The Mumbai Income Tax Appellate Tribunal (ITAT) has delivered a significant judgment that clarifies the scope of Section 54 exemptions in property transactions between married couples, establishing that genuine transactions between spouses can qualify for capital gains tax relief regardless of the familial relationship.

 

The case centered around Kavita Damani, who sought to claim Section 54 exemption after purchasing property from her husband using proceeds from a property sale. The dispute arose when tax authorities questioned the authenticity of the transaction due to the spousal relationship involved.

 

Background of the Property Transactions

The sequence of events began in March 2002 when Kavita and her husband Manoj Damani jointly acquired two adjacent apartments in Mumbai's Powai area. Fifteen years later, in April 2017, Manoj transferred his 50% ownership stake to Kavita through a gift deed, making her the sole proprietor of both properties.

 

In January 2020, Kavita sold these Powai apartments for Rs5.98 crore, generating substantial long-term capital gains of Rs4.21 crore. To minimize her tax liability, she purchased another residential property - a flat in Lodha Estella - from her husband in March 2021 for Rs3.85 crore, additionally paying Rs11.55 lakh in stamp duty fees.

 

The Tax Dispute Unfolds

The trouble began when the Assessing Officer (AO) rejected Kavita's claim for Section 54 exemption worth Rs3.96 crore. The tax authority's primary objection centered on two concerns: first, that the reinvestment transaction lacked genuineness due to the spousal relationship, and second, that Kavita's original contribution to the Powai properties couldn't be established, suggesting her ownership was merely nominal.

 

The AO argued that since Kavita's actual financial contribution to the original 2002 property purchase remained unclear, the capital gains should be taxed in her husband's hands under the income clubbing provisions of Section 64. Consequently, the entire Rs3.96 crore was added to Kavita's taxable income.

 

When Kavita appealed to the Commissioner of Income Tax (Appeals), the original decision was upheld, prompting her to approach the ITAT for final resolution.

 

ITAT's Comprehensive Analysis

The tribunal conducted a thorough review of the case documents and reached several crucial conclusions that favored Kavita's position.

 

Regarding ownership legitimacy, the ITAT determined that regardless of the unclear payment details from the original 2002 purchase, Kavita had become the rightful owner of the Powai properties through the 2017 gift deed. The tribunal noted that she had been consistently paying taxes on rental income generated from these properties since receiving the gift, establishing her as both the legal and economic owner.

 

Four Pillars of Transaction Authenticity

The tribunal's assessment of the Lodha flat purchase revealed four key factors that established the transaction's genuineness:

 

Breaking New Ground: Relationship Irrelevance

The ITAT's most significant finding was its explicit statement that the relationship between buyer and seller holds no relevance for Section 54 exemption eligibility. The tribunal emphasized that no legal restriction prevents purchasing residential property from a spouse for the purpose of claiming this tax benefit.

 

This judgment establishes important precedents for property transactions within families, particularly between spouses seeking to optimize their tax liabilities.

 

Essential Requirements for Valid Claims

For relatives to successfully claim Section 54 exemptions, two fundamental conditions must be satisfied: 

 

Financial Considerations and Costs

While such transactions offer tax advantages, they involve specific costs that parties must consider. The property buyer must pay stamp duty, though this expense can be included as part of the acquisition cost for Section 54 exemption calculations.

 

Meanwhile, the property seller faces capital gains tax liability since the transaction constitutes a genuine sale rather than a gift. Tax experts note that when the difference between purchase and sale prices remains minimal, such arrangements can prove particularly advantageous for married couples.

 

Beyond tax optimization, these transactions offer practical advantages for family wealth management. The property and its control remain within the family unit, providing convenience and continuity. Such arrangements can prove especially beneficial in specific scenarios, such as when the selling spouse can reinvest the proceeds in tax-saving instruments or when their capital gains liability becomes minimal after indexation adjustments.

 

Additionally, relatives can structure these transactions based on circle rates even when market values exceed these government-determined rates, potentially reducing the seller's capital gains tax burden while keeping stamp duty costs lower.

 

The ITAT Mumbai ruling in Kavita Damani's case represents a watershed moment for understanding Section 54 applications in intra-family property transactions. By establishing that genuine transactions between relatives can qualify for capital gains exemptions regardless of their relationship, the judgment opens new avenues for legitimate tax planning strategies within families.

 

The decision reinforces that tax law focuses on transaction authenticity rather than the personal relationships between parties, provided all legal and procedural requirements are meticulously followed. This clarity will likely encourage more families to explore such arrangements as part of their broader wealth and tax optimization strategies.