Delhi High Court Rejects Widow's Tax Exemption Claim for Purchasing Two Flats
The Delhi High Court has denied a widow's claim for capital gains tax exemption under Section 54F of the Income Tax Act, as she had purchased two non-adjacent flats in Noida using the proceeds from the sale of a plot inherited from her husband.
Income TaxCapital GainsSection 54fTax ExemptionReal EstateReal Estate NewsFeb 26, 2025
This decision highlights the strict interpretation of tax laws and the importance of complying with specific eligibility criteria to avoid tax disputes.
What is Section 54F
Section 54F provides tax relief to individual and Hindu Undivided Family (HUF) taxpayers on capital gains earned from the sale of a long-term capital asset, excluding residential property.
To avail of this exemption, the gains must be reinvested in purchasing a new residential property.
Eligibility criteria for Section 54F exemption
The new residential property must be purchased within one year before or two years after the sale of the original asset, or it must be constructed within three years.
The taxpayer must not own more than one residential house at the time of selling the original asset.
The newly acquired property cannot be sold for at least three years from the date of purchase or completion of construction.
The taxpayer must not purchase or construct another residential property within two years (for purchase) or three years (for construction) from the date of the original sale.
What is the case
The taxpayer inherited a plot in Jaipur from her husband in 2005 (the property was initially purchased in 1983).
In Financial Year 2012-13, she sold the plot for Rs.
77,75,000 and reinvested the proceeds in acquiring two apartments in Noida, priced at Rs 44,13,775 and Rs 42,39,275, respectively.
She filed her Income Tax Return on July 31, 2013, claiming an exemption under Section 54F.
However, the Assessing Officer rejected her claim, citing that the law allows an exemption for only one residential property.
What did the court say
The court ruled that Section 54F allows exemption only when the investment is made in a single residential house, whereas her flats were located on different floors and opposite ends of the same tower, making them distinct units.
The court said that the legislative intent, reinforced by the 2014 amendment replacing 'a residential house' with 'one residential house,' clearly limits the exemption to a single property.
“To avoid such tax disputes, taxpayers should invest in one residential property or, if buying multiple units, ensure they are physically and legally integrated into a single dwelling.
Courts have previously granted exemptions when two adjacent flats functioned as a single house, but in this case, the separation made that argument untenable,” said Adnan Siddiqui, Partner, King Stubb & Kasiva, Advocates and Attorneys.
Section 54F allows taxpayers to save on capital gains tax if the proceeds from the sale of a long-term capital asset (other than a residential property) are reinvested in one residential property.
In this case, despite the widow using her capital gains to secure a home for her future, the court’s strict interpretation of the law led to her exemption being denied.
To avoid such issues, taxpayers should ensure compliance by investing in a single qualifying residential unit, as emphasized by Mohammad Reja, Advocate at Guwahati High Court.
Frequently Asked Questions
What is Section 54F of the Income Tax Act?
Section 54F provides tax relief to individual and Hindu Undivided Family (HUF) taxpayers on capital gains earned from the sale of a long-term capital asset, excluding residential property. The gains must be reinvested in purchasing a new residential property to avail of the exemption.
What are the eligibility criteria for Section 54F exemption?
The new residential property must be purchased within one year before or two years after the sale of the original asset, or it must be constructed within three years. The taxpayer must not own more than one residential house at the time of selling the original asset, and the newly acquired property cannot be sold for at least three years from the date of purchase or completion of construction.
Why did the Delhi High Court deny the widow's tax exemption claim?
The court denied the widow's claim because she had purchased two non-adjacent flats in Noida using the proceeds from the sale of a plot she had inherited from her husband. Section 54F allows an exemption only when the investment is made in a single residential house.
What is the legislative intent behind Section 54F?
The legislative intent behind Section 54F, reinforced by the 2014 amendment, is to limit the tax exemption to a single residential property. The law aims to ensure that the capital gains from the sale of a long-term capital asset are reinvested in a single residential property to promote home ownership and stability.
How can taxpayers avoid tax disputes related to Section 54F?
To avoid tax disputes, taxpayers should invest in one residential property or, if buying multiple units, ensure they are physically and legally integrated into a single dwelling. It is also advisable to consult a tax advisor to ensure compliance with the law.
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