ITAT Verdict: Capital Gains Exemption Under Sec 54 Allowed On Property Gifted By Spouse
Last Updated:July 20, 2025, 16:27 IST
The ITAT Mumbai ruled Kavita Manoj Damani can claim capital gain tax exemption under Section 54 of the Income Tax Act, 1961, after purchasing a new flat from her husband.
Section 54 of the Income Tax Act offers exemption from long-term capital gains tax if the profit from selling a residential house is reinvested in buying another residential property within 2 years.
Kavita Manoj Damani vs AO, ITAT Mumbai: In a significant verdict, the Income Tax Appellate Tribunal (ITAT) Mumbai has pronounced that a wife can claim capital gain tax exemption under Section 54 of the Income Tax Act, 1961, given the conditions and legal rules are met properly.
Section 54 of the Income Tax Act offers exemption from long-term capital gains tax if the profit from selling a residential house is reinvested in buying another residential property within 2 years, or used to construct a new one within 3 years from the date of sale.
The above verdict pronounced by the Income Tax Appellate Tribunal (ITAT) Mumbai came following the appeal of Kavita Manoj Damani. Her claim for long-term gain exemption was rejected by the Income Tax Officer (AO), calling it as a ‘tax avoidance attempt’. Even the Commissioner of Income Tax (Appeals) sided with the AO.
So, she was forced to knock on the doors of the Income Tax Appellate Tribunal (ITAT) Mumbai to get the tax relief as per rules and process.
What Happened In The Case?
The case revolves around a Powai property jointly purchased by a couple in 2002, as per Live Mint report. In 2017, the husband gifted his 50% stake to his wife. She sold the entire property in 2020, earning a long-term capital gain of Rs 4.21 crore. To claim exemption under Section 54, she bought a flat from her husband for Rs 3.85 crore and paid Rs 11 lakh in stamp duty—totaling Rs 3.96 crore.
Though AO rejected her claim. The Live Mint report said that the tax officer believed her husband was the real owner, and she didn’t pay for the original flats.
The Assessing Officer initially denied the exemption, arguing that the sale was a sham meant to transfer capital gains back to the husband. The Commissioner of Income Tax (Appeals) also sided with the AO.
However, ITAT Mumbai ruled in favour of the wife, stating that the sale was genuine. She had paid through banking channels, registered the deed, reinvested within two years, and deducted TDS.
The tribunal clarified that the relationship between the buyer and seller is irrelevant under Section 54 if the transaction is authentic.
However, the tribunal looked at the matter from a fresh perspective. It noted that the property was legally gifted in 2017 and so the new property was bought within the allowed 2-year window. Moreover, the legal process including full payment and stamp duty were done properly.
The tribunal in its verdict accepted the deal as a legally valid and allowed the claimant to take the benefits under Section 54.
What This Means for You
You can claim Section 54 exemption on capital gains from property gifted by your spouse.
But you must complete the purchase of a new property within 2 years of selling the old one.
Use a proper gift deed to transfer ownership.
Ensure the money trail and documents are clear and within legal bounds.
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