Taxpayer Wins Rs 83 Lakh Capital Gains Tax Exemption Case: ITAT Mumbai Ruling

On January 8, 2026, a taxpayer, Smt Shah, won her Rs 83 lakh Section 54F capital gains tax exemption case in the Income Tax Appellate Tribunal (ITAT) in Mumbai. The victory came after the income tax officer made an error by not mentioning the specific reason for re-opening her tax file. This case underscores the importance of procedural accuracy in tax assessments and the rights of taxpayers to challenge unjust decisions.

The taxpayer had claimed capital gains tax exemption under Section 54F on long-term capital gains from the sale of shares and using the proceeds to buy a house. The Income Tax assessing officer reopened her assessment under Section 147 based on information from the Investigation Wing about large investments, share buyback transactions, and a possible mismatch between income and investments. However, when the reassessment was completed, the tax assessing officer did not make any additions on the issues mentioned in the reopening reasons. Instead, the only addition made was by denying the Section 54F tax exemption, an issue not part of the recorded reasons for reopening.

Feeling aggrieved, Smt Shah filed an appeal with the Commissioner (Appeals) (CIT A), who upheld the order of the Assessing Officer by relying on Explanation 3 to Section 147, which allows the Assessing Officer to make additions without making any additions in respect of the 'original items' stated in the reasons recorded for reopening the assessment. Dissatisfied with this decision, she filed an appeal in ITAT Mumbai, where she was represented by CA Piyush Chhajed.

On January 8, 2026, Smt Shah won her case in ITAT Mumbai. The tribunal held that where no addition is made on the issues for which the assessment was reopened, the Assessing Officer lacks jurisdiction to make any other addition. The ITAT relied on a binding Bombay High Court precedent to quash the disallowance of the Section 54F exemption and allowed her appeal.

Section 54F of the Income-tax Act, 1961 allows tax exemption on long-term capital gains when the gains arise from the transfer of any long-term capital asset other than a residential house property. This exemption is applicable as long as the assessee, either an individual or a Hindu Undivided Family (HUF), invests the net proceeds to buy or construct a residential house in India. The key conditions for this exemption are:

- The asset transferred must be a long-term capital asset, but not a residential house. - The assessee should, within: one year before or two years after the date of transfer, buy a residential house in India, or three years after the date of transfer, build a residential house in India.

The extent of tax exemption is as follows: - If the entire net consideration was invested in the new residential house, the whole of the capital gain is exempt. If only a part of the net consideration was invested, the exemption is proportionate, i.e., capital gain × (amount invested ÷ net consideration). - If the new residential house is transferred within three years from the date of purchase or construction, the exemption is withdrawn.

Smt Shah filed her ITR for AY 2012-13, claiming capital gain tax exemption under Section 54F. The ITR was originally processed under Section 143(1). Subsequently, the Assessing Officer reopened the assessment under Section 147 based on information received from the Investigation Wing regarding large investments, high-value buyback of shares of a private company, multiple bank accounts, and an alleged mismatch between investments and declared income.

During the reassessment proceedings, however, the AO did not make any addition on the issues which were cited as reasons for reopening the assessment. Instead, the reassessment resulted in an addition of ₹83.43 lakh, by disallowing the exemption claimed under Section 54F, an issue that was not mentioned in the reasons recorded for reopening. The Commissioner (Appeals) upheld the reassessment, relying on Explanation 3 to Section 147, holding that the Assessing Officer could make additions on other issues even if no addition was made on the original reasons.

On further appeal, the ITAT Mumbai held that where no addition is made on the issues for which the assessment was reopened, the Assessing Officer lacks jurisdiction to make any other addition. Relying on a binding Bombay High Court precedent, the ITAT Mumbai quashed the disallowance of the Section 54F exemption and allowed her appeal.

Paragraph 4 of the recorded reasons by the tax officer stated: - The AIR details show investment of Rs 9,75,50,000/- and the 26AS details show receipts of Rs 24,63,563/-. The assessee has declared Rs 2,52,000/- as House Property income and Rs. 22,72,602/- as income from other sources. The source of income for making the investment of Rs 9,75,50,000/- is not commensurate with the income declared by the assessee and needs to be verified.

Paragraph 5 said: - Thus, it is evident from the above facts that the assessee has failed to offer the income from the above transaction to tax for the assessment year under consideration. Therefore, on the basis of the above information and findings, I have reason to believe that income of more than Rs 1,00,000/- has escaped assessment for A.Y 2012-13 within the meaning of Explanation 2 (b) to Section 147 of the Act.

ITAT Mumbai said that on perusal of the reasons recorded, they found that they made no reference to the Section 54F capital gains tax exemption claimed by her. ITAT Mumbai also noted that one of the reasons (paragraph 4) recorded a reference to the income of Rs 2,52,000 declared by her under the head ‘Income from House Property’ and that too in the context of the sufficiency of the source of income for making an investment of Rs 9,75,50,000. Therefore, ITAT Mumbai accepted the contention of the Assessee and held that the Assessing Officer had made an addition/disallowance in respect of the exemption claimed by the Assessee under Section 54F of the Act, even though the same was not one of the issues/reasons for reopening the assessment.

ITAT Mumbai also noted that Shah had challenged the validity of the reassessment proceedings before CIT(A) and had relied on the judgment of the Bombay High Court in the case of Commissioner of Income-tax-5, Mumbai vs. Jet Airways (I) Ltd. 331 ITR 236 (Bombay)/[2011]. The CIT(A) rejected ground number 4 raised by the Assessee challenging the validity of the reassessment proceedings. ITAT Mumbai said that they find that the CIT(A) has not disputed the position that no addition was made by the Assessing Officer in relation to the issue/reason recorded for reopening the assessment.

The CIT(A) relied on Explanation 3 to Section 147 of the Act to hold that the AO was allowed to make an addition by disallowing the exemption claimed by the Assessee under Section 54F of the Act without making any addition in respect of the ‘original items’ stated in the reasons recorded for reopening the assessment. According to Taxmann research, ITAT Mumbai said that the Bombay High Court (in its Jet Airways judgment) had stated that in case after issuing a notice under Section 148, the Assessing Officer accepts the contention of the assessee and holds that the income which the AO had initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him to independently assess some other income of such assessee. This is the situation in this case also. Not having made any addition/disallowance on any of the issues/reasons recorded for reopening the assessment for the assessment year 2012-13, the AO did not have jurisdiction to make some other addition/disallowance in the hands of the assessee.

Judgment: In view of the judgments of the Jurisdictional High Court in Commissioner of Income Tax v. Jet Airways (I) Ltd. [2010] 195 Taxman 117 (Bombay)/[2011] 331 ITR 236 (Bombay), the same are squarely applicable to the facts of the instant case. Respectfully following the same, it is held that the addition made by the Assessing Officer by disallowing the exemption claimed by the assessee under Section 54F cannot be sustained and is hereby quashed.