ITAT Grants Full Section 54 Relief Despite Joint Property Ownership

The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) has provided significant relief to a taxpayer (Jugesh Saluja) who was facing a higher capital gains tax liability after selling a residential property in Chandigarh.

The assessee sold a residential property which was located in Sector 33-A, Chandigarh, for Rs 43,966,173 under Section 50C. The assessee further claimed an indexed cost of acquisition and improvement of Rs 10,341,977 while calculating long-term capital gains. The assessee also claimed a deduction of Rs 21,281,658 under Section 54 for investing in a new residential property in Pune and a deduction of Rs 50 lakh under Section 54EC for investing in specified bonds. The assessee claimed the deductions and offered a taxable long-term capital gain of Rs 7,342,538. During assessment, the AO rejected the claim of Rs 10,341,977 as indexed cost of improvement for want of supporting documents. The AO also restricted the deduction under Section 54 to Rs 8,866,540, as the new Pune property was jointly purchased with the husband of the taxpayer and excluded GST and other charges with respect to the cost of the property. Rs 2.27 crore was, therefore, added to the income of the assessee.

The assessee appealed against the assessment order before CIT(A). But CIT(A) upheld the AO’s order. It agreed that the taxpayer failed to prove the cost of improvement with proper documents and also confirmed that the Section 54 deduction was correctly restricted to 50% since the new property was jointly owned with the husband.

The assessee then challenged the CIT(A)’s order before the Income Tax Appellate Tribunal (ITAT).

The assessee argued before ITAT that the authorities wrongly rejected the claim of the indexed cost of improvement only due to the absence of old bills, even though the property was a constructed house and its existence was accepted by the stamp valuation authority. It was also submitted that details of construction were already provided and the AO should have used valuation methods under Section 55A instead of rejecting the claim outright.

On Section 54, it was argued that the entire investment in the new Pune property was made from the assessee’s own funds, and the deduction should not be reduced merely because the property was jointly held with the husband. The assessee relied on various High Court judgements to support this view.

The DR argued that the taxpayer failed to provide any supporting evidence for the claimed improvement expenses despite multiple opportunities during assessment. It was further submitted that since the new property was jointly owned with the husband, the AO correctly restricted the Section 54 deduction to the assessee’s 50% share.

The Tribunal noted that the assessee had purchased a residential plot in Chandigarh in 1985 for Rs 2,25,000 (Rs 2,49,000 including expenses). After that, the assessee constructed a house and carried out improvements over time – Rs 625,100 in 1986-87, Rs 489,000 in 1996-97, and Rs 650,000 in 2006-07.

Based on these investments, the assessee claimed an indexed cost of acquisition and improvement of Rs 1,03,41,977 while calculating long-term capital gains from the sale of the property.

The Tribunal observed that the property was sold on 14.12.2016 for Rs 43,966,173 (as per Section 50C valuation). The sale deed clearly showed that the property had a built-up area of 3,300 sq. ft.

It also noted that the stamp duty authority had separately valued the construction at Rs 800 per sq. ft, totalling Rs 2,640,000, confirming the existence of a proper residential structure. Therefore, the Tribunal held that the property was a well-built house, and this fact was accepted by both the registration authority and the parties involved.

The Tribunal held that the AO wrongly rejected the entire claim of improvement cost just because old bills were not available. It noted that the sale deed and stamp authority already confirmed the existence of a 3,300 sq. ft. house, proving that construction did exist.

Since the Revenue had not shown any evidence that no construction was done, the Tribunal said the claim could not be fully denied only for lack of old documents.

The Tribunal held that the lower authorities were not correct in rejecting the entire claim of indexed cost of improvement. It observed that in old property cases, it is common that bills and vouchers may not be available after several decades.

Since the record clearly showed a timeline of purchase, construction, and improvements from 1985 to 2006, the claim could not be denied only due to lack of full documents. The facts clearly proved that the property was a developed residential house and not just an empty plot.

The Tribunal directed the AO to recompute the cost of construction and improvement by considering the 3,300 sq. ft. built-up area mentioned in the sale deed and applying relevant PWD rates for the years when construction and improvements were made (1985-86, 1986-87, 1996-97, and 2006-07).

It also instructed the AO to allow indexation benefits as per law while recalculating long-term capital gains. Accordingly, the assessee’s ground was allowed for statistical purposes.

The Tribunal examined the Section 54 issue and noted that after selling the Chandigarh property, the assessee invested the entire sale proceeds in a new residential property in Pune. The payment was made entirely from the assessee’s own bank account, which included the sale proceeds.

Although the Pune property was purchased jointly with the husband, the Tribunal found that the husband had not contributed any funds. Therefore, the deduction under Section 54 could not be restricted only because of joint ownership.

The Tribunal found that payments including one-off premiums, GST, stamp duty, registration fees and other mandatory fees associated with the property are included in the eligible investment for the purposes of Section 54 relief. However, fees for club membership were not included as they are optional and are not linked to the acquisition of the property.

Relying on judicial precedents, the Tribunal allowed full Section 54 exemption to the assessee (except club charges), holding that the source of investment is more important than a joint name in ownership.

In the result, the appeal of the assessee is partly allowed for statistical purposes.