Wife Avoids Income Tax After Selling Two Mumbai Properties for Rs 6 Crore
A wife in Mumbai managed to avoid income tax after selling two properties for Rs 6 crore by leveraging Section 54 benefits and reinvesting the proceeds.
Income TaxSection 54Capital GainsReal EstateMumbaiReal Estate MumbaiJul 27, 2025
Real Estate Mumbai:A wife in Mumbai managed to win an income tax case in the Income Tax Appellate Tribunal (ITAT) even after selling two house properties gifted by her husband for Rs 6 crore without paying any income tax. These properties were originally bought in 2002 for Rs 34 lakh and Rs 17 lakh each, and she sold them in 2020 for Rs 6 crore. According to income tax rules, she made a long-term capital gain (LTCG) of just over Rs 4 crore after factoring in indexation (inflation). However, despite this LTCG of Rs 4 crore, she didn’t owe any income tax because she reinvested the money to buy her husband’s house property, also located in Mumbai, by claiming Section 54 benefits.
As strange as it may seem, all of her transactions were completely legal, and she even paid the full stamp duty required for these real estate deals. The Income Tax Assessing Officer (AO) said in this case that since the husband is the deemed owner of the said property, as per income tax clubbing provisions, the capital gain earned on the sale of the property counts as the income of her husband. “One cannot claim exemption under Section 54 on purchase of one’s own property.”
Apart from this, the AO also raised six objections as to why this lady should be liable for income tax on the sale of her Rs 6 crore property. One of the objections relates to the money used to pay for the flats. The AO took a look at the bank account statement of the husband and wife and saw that the wife received Rs 70 lakh on March 12, 2021, from a company where both she and her husband are employed as directors. On the same date, she transferred the Rs 70 lakh to her husband’s bank account. And then, on the very same day, her husband transferred back the Rs 70 lakh to the company’s bank account where they both serve as directors.
The AO observed: “The same rotation was followed for another payment of Rs 3 crore or 3,00,00,000 (Rs 1.5 crore each) on the same day that is 12.03.2021. Hence, it is seen that the payment of Rs 3.7 crore was moved from the company and reached the company through the wife and husband in a single day. This is nothing but a rotation of money just to evade tax. There’s no actual transfer of money, no right to use the property changed, only the title of the property has changed. In view of the above, it is nothing but a colourable device used to evade tax.”
The Income Tax Appellate Tribunal (ITAT) Mumbai rejected the objections of the Income Tax Assessing Officer (AO) and confirmed that the wife in this case is not required to pay any income tax on the capital gains of Rs 4 crore since she claimed Section 54 tax exemption by purchasing another house from her husband.
Regarding the rotation of money, the ITAT Mumbai’s judge said that the AO only focused on the transactions on March 12, 2021, when most of the purchase consideration has been discharged. The transactions prior to that date were not considered, where the assessee (wife) had initially parked the money in fixed deposits/with the company and then, received it back, which was used to pay the husband for buying the house apartment built by Lodha Developers.
How did this income tax case start?
According to the judgment order of ITAT Mumbai dated June 9, 2025, here’s the timeline of events:
- March 14, 2002: The wife purchased two flats in Hiranandani Gardens, Powai, Mumbai, for Rs 34 lakh (34,51,000) and Rs 17 lakh (17,40,00). She claimed to have purchased these properties in the joint name with her husband.
- March 27, 2015: Husband purchased another house property in Lodha Estrella solely in his own name.
- April 1, 2017: Her husband, through a legal gift deed, gifted the wife his share of 50% in the said properties in Hiranandani Gardens, Powai, Mumbai.
- January 9, 2020: The wife sold the two house properties located in Hiranandani Gardens for Rs 5.98 crore (5,98,00,000). She calculated her long-term capital gains as Rs 4 crore (4,21,83,273) and claimed Section 54 tax exemption benefits in respect of the purchase of another immovable house property from her husband of Rs 3.85 crore (3,85,00,000).
- March 18, 2021: The wife used the money she got from the sale of the two Hiranandani Gardens house properties (2020) to buy her own husband’s Lodha properties, which he purchased in 2015. She claimed Section 54 long-term capital gains tax exemption for this purpose.
What did ITAT Mumbai say?
A total of six grounds were raised by the Income Tax Assessing Officer regarding why the wife should not get Section 54 long-term capital gains exemption.
Sale agreement between husband and wife
- “The Assessing Officer has brought to tax long-term capital gains of Rs 4,21,83,273 on the sale of two flats without allowing the exemption claimed by the assessee under Section 54 amounting to Rs 3,96,55,000.
- The sale of flats has been executed via agreements to sell dated January 9, 2020, and the said flats were initially purchased via an agreement to purchase dated March 14, 2002, read with the registered gift deed dated April 1, 2017.
- The contents of these sale agreements (and purchase/gift deed) are not in dispute and the same have been executed by the assessee in her individual capacity and the consideration has been received by her in her bank account and which has been duly offered to tax by the assessee and has been brought to tax by the AO in the hands of the assessee.”
Ownership title transfer of the house properties
- “Now, coming to the exemption claimed by the assessee under Section 54 amounting to Rs 3,96,55,000, the same relates to the purchase of another flat by the assessee from her husband via a registered agreement to sell dated March 18, 2021, for a stated consideration of Rs 3,85,00,000 on which the assessee has paid stamp duty of Rs 11,55,000.
- The factum of ownership of the said flat in the name of the husband of the assessee via an agreement to sell dated March 27, 2015, is not in dispute nor the contents of the subject registered agreement to sell dated March 18, 2021, wherein the title in the property has been transferred by him in the name of the assessee.”
Rotation of funds
- “We find that the AO (tax department) alleging the rotation of funds has merely looked at the transactions on March 12, 2021, when the majority of the purchase consideration has been discharged and has not considered the transactions prior to that date where the money has been initially parked by the assessee in fixed deposits/with the company and thereafter, received back and out of which, the amount was paid to the husband of the assessee towards the purchase consideration.
- Further, we find that the capital gains which have been brought to tax relates to the flats that have been sold/ transferred by the assessee via an agreement to sell dated January 9, 2020, and the assessee has thereafter purchased another flat via an agreement to sell dated March 18, 2021, wherein the consideration has been discharged by March 12, 2021.
- The said purchase is thus within the stipulated time period of two years after the date on which the transfer of the original asset took place as prescribed under Section 54, the claim of exemption under Section 54 cannot be denied to the assessee (wife).”
How does LTCG tax exemption under Section 54 work?
Chartered Accountant Suresh Surana explains:
- “Section 54 of the Income Tax Act, 1961 provides that an individual taxpayer may claim tax exemption on long-term capital gains arising from a sale of residential house property/land by way of investing the capital gains in one residential property in India. Such a new house property should be purchased within a period of 1 year before or 2 years after the date of transfer of the old house or should be constructed within a period of 3 years from the date of transfer of the old house.
- It is pertinent to note that such exemption can be claimed only in respect of one residential house property purchased/constructed in India. However, if the long-term capital gains are up to Rs 2 crore, the taxpayer can avail a once in a lifetime option of acquiring 2 house properties within the above time limit.
- Also, the new house property would be subjected to a lock-in of 3 years. If a taxpayer claiming exemption under Section 54 of the Income Tax Act, 1961 and transfers the new house within 3 years from the date of its acquisition/completion of construction, then the benefit granted under Section 54 of the Income Tax Act, 1961 will be withdrawn and accordingly, the cost of acquisition of the new assets would be reduced from the exempted capital gains.”
The amount of capital gains exemption u/s 54 will be the lower of the following:
1. Amount of capital gains arising on the transfer of land; or
2. Amount invested in the purchase/construction of a new residential house property (including the amount deposited in the Capital Gains Deposit Account Scheme)
Surana says: “The threshold limit of considering investment in a new house property would be restricted to Rs 10 crore for the purpose of claiming deduction under Section 54 of the Income Tax Act, 1961.”
As strange as it may seem, all of her transactions were completely legal, and she even paid the full stamp duty required for these real estate deals. The Income Tax Assessing Officer (AO) said in this case that since the husband is the deemed owner of the said property, as per income tax clubbing provisions, the capital gain earned on the sale of the property counts as the income of her husband. “One cannot claim exemption under Section 54 on purchase of one’s own property.”
Apart from this, the AO also raised six objections as to why this lady should be liable for income tax on the sale of her Rs 6 crore property. One of the objections relates to the money used to pay for the flats. The AO took a look at the bank account statement of the husband and wife and saw that the wife received Rs 70 lakh on March 12, 2021, from a company where both she and her husband are employed as directors. On the same date, she transferred the Rs 70 lakh to her husband’s bank account. And then, on the very same day, her husband transferred back the Rs 70 lakh to the company’s bank account where they both serve as directors.
The AO observed: “The same rotation was followed for another payment of Rs 3 crore or 3,00,00,000 (Rs 1.5 crore each) on the same day that is 12.03.2021. Hence, it is seen that the payment of Rs 3.7 crore was moved from the company and reached the company through the wife and husband in a single day. This is nothing but a rotation of money just to evade tax. There’s no actual transfer of money, no right to use the property changed, only the title of the property has changed. In view of the above, it is nothing but a colourable device used to evade tax.”
The Income Tax Appellate Tribunal (ITAT) Mumbai rejected the objections of the Income Tax Assessing Officer (AO) and confirmed that the wife in this case is not required to pay any income tax on the capital gains of Rs 4 crore since she claimed Section 54 tax exemption by purchasing another house from her husband.
Regarding the rotation of money, the ITAT Mumbai’s judge said that the AO only focused on the transactions on March 12, 2021, when most of the purchase consideration has been discharged. The transactions prior to that date were not considered, where the assessee (wife) had initially parked the money in fixed deposits/with the company and then, received it back, which was used to pay the husband for buying the house apartment built by Lodha Developers.
How did this income tax case start?
According to the judgment order of ITAT Mumbai dated June 9, 2025, here’s the timeline of events:
- March 14, 2002: The wife purchased two flats in Hiranandani Gardens, Powai, Mumbai, for Rs 34 lakh (34,51,000) and Rs 17 lakh (17,40,00). She claimed to have purchased these properties in the joint name with her husband.
- March 27, 2015: Husband purchased another house property in Lodha Estrella solely in his own name.
- April 1, 2017: Her husband, through a legal gift deed, gifted the wife his share of 50% in the said properties in Hiranandani Gardens, Powai, Mumbai.
- January 9, 2020: The wife sold the two house properties located in Hiranandani Gardens for Rs 5.98 crore (5,98,00,000). She calculated her long-term capital gains as Rs 4 crore (4,21,83,273) and claimed Section 54 tax exemption benefits in respect of the purchase of another immovable house property from her husband of Rs 3.85 crore (3,85,00,000).
- March 18, 2021: The wife used the money she got from the sale of the two Hiranandani Gardens house properties (2020) to buy her own husband’s Lodha properties, which he purchased in 2015. She claimed Section 54 long-term capital gains tax exemption for this purpose.
What did ITAT Mumbai say?
A total of six grounds were raised by the Income Tax Assessing Officer regarding why the wife should not get Section 54 long-term capital gains exemption.
Sale agreement between husband and wife
- “The Assessing Officer has brought to tax long-term capital gains of Rs 4,21,83,273 on the sale of two flats without allowing the exemption claimed by the assessee under Section 54 amounting to Rs 3,96,55,000.
- The sale of flats has been executed via agreements to sell dated January 9, 2020, and the said flats were initially purchased via an agreement to purchase dated March 14, 2002, read with the registered gift deed dated April 1, 2017.
- The contents of these sale agreements (and purchase/gift deed) are not in dispute and the same have been executed by the assessee in her individual capacity and the consideration has been received by her in her bank account and which has been duly offered to tax by the assessee and has been brought to tax by the AO in the hands of the assessee.”
Ownership title transfer of the house properties
- “Now, coming to the exemption claimed by the assessee under Section 54 amounting to Rs 3,96,55,000, the same relates to the purchase of another flat by the assessee from her husband via a registered agreement to sell dated March 18, 2021, for a stated consideration of Rs 3,85,00,000 on which the assessee has paid stamp duty of Rs 11,55,000.
- The factum of ownership of the said flat in the name of the husband of the assessee via an agreement to sell dated March 27, 2015, is not in dispute nor the contents of the subject registered agreement to sell dated March 18, 2021, wherein the title in the property has been transferred by him in the name of the assessee.”
Rotation of funds
- “We find that the AO (tax department) alleging the rotation of funds has merely looked at the transactions on March 12, 2021, when the majority of the purchase consideration has been discharged and has not considered the transactions prior to that date where the money has been initially parked by the assessee in fixed deposits/with the company and thereafter, received back and out of which, the amount was paid to the husband of the assessee towards the purchase consideration.
- Further, we find that the capital gains which have been brought to tax relates to the flats that have been sold/ transferred by the assessee via an agreement to sell dated January 9, 2020, and the assessee has thereafter purchased another flat via an agreement to sell dated March 18, 2021, wherein the consideration has been discharged by March 12, 2021.
- The said purchase is thus within the stipulated time period of two years after the date on which the transfer of the original asset took place as prescribed under Section 54, the claim of exemption under Section 54 cannot be denied to the assessee (wife).”
How does LTCG tax exemption under Section 54 work?
Chartered Accountant Suresh Surana explains:
- “Section 54 of the Income Tax Act, 1961 provides that an individual taxpayer may claim tax exemption on long-term capital gains arising from a sale of residential house property/land by way of investing the capital gains in one residential property in India. Such a new house property should be purchased within a period of 1 year before or 2 years after the date of transfer of the old house or should be constructed within a period of 3 years from the date of transfer of the old house.
- It is pertinent to note that such exemption can be claimed only in respect of one residential house property purchased/constructed in India. However, if the long-term capital gains are up to Rs 2 crore, the taxpayer can avail a once in a lifetime option of acquiring 2 house properties within the above time limit.
- Also, the new house property would be subjected to a lock-in of 3 years. If a taxpayer claiming exemption under Section 54 of the Income Tax Act, 1961 and transfers the new house within 3 years from the date of its acquisition/completion of construction, then the benefit granted under Section 54 of the Income Tax Act, 1961 will be withdrawn and accordingly, the cost of acquisition of the new assets would be reduced from the exempted capital gains.”
The amount of capital gains exemption u/s 54 will be the lower of the following:
1. Amount of capital gains arising on the transfer of land; or
2. Amount invested in the purchase/construction of a new residential house property (including the amount deposited in the Capital Gains Deposit Account Scheme)
Surana says: “The threshold limit of considering investment in a new house property would be restricted to Rs 10 crore for the purpose of claiming deduction under Section 54 of the Income Tax Act, 1961.”
Frequently Asked Questions
What is Section 54 in the Income Tax Act?
Section 54 of the Income Tax Act, 1961, allows individuals to claim tax exemption on long-term capital gains arising from the sale of residential house property by investing the gains in a new residential property within specified time limits.
How long do I have to purchase a new property to claim Section 54 benefits?
You must purchase the new property within 2 years after the date of transfer of the old property or construct it within 3 years from the date of transfer to claim Section 54 benefits.
Can I claim Section 54 benefits if I buy two properties?
Yes, you can claim Section 54 benefits for two properties if the long-term capital gains are up to Rs 2 crore, but this is a one-time benefit.
What is the lock-in period for the new property purchased under Section 54?
The new property must be held for at least 3 years from the date of acquisition or completion of construction to avoid the withdrawal of the tax exemption.
What happens if I sell the new property within 3 years?
If you sell the new property within 3 years from the date of acquisition or completion of construction, the tax exemption granted under Section 54 will be withdrawn, and the cost of acquisition of the new asset will be reduced from the exempted capital gains.
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