The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has delivered an important ruling on the availability of Section 54F exemption where a residential property is purchased from a spouse. In Neha Karan Motwani v. ITO, the Tribunal rejected the Revenue’s allegation that the transaction was a colourable device designed to avoid tax and held that the assessee was entitled to claim exemption under Section 54F of the Income-tax Act.
The ruling reinforces an important principle of tax law: a genuine transaction cannot be treated as a tax-avoidance arrangement merely because it is entered into between family members, particularly when all statutory conditions for claiming an exemption are satisfied.
The Tribunal accordingly directed deletion of the disallowance of ₹6,91,52,369 made by the Assessing Officer.
Background of the Case
For Assessment Year 2021-22, the assessee filed her return declaring total income of approximately ₹1.93 crore. During the relevant financial year, she earned substantial long-term capital gains from the transfer of unlisted shares, amounting to approximately ₹8.31 crore.
Against the capital gains, the assessee claimed exemption under Section 54F amounting to ₹6.91 crore, on the basis of investment in a residential property.
The property was purchased from HP Trading, a proprietorship concern of the assessee’s husband, for a consideration of ₹7.50 crore. The transaction was supported by a deed of transfer, and the entire consideration was paid through the stated transaction.
The property was situated at Juhu Tara Road, Santacruz (West), Mumbai. According to the assessee, the property was acquired as an investment for her future security and was different from the property in which she was residing.
Why Did the Assessing Officer Deny Section 54F Exemption?
The Assessing Officer questioned the genuineness and purpose of the transaction primarily because the property had been purchased from the assessee’s husband.
The Revenue noted that the husband subsequently reported short-term capital gains of approximately ₹4.85 crore from the sale of the property. He had also set off a portion of those gains against business losses.
Based on these circumstances, the Assessing Officer concluded that the transaction was effectively a family arrangement intended to reduce the overall tax liability.
The Assessing Officer therefore invoked the principle relating to colourable devices, referring to the Supreme Court’s decision in McDowell & Co. Ltd. v. CTO, and denied the assessee’s claim of Section 54F exemption.
The CIT(A) subsequently upheld the disallowance.
Key Issue Before the ITAT
The principal question before the Mumbai ITAT was:
Can exemption under Section 54F be denied merely because the assessee purchased a residential property from her husband, when the transaction is genuine and the statutory conditions of Section 54F are otherwise fulfilled?
The Tribunal answered the question in favour of the assessee.
ITAT’s Important Findings
1. No statutory prohibition on purchasing property from a spouse
The Tribunal noted that there is no prohibition under the Income-tax Act against purchasing a residential property from a relative or spouse.
Therefore, the mere fact that the seller was the assessee’s husband could not, by itself, justify denial of Section 54F exemption.
The Tribunal emphasized that the relevant consideration is whether the transaction is genuine and whether the conditions prescribed by the statute have been fulfilled.
2. Business losses arose much later
One of the most significant observations of the Tribunal concerned the timing of the husband’s business losses.
The property transaction took place in June 2021, whereas the business losses relied upon by the Assessing Officer arose only on 31 March 2022.
Consequently, when the property was transferred to the assessee, those losses had neither accrued nor, according to the Tribunal’s reasoning, could they reasonably have been anticipated.
This substantially weakened the Revenue’s theory that the property transaction had been structured specifically to enable the husband to utilise those subsequent business losses.
The Tribunal therefore found the Revenue’s reasoning insufficient to establish a pre-planned tax-avoidance arrangement.
3. Suspicion cannot replace evidence
The Tribunal observed that the Assessing Officer had not pointed out any specific violation of the statutory conditions prescribed under Section 54F.
The principal basis for rejecting the exemption was the alleged tax benefit arising from the transaction between the spouses.
However, tax authorities cannot deny a statutory deduction merely on suspicion, conjecture or surmise when the underlying transaction is supported by documentary evidence and is otherwise genuine.
The Tribunal found that the transaction had been carried out within the framework of law and could not be characterised as a colourable device merely because the parties were husband and wife.
Reliance on Earlier ITAT Decisions
The Mumbai ITAT also relied upon the principles laid down in earlier decisions dealing with similar transactions.
In Nidhi Siddharth Kejriwal v. DCIT, the Mumbai Bench had accepted a Section 54F claim where the purchase of residential property from a relative was supported by documentary evidence, including registered documents and other relevant records.
The Tribunal also referred to Kavita Manoj Damani v. ITO, where the Mumbai Bench had held that exemption under Section 54 could not be denied merely because the assessee purchased residential property from her husband.
Other judicial precedents were also considered, supporting the proposition that legitimate tax planning within the boundaries of law cannot automatically be equated with tax evasion or an impermissible colourable device.
Tribunal’s Final Decision
After considering the facts and applicable legal principles, the Mumbai ITAT concluded that the assessee had undertaken a genuine transaction and was entitled to the benefit of Section 54F.
The Tribunal accordingly directed the Assessing Officer to delete the disallowance of ₹6,91,52,369.
The appeal filed by the assessee was therefore allowed.
Key Takeaways for Taxpayers
This ruling provides several important lessons for taxpayers claiming capital gains exemptions:
- Purchase of property from a spouse is not prohibited for claiming Section 54 or Section 54F exemption.
- A transaction between relatives cannot automatically be treated as a sham or colourable device.
- The assessee should maintain proper documentation supporting the purchase and payment of consideration.
- The source of investment should be clearly demonstrable.
- Registered agreements, payment records and other documentary evidence can play an important role in establishing genuineness.
- Tax planning carried out within the legal framework is not automatically impermissible.
- Allegations of tax avoidance must be supported by cogent evidence, rather than merely by the existence of a tax benefit.
- Most importantly, the statutory conditions of Section 54F must independently be satisfied.
Conclusion
The decision in Neha Karan Motwani v. ITO is significant for taxpayers undertaking genuine property transactions within a family. The Mumbai ITAT has made it clear that the relationship between the buyer and seller, by itself, cannot be the basis for denying a statutory capital gains exemption.
Where a residential property is genuinely purchased, consideration is actually paid, the transaction is properly documented and the statutory requirements of Section 54F are fulfilled, the exemption cannot ordinarily be denied merely because the property was purchased from a spouse.
The ruling also highlights the importance of distinguishing legitimate tax planning from artificial or sham arrangements. A transaction does not become a colourable device simply because it produces a legitimate tax consequence.
For taxpayers and tax professionals, the decision provides useful guidance on how Section 54F claims involving related parties should be examined and defended during assessment and appellate proceedings.