ITAT Mumbai Grants Full Tax Exemption Under Section 54 for Property Sale
The Income Tax Appellate Tribunal (ITAT) in Mumbai has ruled in favor of Mrs. Kashyap, granting her full tax exemption under Section 54 for the sale of two properties and the subsequent purchase of a new property. The case highlights the importance of actual investment and proper documentation in tax claims.
Income TaxSection 54Capital GainsTax ExemptionProperty PurchaseReal Estate MumbaiNov 06, 2025
Section 54 of the Income Tax Act, 1961 provides that if an individual or a Hindu Undivided Family (HUF) sells a long-term capital asset like a residential house, the capital gains from such a transfer would be exempt from tax, subject to certain reinvestment conditions.
The tax officer also noted that the property towards which Mrs. Kashyap claimed Section 54 tax deduction was purchased jointly with her son-in-law, who contributed Rs 50 lakh towards the purchase. While the tax officer acknowledged that Mrs. Kashyap had paid the remaining amount for the new property, he denied her tax exemption claim because the ownership of the property was split 50% between Mrs. Kashyap and her son-in-law. Consequently, he limited the tax deduction under Section 54 to 50% of the invested amount, which came to Rs 2 crore.
Additionally, the AO determined the cost of acquisition as of April 1, 2001, based on the ready reckoner value, rejecting the valuation that Mrs. Kashyap had, based on the Government Valuer’s report.
Aggrieved by the tax officer’s action, Mrs. Kashyap filed an appeal with the Commissioner of Appeals (CIT A). The CIT (A) rejected the tax officer’s assessment, and Mrs. Kashyap won the case. The income tax department then appealed to the Income Tax Appellate Tribunal (ITAT) Mumbai.
Mihir Tanna, associate director at S.K Patodia LLP, explains that for income tax purposes, ownership percentage is determined by the amount contributed during acquisition. If the share in the house property is not specified in the agreement, joint owners cannot be treated as equal owners. Therefore, they always advise clients to retain corresponding bank statements to show the amount contributed by each owner while acquiring the house property.
Tanna adds that in most cases, joint owners are relatives, and when it comes to claiming certain deductions or exemptions for house property, it’s not absolutely necessary for the funds used to buy the property to come only from the assessee's own bank account, especially when the funds are legitimately sourced from relatives. However, it’s a good idea for joint owners to contribute from their own bank to avoid any litigation.
According to Tanna, another issue involved in the judgment with respect to property acquired before 2001 is that the court accepted the cost as per a valuation report. For ancestral property or property received through will, often the cost is not known as it was acquired by grandfather or great-grandfather. It is advisable that sellers obtain valuation reports from registered valuers as on April 1, 2001, and consider it as the cost of acquisition for the calculation of capital gain.
Chartered Accountant Dr. Suresh Surana says that in the given case, I.T.A. No. 2053/Mum/2025, the assessee, Mrs. Kashyap, filed her income tax return (ITR) for AY 2021-22, declaring a total income of Rs 89.08 lakh. During scrutiny, the Assessing Officer (AO) noticed that she had earned long-term capital gains (LTCG) from the sale of two residential properties and claimed a deduction of Rs 4.00 crore under Section 54 for investment in a new residential property purchased jointly with her son-in-law. Out of the total investment of Rs 4.17 crore, Mrs. Kashyap had contributed Rs 3.68 crore (around 85%) and her son-in-law Rs 50 lakh.
The AO, however, restricted the deduction under Section 54 to 50%, solely on the ground that the new property was co-owned. Further, while computing LTCG, the AO substituted the cost of acquisition (as on 01.04.2001) determined by a government-registered valuer with the lower ready-reckoner value, without referring the matter to a Departmental Valuation Officer (DVO).
Aggrieved by the same, the assessee appealed before the CIT(A)/NFAC, submitting the following points:
1. Her contribution represented more than 85% of the cost of the new property.
2. The co-ownership ratio was not specified in the original deed.
3. An amended purchase deed explicitly recorded the proportional shares.
The CIT(A) accepted the claim and allowed full deduction under Section 54 as per actual investment, as well as the valuation adopted by the assessee. The Revenue then appealed before the Mumbai ITAT.
According to Surana, the ITAT noted the following key facts and findings:
- The AO had never disputed that the assessee invested Rs 3.67 crore out of the total Rs 4.17 crore. The restriction to 50% was purely based on the presumption of equal ownership, without any documentary backing.
- The assessee produced a rectified (amended) purchase deed clearly stating the proportionate ownership between her and the son-in-law. This document was accepted by the CIT(A), and the AO failed to contest its authenticity, despite being given an opportunity for a remand report.
- Section 54 allows exemption for the amount actually invested in the new residential property, provided the investment is made within the prescribed timelines. The section does not restrict the deduction to the percentage of ownership reflected in title documents, so long as the funds invested can be traced to the capital gains from the sale of the original property.
- The CIT(A) accepted the government valuer’s report and the certificate from the Stamp Valuation Authority, both of which showed a fair market value (FMV) of about Rs 1.70 crore, which was consistent with the assessee’s claim. The ITAT held that since this valuation matched the stamp authority’s rate, it did not violate the proviso to Section 55(2)(b). The AO’s reliance on ready-reckoner rates, without DVO reference, was therefore unjustified.
- The Tribunal also recorded that the CIT(A) had duly called for a remand report and, after the AO’s non-response, was justified in deciding the matter on the merits.
Accordingly, the ITAT Mumbai held as follows:
- Deduction under Section 54 is linked to actual investment, not the nominal ownership ratio; hence, the assessee was entitled to exemption to the extent of Rs 3.68 crore actually invested.
- The AO’s restriction was based on assumption, without evidentiary basis or contradiction of the amended deed.
- The valuation adopted by the assessee was supported by government and stamp-authority documents, satisfying the statutory ceiling under Section 55(2)(b).
- The Revenue failed to demonstrate any factual or legal infirmity in the CIT(A)’s order.
Surana concludes: “The Mumbai ITAT dismissed the Revenue’s appeal, affirming full deduction under Section 54 for the amount invested by Mrs. Kashyap and upholding the valuation method adopted by her. This decision reinforces that Section 54 deduction must be granted based on actual investment in the new residential property, irrespective of co-ownership on paper, provided the funds are demonstrably contributed by the assessee and cost-of-acquisition valuation supported by registered valuers or stamp-authority certificates cannot be arbitrarily substituted by the AO without a proper DVO reference.”
ITAT Mumbai in its judgment (I.T.A. No. 2053/Mum/2025) dated October 27, 2025, stated that the undisputed facts of this case are that Mrs. Kashyap has sold two properties and has claimed tax exemption under Section 54, towards the purchase of a new property. The tax officer noticed that she had purchased the new property along with her son-in-law. Though the tax officer admitted that she had paid Rs 3.67 crore for purchasing the property, the tax exemption was restricted to 50% of the cost of acquisition of the new property because she had jointly acquired the new property with her son-in-law.
In this regard, ITAT Mumbai noted that in the purchase agreement document of the new property, the share of ownership between her and her son-in-law has not been specifically mentioned. The tax officer also considered the cost of acquisition of the property as of April 1, 2001, at Rs 5,078 based on the ready reckoner value as against the valuation adopted by the assessee.
Before the CIT(A), Mrs. Kashyap submitted a modified purchase deed where her shares and her son-in-law’s have been explicitly mentioned. She also submitted the valuation of the property substantiating the value as on April 1, 2001.
ITAT Mumbai said that the CIT(A) gave relief to her after considering the various submissions made by the tax officer along with the documentary evidence(s). Before concluding the appellate proceedings, the CIT(A) called for a remand report from the tax officer.
Frequently Asked Questions
What is Section 54 in the Income Tax Act?
Section 54 of the Income Tax Act, 1961 provides that if an individual or a Hindu Undivided Family (HUF) sells a long-term capital asset like a residential house, the capital gains from such transfer would be exempt from tax, subject to certain reinvestment conditions.
How is the ownership percentage determined for tax purposes?
For income tax purposes, ownership percentage is determined by the amount contributed during acquisition. If the share in the house property is not specified in the agreement, joint owners cannot be treated as equal owners.
What documents are required to support a tax claim under Section 54?
To support a tax claim under Section 54, you need to provide documents such as the purchase deed, bank statements showing the amount contributed by each owner, and valuation reports from registered valuers or stamp-authority certificates.
Can funds from relatives be used for claiming deductions under Section 54?
Yes, funds from relatives can be used for claiming deductions under Section 54, provided the funds are demonstrably contributed by the assessee and the actual investment can be traced to the capital gains from the sale of the original property.
What is the role of the Departmental Valuation Officer (DVO) in determining the cost of acquisition?
The Departmental Valuation Officer (DVO) is responsible for providing an independent valuation of the property, which can be used to determine the cost of acquisition for the calculation of capital gains. The AO cannot substitute this valuation with ready-reckoner rates without a proper DVO reference.
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