ITAT Mumbai Rules in Favour of Wife Claiming Section 54 Exemption Despite Timing Dispute

By Mayank Garg
LegalMantra.net | October 2025

Introduction

In a recent and significant ruling, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has reaffirmed the liberal interpretation of Section 54 of the Income Tax Act, 1961, granting relief to a taxpayer who sold her residential property and reinvested the sale proceeds in another property jointly owned with her husband.

The case revolves around Mrs. Payal, who sold her old residential property for ?2.85 crore and subsequently purchased a new one for Rs 3.05 crore. Despite having executed the new purchase agreement prior to the sale date, the Tribunal held that the taxpayer was still eligible for long-term capital gains (LTCG) exemption under Section 54, emphasizing the substance-over-form principle and the date of possession over mere date of agreement.

Facts of the Case

• Assessee: Mrs. Payal (Individual)

• Assessment Year: 2012–13

• Sale of Old Property: July 21, 2011

• Sale Consideration: Rs. 2.85 crore (jointly owned with husband)

• Share of Assessee: Rs. 91,33,982 (approx. ?91 lakh)

• Purchase of New Property: Jointly with husband

• Agreement Date: August 28, 2009

• Total Cost of New House: Rs. 3.05 crore

• Claimed Exemption: Rs. 91,33,982 under Section 54 of the Income Tax Act, 1961

Contention of the Assessing Officer

The Assessing Officer (AO) rejected the assessee’s claim for exemption under Section 54 on the following grounds:

1. The purchase agreement for the new house was executed more than one year before the sale of the old property.

2. Almost the entire payment for the new property was made before December 14, 2009, which was beyond the prescribed time limit under Section 54 (one year before the sale date).

3. Consequently, the AO disallowed the exemption of Rs. 91 lakh and computed the total income at Rs. 96,07,966, finalizing the assessment under Section 143(3).

Appeal Before CIT(A)

Mrs. Payal appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], contending that:

• The date of possession and actual acquisition of the new property were relevant, not merely the date of agreement or payment.

• The construction and handover of the property were completed within the statutory period prescribed under Section 54.

However, CIT(A) dismissed her appeal on April 9, 2025, upholding the Assessing Officer’s view.

ITAT Mumbai Ruling (ITA No. 3647/MUM/2025, Order dated 18.08.2025)

Aggrieved by the CIT(A)’s decision, Mrs. Payal appealed to the ITAT Mumbai, which ruled in her favour, holding that:

“What is material for the purpose of Section 54 is the date of possession or acquisition of the property, and not merely the date of the agreement or payment.”

The Tribunal emphasized that the intent of Section 54 is to promote reinvestment in residential property, and therefore a liberal interpretation must be adopted to grant relief where the investment is genuine and within a reasonable time frame.

Accordingly, the ITAT directed the Assessing Officer to accept the deduction claim under Section 54, allowing the LTCG exemption of ?91,33,982.

Key Legal Provisions Involved

Section 54 of the Income Tax Act, 1961

This section provides exemption from long-term capital gains tax when the sale proceeds of a residential property are reinvested in another residential property within:

• 1 year before or 2 years after the date of sale (if purchased), or

• 3 years after the date of sale (if constructed).

The exemption is available to individuals or Hindu Undivided Families (HUFs).

Judicial Precedents Supporting the Ruling

The ITAT’s decision aligns with a series of judgments emphasizing substantial compliance and beneficial interpretation of Section 54:

1. CIT v. Smt. Beena K. Jain (1993) 75 Taxman 145 (Bom.)
   The Bombay High Court held that if the taxpayer has acquired substantial domain over the new property, exemption under Section 54 cannot be denied merely on technical grounds like registration date.

2. CIT v. J.R. Subramanya Bhat (1987) 165 ITR 571 (Karn.)
   The Karnataka High Court observed that the word “purchase” in Section 54 should be interpreted liberally to include an agreement followed by possession.

3. CIT v. Smt. K. Ramachandra Rao (2015) 277 CTR 522 (Karn.)
   It was held that even if the investment in the new property is made before receiving the full sale consideration of the old property, the exemption cannot be denied if the sale and purchase are proximate in time.

4. Balraj v. CIT (2002) 123 Taxman 290 (Del.)
   The Delhi High Court held that possession and control of the new property are determinative, not the date of registration.

ITAT’s Observations

The Tribunal highlighted the following principles:

• Substance over form: The spirit of Section 54 is to encourage reinvestment in housing. Technical lapses like early agreement or partial payment should not deprive genuine taxpayers of relief.

• Possession date matters: Since Mrs. Payal received possession close to the sale date, the transaction falls within the intent and timeframe of Section 54.

• Joint ownership permissible: Purchasing the new property jointly with the husband does not disqualify the exemption claim, as long as the taxpayer’s investment is identifiable.

Outcome

• The ITAT directed the Assessing Officer to allow the Section 54 exemption claimed by Mrs. Payal.

• The addition of ?91 lakh made to her total income was deleted.

• The assessee was thus not liable to pay any capital gains tax on the transaction.

Key Takeaways

1. Possession and actual acquisition are more relevant than the date of agreement or payment for Section 54 exemption.

2. Joint ownership with spouse does not negate eligibility, provided reinvestment is genuine.

3. Courts and Tribunals continue to interpret Section 54 beneficially to further the purpose of housing reinvestment.

4. Taxpayers should maintain documentary evidence of possession, construction completion, and ownership to support their claims.

Conclusion

This ruling by the ITAT Mumbai reinforces a taxpayer-friendly approach under Section 54 of the Income Tax Act, protecting genuine investors from denial of exemption on technicalities. It underscores that the legislative intent is to facilitate reinvestment in housing, not to penalize procedural timing issues.

For taxpayers and practitioners alike, this judgment serves as a valuable precedent confirming that “possession is key”in determining eligibility for capital gains exemption under Section 54.

Reference:
ITAT Mumbai – ITA No. 3647/MUM/2025, Order dated August 18, 2025
Income Tax Act, 1961 – Section 54

Unlock the Potential of Legal Expertise with LegalMantra.net - Your Trusted Legal Consultancy Partner”

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc