While denying capital gains exemption under Section 54 of the Income Tax Act to a retired government employee, the Punjab & Haryana High Court (Chandigarh Bench) has emphasised that both the sale of the original asset and the purchase of the new asset must be executed by the same assessee, and that reinvestment in a property standing exclusively in the spouse’s name does not qualify for capital gains exemption.
The Court explained that for claiming exemption under Section 54 of the Income Tax Act, both the transfer of the original residential asset and the purchase or construction of the new residential asset must be carried out by the same assessee, and the new asset must stand in the name of the assessee himself. The exemption is not available where the reinvestment is made solely in the name of the spouse, even if the entire investment has been funded from the assessee’s own resources and the spouse has no independent income.
The term “assessee” in Section 54 is to be interpreted strictly, and Section 64(1)(iv) of the Act, which deems the husband to be the beneficial owner of spousal property, does not extend to conferring the exemption where the new asset is registered in the wife’s name, pointed out the Court.
The Division Bench comprising Justice Deepak Sibal and Justice Rupinderjit Chahal critically observed that the assessee himself had claimed exemption under Section 54-F of the Income Tax Act, but on a plain reading of the provision, Section 54-F applies only where the original asset transferred is not a residential house. Since in the present case, both the original asset sold and the new asset purchased were residential properties, the Court pointed out that Section 54-F could not have been invoked at all, and the relevant provision was, in fact, Section 54 of the Act (as it stood at the relevant time). The Court noted that this basic distinction had escaped the notice of the Assessing Officer, the CIT(A), and the ITAT, which the Bench stated it did not appreciate.
The Court further observed that Section 54 of the Act permits exemption only if both the transactions of sale of the original asset and purchase of the new asset, within the stipulated time, are executed by the same assessee as defined under Section 2(7) of the Act. The Bench emphatically recorded that a husband and wife are different individuals and distinct legal entities, and that one transaction by the husband and the other by the wife cannot be clubbed together for claiming exemption under Section 54 of the Act.
The Court placed heavy reliance on a string of its own Division Bench precedents, beginning with Jai Narayan vs. Income Tax Officer [(2008) 306 ITR 335], where it had been held that the term “assessee” in Section 54-B must be interpreted to mean that the new asset has to be in the name of the assessee himself, and that purchase of agricultural land in the name of a son or grandson would not entitle the assessee to exemption.
The Court followed this view in CIT vs. Dinesh Verma [(2015) 60 taxmann.com 461], where it was held that Section 54-B does not entitle an assessee to the benefit if the subsequent property is purchased by a person other than the assessee, including a close relative such as his wife or children. The Court further referred to Kamal Kant Kamboj vs. Income Tax Officer [(2017) 88 taxmann.com 541], and Bahadur Singh vs. CIT(A) [(2023) 154 taxmann.com 456], where the Court again declined exemption where the property was purchased solely in the name of the wife.
Briefly, the appellant, Subh Karan Yadav, a retired Government employee, owned a residential house in Rewari which he sold during the assessment year 2011-12 for a sale consideration of Rs. 22 lakhs. On Feb 09, 2011, within the stipulated window, he purchased a residential plot at Bawal in the name of his wife, on which a residential house was subsequently constructed. In his income tax return for AY 2011-12, the appellant disclosed both transactions and claimed exemption from capital gains tax under Section 54-F of the Income Tax Act, on the ground that the entire sale consideration had been reinvested.
In 2018, a notice under Section 148 of the Income Tax Act was issued to the appellant questioning his claim of exemption under Section 54-F. The appellant did not file any reply, and the Assessing Officer proceeded to deny the exemption, adding Rs. 22 lakhs to his declared income through an assessment order. The appellant then carried the matter in appeal before the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal (ITAT), but, in vain.
