A recent ruling by the Mumbai bench of the Income-tax Appellate Tribunal (ITAT) presents significant information for individuals who jointly own property with their spouse. The ruling clarified that having joint ownership in a property does not affect one’s eligibility for tax benefits under section 54-F of the Income-tax (I-T) Act concerning long-term capital gains. This section allows for tax exemption when the net sale proceeds from the sale of an asset (excluding house property) are reinvested in a residential property, with the exemption amount proportional to the investment in the new house.
One condition for claiming this exemption is the taxpayer must not own more than one residential property (besides the newly invested property) at the time of selling the original asset. In the case involving S. Singh, the ITAT decided that owning joint interests in two residential properties does not prevent a taxpayer from claiming a deduction under section 54F of the Income-tax Act.
Singh had generated long-term capital gains of Rs. 61.6 lakh from selling agricultural land in Bhopal during the 2012-13 fiscal year. Despite having a stake in two residential properties—one with her husband and another with her father’s Hindu Undivided Family (HUF)—she qualified for an exemption under section 54F due to her reinvestment in a new house.
The income tax officer initially denied the deduction due to her owning multiple properties, but Singh argued that the properties were jointly owned and that she was not the sole financier. Despite mixed rulings from different high courts on such matters, the ITAT ruled in favor of Singh, aligning with the Supreme Court’s principle that the interpretation favoring the taxpayer should prevail when two interpretations are possible.
Experts note the contentious nature of this issue and the existence of contrasting rulings, such as one from the Karnataka high court. They advise taxpayers in similar situations to rely on favorable decisions from their jurisdictional tribunal or court to support their claims and to avoid penalties by fully disclosing information in their tax returns and in responses to tax notices.