Gift of Property Share from Husband to Wife Eligible for Capital Gain Exemption, But Clubbing and Capital Gains Rules Apply: Rules ITAT [Read Order]

Kavita Manoj Damani,appellant-assessee, had filed her return declaring income of Rs. 29.6 lakh. The case was selected for scrutiny to examine the capital gains exemption claimed under Section 54. The Assessing Officer (AO) later denied the exemption of Rs. 3.96 crore and added it back to her income.

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The AO found that the assessee had jointly purchased two flats in 2002 with her husband but could not prove that she had made any payment. It was held that her husband was the real owner. In 2017, her husband gifted his share to her, but the AO held that under tax laws, the income from such property would still be clubbed with the husband’s income.

The assessee sold the flats in 2020 for Rs. 5.98 crore and claimed exemption under Section 54 for buying a new property from her husband. The AO rejected the claim, stating that a person cannot buy property from themselves.

The AO also found that the payments made towards the new property were routed through a company where both were directors, and the money returned to the same company on the same day. This was treated as a circular transaction with no real payment made.

It was further noted that the assessee did not invest the capital gains in a new property or a capital gains account before the due date. Instead, the money was used for other purposes like fixed deposits and company investments.

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Based on all this, the AO treated the transaction as a tax avoidance method and disallowed the entire exemption claimed under Section 54.

The assessee, aggrieved by the assessment order, filed an appeal before the Commissioner of Income Tax(Appeals)[CIT(A)]. However, the CIT(A) upheld the AO’s decision and denied the exemption under Section 54 of the Act.

It was held that the flats sold by the assessee were originally purchased in joint name with her husband, but the payments were made by him. So, he was treated as the real owner. The new property was also purchased from the husband, which meant the transaction was between the same person, and exemption could not be claimed.

The CIT(A) also found that the payment for the new property was only a rotation of funds through their company, with no real money exchanged. The capital gains were not invested or deposited as required under the law.

So, the CIT(A) treated the transaction as a tax avoidance arrangement and dismissed the appeal. The assessee then filed an appeal before the tribunal.

The two member bench comprising Amit Shukla (Judicial Member) and Vikram Singh Yadav (Accountant Member) examined the case and noted that the AO had taxed long-term capital gains of ₹4.21 crore from the sale of two flats but denied exemption under Section 54 of ₹3.96 crore.

The flats were sold by the assessee on 9 January 2020. They were originally bought in 2002 and later gifted to her by her husband in 2017. The sale proceeds were received in her bank account and offered to tax.

To claim exemption under Section 54, the assessee purchased another flat from her husband for ₹3.85 crore through a registered agreement dated 18 March 2021. She also paid ₹11.55 lakh as stamp duty. The tribunal noted that the husband’s ownership and the transfer of the flat to the assessee were not disputed.

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The appellate tribunal found that the assessee paid the full purchase amount by 12 March 2021, within the extended deadline allowed under the law. The money used for this payment was initially kept in fixed deposits and with a company, and then paid to her husband after tax deduction.

Since the new flat was purchased within two years from the date of sale of the original flats, the tribunal held that the exemption claim under Section 54 was valid. It directed the AO to allow the exemption.

In short,the appeal was allowed.

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