Can Joint Ownership of Residential House Disqualify Section 54F Claim? Case Analysis of ITAT Delhi Ruling

The Section 54F of the Income Tax Act, 1961, provides exemption from long-term capital gains ( LTCG ) if the proceeds from the sale of a long-term capital asset (other than a residential house) are invested in purchasing or constructing a new residential house.

However, the benefit is conditional, particularly, the assessee must not own more than one residential house (other than the new one) on the date of transfer.

The issue comes up is that ‘Does joint ownership of a residential property amount to “owning” a house for the purposes of Section 54F?’ The answer is ‘NO’.

Joint ownership of a residential property does not automatically disqualify a claim under Section 54F, as clarified in the recent ITAT Delhi Bench ruling.

Section 54F

Section 54F of the Income Tax Act, 1961, allows exemption from long-term capital gains tax if net consideration from the sale of a capital asset (other than a residential house) is invested in purchasing or constructing a new residential house, subject to the assessee not owning more than one residential house other than the new one, on the date of transfer.

Does Joint Ownership Constitute “Owning” a House?

A central issue in this case was whether joint ownership of properties would count as “owning” for the purposes of Section 54F. The Assessing Officer asserted that assessee was not eligible for 54F exemption, stating his holding in multiple residential properties, several of which were jointly owned.

The assessee argued that the ownership records relied on by the AO did not reflect the actual position due to a family settlement dated 05.04.2019. The settlement redistributed residential and commercial properties among family members.

The ITAT stressed that the important test was absolute ownership, referencing judicial precedents that interpreted “owning” as “owning wholly” and not fractional or joint ownership. Thus, after reviewing the family settlement, the tribunal observed that the assessee did not hold absolute ownership of any residential property.

‘Own’ of Section 54F Clarified

According to the rulings of the ITAT in multiple rulings including Rasiklal N. Satra v. CIT and Ashok G. Chauhan v. ACIT, it was clearly clarified that “the word 'own' appearing in section 54F of the Act includes only such residential house which is fully and wholly owned by one person and not a residential house owned by more than one person.”

The legislation itself clarified that if a person owns a second residential house, which is shared by his family or any other, cannot be considered as fully owned by him. It cannot be used as a reason for denying the exemption under Section 54F.

According to the tribunal, shared interest in the property does not amount to ownership of the property. The words "residential house" are preceded by the word "a" in the legislative. The tribunal stated that it would not cover a shared interest in a residential property and that it must refer to a complete residential dwelling.

When multiple people own a piece of property, it cannot be claimed that any one of them is the owner. No single person can sell the entire property in such a situation. He is certainly free to sell his portion of the property, but in the eyes of the law, the co-owners would still own it. Absolute ownership is not the same as joint ownership.

According to the tribunal, “After the judgment of Hon'ble Supreme Court in the case of Seth Benersi Dass Gupta (supra), the legislature could also amend the provisions of Section 54F so as to include part ownership. Since, the legislature has consciously not amended the provisions of section 54F, it has to be held that the word "own" in Section 54-F would include only the case where a residential house is fully and wholly owned by the assessee and consequently would not include a residential house owned by more than one person.”

Decision of the Tribunal

The ITAT upheld the CIT(A)’s order allowing exemption under Section 54F. It clarified that joint ownership of a property does not amount to full ownership, and therefore does not bar a taxpayer from availing the benefit of Section 54F.

Loophole of the Income Tax Act

It is much simpler to understand taxes before investing in real estate when one has a solid understanding of the Income Tax Act or the advice of a qualified chartered accountant. An individual who does not "own" more than one residential property on the transfer date is excluded under Section 54F.

But the legislation says nothing about what co-ownership means. Many taxpayers continue to claim the exemption by registering homes jointly with family members or close acquaintances, taking advantage of this legislative gap. Large investors and other real estate stakeholders profit from it, while the exchequer may lose money as a result.

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