Tribunal allows full capital gains exemption under Sec 54 on reinvestment in jointly owned residential property

 Mumbai tribunal has clarified that Section 54 of the Income-tax Act, 1961 (‘the Act’) deduction should be allowed in full to the extent of the amount actually funded by the Assessee towards the new residential property, irrespective of the property being jointly registered in the name of another family member.

The Assessee sold two residential properties and invested the long-term capital gains into a new residential house property jointly purchased with her son-in-law. Total consideration for the new flat was approx. ₹4.18 crore, out of which the assessee contributed ~₹3.68 crore (over 85%), and the son-in-law contributed ₹50 lakh. The sale deed initially did not specify share ratio, but a rectification deed later clarified ownership interests.

The Assessing Officer restricted the exemption under Section 54 of the Act to 50% of the investment on the ground that the property was jointly held with the son-in-law. Even though the AO accepted that the Assessee contributed the majority of the purchase price, he considered only 50% exemption solely due to joint ownership. The CIT(A) allowed full deduction under Section 54 of the Act, holding that exemption is allowable to the extent of the actual capital gains invested in the new property, irrespective of joint ownership. Aggrieved by the order of the CIT(A), the Revenue filed an appeal before the Tribunal, contending that the benefit under Section 54 of the Act is intended solely for the Assessee’s own benefit.

The Tribunal upheld the CIT(A)’s decision, holding that Section 54 of the Act focuses on the amount actually re-invested in the new residential house, and the deduction cannot be denied merely on account of joint ownership. It further observed that the sale deed did not specify any ownership ratio and, since the Assessee’s investment in the property was undisputed, the entire amount re-invested by the Assessee should be eligible for deduction under Section 54 of the Act.

This ruling reinforces that exemption under Section 54 of the Act should be granted based on the actual investment made by the taxpayer. Further, taxpayers should maintain robust documentary evidence and a clear banking trail supporting the investment in the new property.