HIMANCSHU MANORANJAN BHATT,MUMBAI vs. ITO WARD-22(1)(1), MUMBAI

The facts, in brief, are that the assessee is an individual. The assessee had originally filed his return of income for the year under consideration on 03.11.2011, declaring total income of Rs. 1,33,532/-. The assessment was subsequently reopened under section 147 of the Act and the assessment under section 143(3) read with section 147 of the Act was completed on 28.12.2018, determining total income at Rs. 74,16,675/-. In the said assessment, the claim of exemption under section 54 of the Act in respect of long-term capital gain of Rs. 72,83,143/- was not allowed. The appeal preferred by the assessee against the said assessment order was dismissed by the learned CIT(A) vide order dated 31.05.2023.

The assessee carried the matter in appeal before the Tribunal. The Co-ordinate Bench, vide order dated 08.11.2023 in ITA No. 2550/Mum/2023, restored the issue relating to computation of income under the head "capital gains" to the file of the Assessing Officer for de novo adjudication after verification of the assessee's claim for exemption under section 54 of the Act. The Co-ordinate Bench, inter alia, observed that the Assessing Officer was required to grant the benefit of section 54 while computing the income under the head "capital gains" and directed the assessee to furnish the documents and information in support of his claim.

In the proceedings pursuant to the order of the Co-ordinate Bench, the assessee furnished, inter alia, the sale deed relating to the property sold, the purchase agreement relating to the new residential property, the valuation report and the relevant bank/payment details. The assessee claimed exemption under section 54 of the Act in respect of the entire investment made in the new residential property.

The case of the assessee before the Assessing Officer was that although the new residential property stood in the joint names of the assessee and his wife, the entire consideration for acquisition

The Assessing Officer, while giving effect to the directions of the Co-ordinate Bench , accepted the long-term capital gain of Rs. 72,83,143/- computed in the original assessment as the basis for computation. The Assessing Officer also accepted that during the relevant financial year the assessee had purchased the residential property jointly with his wife for a consideration of Rs. 1,37,00,000/-. However, since the new residential property was jointly held by the assessee and his wife, the Assessing Officer attributed 50% of the purchase consideration to the assessee and accordingly restricted the amount eligible for exemption under section 54 to Rs. 68,50,000/-, being 50% of Rs. 1,37,00,000/-. The Assessing Officer accordingly computed the taxable long-term capital gain as under:

Aggrieved by the aforesaid assessment order, the assessee preferred an appeal before the learned CIT(A). The assessee contended that the Assessing Officer had erred in restricting the exemption under section 54 to Rs. 68,50,000/-, being 50% of the purchase consideration of Rs. 1,37,00,000/-. It was submitted that the old residential property was exclusively owned by the assessee and the consideration received on its sale was invested in acquisition of the new residential property. According to the assessee, the entire consideration for acquisition of the new property was borne by him and the name of his wife was included as a joint purchaser merely for convenience. It was, therefore, contended that the entire investment ought to be considered for the purpose of exemption under section 54.

The assessee further submitted that the Assessing Officer had not brought on record any basis for restricting the claim to 50% other than the fact that the new property stood jointly in the

During the appellate proceedings, the assessee also raised alternative contentions regarding the correct computation of long- term capital gain and the quantum of investment eligible for exemption under section 54. The assessee contended that, on the basis of the DVO's valuation of the cost of acquisition at Rs. 39,25,000/-, the indexed cost of acquisition worked out to Rs. 58,13,906/- and the correct long-term capital gain, on sale consideration of Rs. 1,27,00,000/-, worked out to Rs. 68,86,094/.

The assessee further contended that the total cost of acquisition of the new residential property was not merely Rs. 1,37,00,000/-, but Rs. 1,44,63,900/-, comprising the purchase consideration of Rs. 1,37,00,000/-, stamp duty of Rs. 7,32,700/- and registration charges of Rs. 31,200/-. The assessee filed an application under Rule 46A in respect of the supporting evidence concerning stamp duty and registration charges. The assessee also raised an additional ground on 19.11.2025 contending, without prejudice, that even if the Assessing Officer's action in restricting the investment to 50% was accepted, the aforesaid amounts were required to be considered while determining the eligible investment and the resultant taxable capital gain.

The learned CIT(A) held that the assessee had failed to discharge the said burden. It was observed that there was no separate declaration from the co-owner and no contemporaneous evidence or material filed at the time of purchase to establish that the spouse had no right, title, interest or contribution in the property. The learned CIT(A) held that an assertion made after more than a decade, unsupported by legal documentation, could not override the registered ownership of the property.

The learned CIT(A) further held that the Assessing Officer had rightly restricted the exemption under section 54 to the extent of the assessee's legal share in the new property. According to the learned CIT(A), recording the spouse as a joint owner in a registered property document was a material legal act conveying substantive title and the assessee could not subsequently contend that such title was illusory or non-existent. The learned CIT(A) also

The learned CIT(A) also observed that the assessee had not claimed exemption under section 54 either in the original return or in the return filed in response to the notice under section 148 and that the claim was made for the first time during the reassessment proceedings. According to the learned CIT(A), this circumstance further weakened the assessee's claim for full exemption.

The learned CIT(A), taking all the grounds together, concluded that the assessee had not brought any material to rebut the findings of the Assessing Officer and that the exemption had been allowed in accordance with the assessee's legal share in the new property. Accordingly, the addition of Rs. 4,33,143/-, representing taxable long-term capital gain, was confirmed and the appeal of the assessee was dismissed.

Aggrieved by the aforesaid order of the learned CIT(A), the assessee is in appeal before us and has raised the following grounds of appeal: 1. The learned Commissioner of Income Tax (Appeals), Income Tax Department, NFAC, Delhi, [CIT(A)] has erred on the facts and circumstances of the case and in law in restricting the claim of new property u/s 54 to Rs. 68,50,000/- i.e. 50% of Rs. 1,37,00,000/- and

The learned AR submitted that the entire investment in the new residential property was made by the assessee. He invited our attention to the relevant pages of the paper book, including the deed of transfer and the details of payments made by the purchasers of the old flat directly to the developer of the new flat on behalf of and at the instructions of the assessee. He submitted that the consideration of Rs. 1,27,00,000/- arising from sale of the old flat was paid directly to the developer towards acquisition of the new flat. The balance amount of Rs. 10,00,000/- was also paid towards the new flat and the assessee had additionally borne stamp duty of Rs. 7,32,700/- and registration charges of Rs. 31,200/-. Thus, according to the learned AR, the entire investment was attributable to the assessee and the mere inclusion of the spouse's name in the purchase agreement could not justify restricting the deduction under section 54 to 50%.

The learned AR contended that the learned CIT(A) erred in proceeding on the footing that the assessee was required to establish that his spouse was merely a nominal holder or benamidar. According to him, for the purpose of section 54, what is relevant is the investment made by the assessee in the new

In support of this proposition, the learned AR relied upon the decision of the Hon'ble Delhi High Court in ,CIT v. Ravinder Kumar Arora [2011] 15 taxmann.com 307, and submitted that the Hon'ble High Court had held that the relevant provision does not require the residential house to be purchased exclusively in the name of the assessee and that inclusion of the wife's name in the purchase document would not disentitle the assessee from the deduction where the investment was made by the assessee. He also relied upon the decision of the Co-ordinate Bench in Tejal Kaushal Shah v. ITO, ITA No. 3303/Mum/2024 for the proposition that the deduction is to be determined with reference to the actual investment made by the assessee and cannot be mechanically restricted according to the ratio of names appearing in the purchase document.

The learned AR, therefore, submitted that since the amount invested by the assessee in the new residential property was higher than the long-term capital gain, the entire capital gain was eligible for deduction under section 54(1)(ii) and the addition of Rs. 4,33,143/- deserved to be deleted.

Per contra, the learned Departmental Representative relied upon the order passed by the learned CIT(A) and supported the

We have considered the rival submissions and perused the material available on record. We have also carefully gone through the orders of the authorities below and the judicial precedents relied upon by the learned AR. The short controversy arising for our consideration in Ground No. 1 is whether the exemption available to the assessee under section 54 of the Act could be restricted to 50% of the investment in the new residential property merely for the reason that the said property was acquired in the joint names of the assessee and his wife, notwithstanding the assessee's case that the investment in the new property was made out of funds attributable to him.

Before proceeding further, it is pertinent to note that this is the second round of proceedings before the Tribunal. In the first round, the Coordinate Bench, vide order dated 08.11.2023 in ITA No. 2550/Mum/2023, considered the assessee's claim under section 54 of the Act. In paragraph 7 of the said order, the Coordinate Bench held as under: "7. However, at the same time, it is also evident from the reasons recorded by the AO while reopening the assessment, as noted on page 1 of the assessment order, that the assessee purchased immovable property valued at Rs. 1,46,88,500 and sold immovable property at Rs. 1,27,00,000, during the year under consideration. Thus, when such are the facts, we are of the considered view that the AO was also required to grant the benefit of section 54 of the Act to the assessee while computing the income under the head 'capital gains'. However, as evident from the record, despite noting the aforesaid reasons for reopening the assessment, the AO merely computed the long-term capital gains

Thus, in the first round, the Coordinate Bench specifically directed the Assessing Officer to grant the benefit of section 54 in accordance with law after verification of the assessee's claim. The matter presently before us concerns the extent of such exemption after the verification undertaken in the consequential proceedings. In the consequential assessment proceedings, the Assessing Officer accepted the purchase of the new residential property for a consideration of Rs. 1,37,00,000/- but restricted the amount attributable to the assessee to Rs. 68,50,000/-, being 50% thereof, essentially on the premise that the new property had been purchased jointly in the names of the assessee and his wife. The learned CIT(A) affirmed the said approach by holding that the purchase agreement recognised the assessee and his spouse as joint owners, each having a 50% undivided interest, and that the assessee had failed to establish that the spouse was merely a nominal holder or benamidar.

In our considered view, the approach adopted by the learned CIT(A) proceeds on an incorrect understanding of the requirement of section 54 of the Act. The issue for consideration under section 54 is whether the assessee has made the requisite investment in a

On this aspect, the decision of the Hon'ble Delhi High Court in CIT v. Ravinder Kumar Arora [2011] 15 taxmann.com 307 (Delhi)/ [2012] 342 ITR 38 (Delhi), relied upon by the learned AR, is directly relevant. In that case also, the Assessing Officer had restricted the exemption to 50% on the ground that the residential property was purchased jointly in the names of the assessee and his wife, though the investment had been made by the assessee. The Hon'ble High Court recorded the following factual position: "8. At the outset, important factual findings recorded by the Tribunal in this case are that it was the assessee who independently invested in the purchase of new residential house though in his own name but along with the name of his wife also and that it was the assessee who paid stamp duty and corporation tax at the time of the registration of the sale deed of the house so purchased and has also paid commission and legal expenses in connection with the purchase of the house. The Tribunal further records that whole of the purchase consideration has been paid by the assessee and not even a single penny has been contributed by the wife in the purchase of the house. The Tribunal also noted the argument that the property was purchased by the assessee in the joint name with his wife for 'shagun' purpose and because of the fact that the assessee was physically handicapped. The Tribunal further concludes that as a matter of fact, the assessee was the real owner of the residential house in question."

The Hon'ble High Court further explained the legal position as under: "10. Even when we look into the matter from another angle, facts remain that the assessee is the actual and constructive owner of the house. In CIT v. Podar Cement (P.) Ltd. [1997] 92 Taxman 541 / 226 ITR 625 (SC), the Supreme Court has also accepted the theory of constructive ownership. Moreover, Section 54F mandates that the house should be purchased by the assessee and it does not stipulate that the house should be purchased in the name of the assessee only. Here is a case where the house was purchased by the assessee and that too in his name and wife's name was also included additionally. Such inclusion of the name of the wife for the above-stated peculiar factual reason should not stand in the way of the deduction legitimately accruing to the assessee. Objective of Section 54F and the like provision such as Section 54 is to provide impetus to the house construction and so long as the purpose of house construction is achieved, such hyper technicality should not impede the way of deduction which the legislature has allowed. Purposive construction is to be preferred as against the literal construction, more so when even literal construction also does not say that the house should be purchased in the name of the assessee only. Section 54F of the Act is the beneficial provision which should be interpreted liberally in favour of the exemption/deduction to the taxpayer and deduction should not be denied on hyper technical ground. Andhra Pradesh High Court in the case of Mir Gulam Ali Khan v. CIT [1987] 165 ITR 228 /[1986] 28 Taxman 572 has held that the object of granting exemption under Section 54 of the Act is that an assessee who sells a residential house for purchasing another house must be given exemption so far as capital gains are concerned. The word 'assessee' must be given wide and liberal interpretation so as to include his legal heirs also. There is no warrant for giving too strict an interpretation to the word 'assessee' as that would frustrate the object of granting exemption."

We also find support from the subsequent decision of the Coordinate Bench in Smt. Tejal Kaushal Shah v. ITO, ITA No. 3303/Mum/2024, order dated 17.04.2025. The Coordinate Bench, after examining section 54, recorded the following findings: "9. On a perusal of the above provision, it is observed that the capital gain which arises from the transfer of a long term capital asset being buildings or lands appurtenant thereto and the same being a residential house where the assessee has within a period of one year before or two years after the transfer purchased or within a period of 3 years after the date of transfer constructed a residential house is entitled to claim deduction under this provision. Upon considering the same, we do not find any embargo for the assessee to claim deduction under this provision either as a co-owner, or on sale of one or two residential properties or on purchase of a residential property as a co-owner. We do not find any express bar for the assessee to claim the said deduction on a property which has been jointly purchased by the assessee. Further, the ld. AO's contention that the old property was purchased jointly by the assessee's husband and the assessee is to be taken into view only to find out if the assessee's husband has also claimed deduction u/s. 54 of the Act pertaining to the sale of this property and purchase of the new residential house. If as per the contention, the old property belongs to the assessee and the sale consideration received out of the transfer was invested by the assessee in the new property, the assessee is entitled to claim

The Coordinate Bench thereafter concluded:

The legal position which thus emerges is that the mere fact that the new residential property is purchased jointly with the spouse does not, by itself, provide a basis for mechanically restricting the exemption under section 54 to 50%. The quantum of deduction has to be examined with reference to the investment actually made by the assessee in the new residential property. The percentage of ownership mentioned in the purchase document cannot, in the absence of a statutory prescription to that effect, substitute the enquiry as to the source and extent of investment made by the assessee.

When the facts of the present case are examined in the light of the aforesaid legal position, we find that the Assessing Officer accepted that the new residential property was purchased for Rs. 1,37,00,000/-. The assessee's consistent case is that the sale consideration of Rs. 1,27,00,000/- arising from the old residential property was utilised towards acquisition of the new residential

Significantly, the Assessing Officer did not record a finding that 50% of the purchase consideration of the new property had, in fact, been contributed by the assessee's wife. The deduction was restricted to 50% essentially by attributing one-half of the purchase consideration to each of the two persons whose names appeared in the purchase document. The learned CIT(A), instead of examining the actual source and extent of the investment, proceeded further to hold that the assessee was required to establish that his wife was a benamidar or a nominal holder and that, in the absence of such proof, each joint owner had to be treated as holding a 50% interest.

In our considered view, the aforesaid reasoning of the learned CIT(A) cannot be sustained for the purpose of determining the exemption under section 54. The controversy before the learned

We are also unable to approve the observation of the learned CIT(A) that the assessee's claim for full exemption stood weakened because the exemption was not claimed in the original return or the return filed in response to notice under section 148. In the first round of litigation in the assessee's own case, the Coordinate Bench had already considered the circumstances in which the claim under section 54 arose and specifically restored the computation of capital gains to the Assessing Officer with a direction to verify and grant the benefit available under section 54 in accordance with law. Therefore, in the present second round, the claim was required to be examined on its merits pursuant to the binding directions contained in the earlier order of the

We further find that the facts of Ravinder Kumar Arora (supra) bear close similarity to the controversy before us. In that case also, the Revenue restricted the exemption to 50% because the new residential property was purchased jointly with the wife. The Hon'ble Delhi High Court upheld full exemption where the purchase consideration was funded by the assessee. In the present case also, no material has been brought on record by the Revenue to establish an independent 50% financial contribution by the assessee's wife. The restriction made by the Assessing Officer is founded upon the joint names appearing in the purchase agreement rather than upon any finding regarding actual contribution of funds.

In view of the above discussion, respectfully following the ratio laid down by the Hon'ble Delhi High Court in CIT v. Ravinder Kumar Arora (supra) and the decision of the Coordinate Bench in Smt. Tejal Kaushal Shah v. ITO (supra), we hold that the exemption under section 54 cannot be restricted to 50% merely because the new residential property was purchased jointly in the names of the assessee and his wife. Since the investment attributable to the assessee in the new residential property exceeds the long-term capital gain of Rs. 72,83,143/- adopted by the

Consequently, Ground No. 1 raised by the assessee is allowed.

In view of our decision allowing the assessee's principal claim under section 54 and directing deletion of the entire addition of Rs. 4,33,143/-, the alternative grounds raised in Ground Nos. 2 and 3 concerning recomputation of long-term capital gain on the basis of the DVO valuation and inclusion of stamp duty of Rs. 7,32,700/- and registration charges of Rs. 31,200/- in the cost of the new residential property become academic and do not require separate adjudication. Accordingly, Ground Nos. 2 and 3 are left open as infructuous for the purposes of the present appeal.

Ground No. 4 being general in nature requires no separate adjudication.

In the result, the appeal filed by the assessee is allowed.