MUMBAI: In a landmark decision regarding capital gains tax exemptions, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that buying a residential property from close relatives should not be categorized as a sham transaction solely due to the tax advantages it may offer.
The tribunal granted a ₹41.5 crore exemption under Section 54F to an individual who purchased a flat from her in-laws, overturning the tax department’s assertion that the transaction was merely a facade.
Section 54F permits individuals to exempt long-term capital gains from the sale of any asset, other than a residential house, provided the proceeds are reinvested in purchasing or constructing a residential property within a specified timeframe.
In this particular case, the taxpayer sold unlisted shares, garnering long-term capital gains that were reinvested into a high-value residential property in Mumbai. The income tax officer rejected the exemption, contending that the deal was a contrived arrangement within the family designed to evade taxes, citing reasons such as cohabitation, a family member’s involvement via power of attorney for both parties, and the lack of tax liability on the sellers.
However, the ITAT determined that the fundamental transactions—sale of shares and property acquisition—were substantiated by adequate documentation, including a registered agreement, payment of stamp duty, and demat records.
The tribunal emphasized that there are no restrictions in the Income Tax Act concerning property purchases from relatives for the purpose of claiming Section 54F benefits. It asserted that mere suspicion cannot replace concrete evidence, and familial relationships or purported “unnatural conduct” should not disqualify statutory exemptions in the absence of tangible proof of misconduct.
Furthermore, the ITAT clarified that legitimate tax planning is not the same as tax evasion, even if it leads to decreased tax liability. The tribunal pointed out that the seller’s tax situation, such as cases where capital gains are mitigated due to indexation, does not affect the buyer’s eligibility for exemption.
Most importantly, the tribunal noted that tax authorities had not identified any legal flaws in the transaction nor invoked general anti-avoidance regulations (GAAR). Given these conditions, it ruled that the benefits of favorable provisions like Section 54F should not be denied. The ITAT granted the appeal, directing the complete annulment of the adjustments made by the income tax officer. Tax experts believe this ruling reaffirms that authentic intra-family transactions, when properly documented and compliant with legal standards, cannot be dismissed merely based on tax avoidance suspicions.
