Woman Sells Two Gifted Flats Worth Rs. 6 Crore and Pays No Tax on Capital Gain of Rs. 4.21 Crore [Read ITAT Order]

Do you have questions regarding family property transfers and long-term capital gain (LTCG) taxation? Then this case may help you clear your question. A woman managed to win a case in Mumbai ITAT, where the court ruled that she is not liable to pay any tax on her profit earned by selling two flats worth Rs 6 crore that were gifted by her husband. These properties were initially bought in 2002 for Rs 34 lakh and sold in 2020 for Rs 6 crore.

A woman, jointly with her husband, bought two adjacent flats in Powai, Mumbai; each was the owner of 50% shares of each flat. Later, her husband gifted his 50% share in these flats to his wife in April 2017 via a registered gift deed, and thereafter, the woman became the full legal owner of the Powai flats. Later, women sold both of these Powai flats for Rs. 5.98 crore in January 2020 and earned a total long-term capital gain of Rs. 4.21 crore. Then she bought another flat in Lodha Estella, Mumbai, worth Rs. 3.85 crore that was registered in her husband’s name under Section 54 of the Income Tax Act. Further, the woman paid Rs. 11.55 lakh in stamp duty, making the total investment for exemption Rs. 3.96 crore.

However, when she went to file ITR to claim this exemption of Rs. 3.96 crore under Section 54, the Income Tax Department rejected her claim, arguing that firstly, the initial Powai property was not really owned by the woman; she was just a nominal owner. Therefore, according to Section 64, the capital gains from the Powai flats should be taxed in the hands of her husband, not her. Secondly, the purchase of the Lodha flat from her husband was not a real transaction. He thought it was just a technique to avoid paying tax and not an honest purchase.

In conclusion, the department added Rs. 3.96 crore back to her taxable income. Then the woman approached the Commissioner of Income Tax (CIT – Appeals); they further rejected her appeal and supported the decision of the tax department. The woman was still dissatisfied with their decision, hence further approached the Mumbai Income Tax Appellate Tribunal (ITAT). The court examined the entire case and ruled in favour of the woman, saying the gift from her husband was valid under income tax law; moreover, all the rent income from these flats was being declared and taxed in her name. The sale proceeds of Rs. 5.98 crore were credited to her bank account. She filed her ITR correctly, showing this income. Hence, the woman was declared legally eligible to claim a tax exemption on her capital gain.

This judgment indicates that the Section 54 exemption is still valid if the reinvestment is done in property of a relative, such as a spouse, as long as the transaction is genuine, properly documented, and the payment is made through legal means.

The relationship between the buyer and seller does not impact the eligibility for exemption, as long as all legal and tax requirements are properly followed. Although stamp duty must be paid on the purchase, it can be added to the cost of acquisition when calculating the amount invested under Section 54. However, the seller will be liable to pay capital gains tax if there is a profit from the sale, unless he claims an exemption by reinvesting the proceeds as permitted under the Income Tax Act.

Refer to the official judgment for complete information.