Legality of Section 54F Exemptions on Inter-Spousal Property Transfers: ITAT Mumbai Quashes Colorable Device Allegations

The intersection of family arrangements and capital gains tax exemptions often attracts intense scrutiny from the revenue authorities. A recurring point of contention is whether an assessee can legitimately claim tax exemptions by purchasing a residential property from a close relative, such as a spouse. The Income Tax Appellate Tribunal (ITAT), Mumbai, recently delivered a landmark ruling in the case of Neha Karan Motwani Vs ITO, addressing this exact controversy.

The tribunal firmly rejected the Revenue’s hypothesis that acquiring a property from a husband to claim benefits under Section 54F of the Income Tax Act 1961 inherently constitutes a "colorable device" for tax evasion. This comprehensive analysis delves into the factual matrix, the statutory framework, the arguments presented by both sides, and the judicial precedents that shaped this significant verdict.

The Factual Matrix of the Dispute

The controversy stems from the income tax return filed by the assessee for the Assessment Year (AY) 2021-22. On 24.12.2021, the assessee declared a total income of Rs. 1,92,59,430/-, which encompassed earnings from salary, house property, capital gains, and other sources.

The Capital Gains and Subsequent Investment

During the financial year, the assessee executed the transfer of unlisted and unquoted equity shares of M/s Fitternity Health E-Solutions Private Limited and M/s Curefit Healthcare Pvt. Ltd. This transaction, finalized on 31.03.2021, resulted in substantial Long-Term Capital Gains (LTCG) amounting to Rs. 8,31,47,788/-.

To optimize her tax liabilities within the permissible legal framework, the assessee sought an exemption under Section 54F of the Income Tax Act 1961. She claimed a deduction of Rs. 6,91,52,369/- by reinvesting the proceeds into a residential house property.

The property in question—Flat No.102, Usha Sundar Premises CHSL, Juhu Tara Road, Santacruz (West), Mumbai—was acquired from HP Trading, a sole proprietorship concern owned by her husband, Shri Karan Haresh Motwani. The acquisition was formalized through a Deed of Transfer dated 30.03.2021, which was subsequently registered on 30.06.2021. The total negotiated consideration for this residential flat was Rs. 7,50,00,000/-, and the entire amount was successfully remitted through banking channels by 27.05.2021.