Section 54F Survives Family Connection: ITAT Backs Genuine Intra-Family Property Transaction

 In a recent ruling, the Hon'ble Mumbai Tribunal examined the availability of deduction under Section 54F of the Income-tax Act, 1961 where a residential property is purchased from close relatives, and whether such a transaction can be disregarded as a colourable device merely because the parties are family members.

In the instant case, the assessee, earned long-term capital gains on the sale of unlisted shares and reinvested the proceeds in the purchase of a residential flat from her father-in-law and mother-in-law, claiming deduction under Section 54F. The Ld. AO disallowed the claim, holding that the transaction was an artificial arrangement structured within the family solely to avail the benefit of Section 54F. The AO relied upon factors such as the close relationship between the parties, the continued residence of family members in the premises, the absence of any effective capital gains tax liability in the hands of the sellers, and certain discrepancies in the departmental records, concluding that the arrangement constituted a colourable device. The Ld. CIT(A) upheld the disallowance. Aggrieved, the assessee appealed to the Hon'ble Tribunal.

Before the Tribunal, the assessee submitted that the entire transaction was genuine and supported by documentary evidence. It was contended that the income tax law does not prohibit the purchase of property from a relative, that the sellers did not continue to occupy the property purchased by the assessee, and that the execution of the agreement by the same individual in different capacities was legally permissible. The assessee further argued that the transaction was undertaken for genuine commercial and family considerations, and that the tax position of the sellers had no bearing on the assessee's eligibility for deduction. The Revenue, on the other hand, maintained that the arrangement was a colourable device intended to evade tax.

The Hon'ble Tribunal rejected the Revenue's contentions, holding that both the sale of shares and the purchase of the residential flat were genuine transactions supported by adequate documentary evidence, and that no adverse finding had been recorded regarding either transaction. It observed that there is no prohibition against purchasing a residential property from a relative, and that the manner in which the sale agreement was executed had not been questioned by the registering authorities. The Tribunal further held that a deduction under Section 54F cannot be denied merely because it arises from an intra-family transaction, unless the Revenue establishes with cogent evidence that the arrangement is a sham or colourable device. In the absence of any such material, the Tribunal directed the AO to allow the deduction claimed by the assessee.

This ruling provides important clarity on the scope of deduction under Section 54F in the context of intra-family property transactions. It firmly establishes that the mere existence of a family relationship between the transferor and transferee cannot, by itself, justify denial of the deduction where the transaction is genuine, properly documented and legally valid.