Capital Gains Exemption Under Section 54 and SpousetoSpouse Transactions : Legislative Intent, Judicial Trends, and Compliance Safeguards

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The Tax Publishers Income Tax--Capital Gains Exemption Under Section 54 and Spouse-to-Spouse Transactions : Legislative Intent, Judicial Trends, and Compliance Safeguards CS. Ayush Rathi The exemption under section 54 of the Income Tax Act, 1961 (Hereinafter referred to as the 'Act') has always been a cornerstone relief provision, enabling taxpayers to roll over long-term capital gains into a new residential property without immediate tax incidence. While the statute is silent on whether the new property can be purchased from a close relative or spouse, revenue authorities have often challenged such transactions, alleging they are artificial or designed solely to avoid tax. This article examines the legislative framework, policy considerations, and judicial approach to section 54 of the Act in the context of spouse-to-spouse property purchases, with a brief illustrative case from the ITAT Mumbai. 1. Legislative Intent and Evolution of section 54 Section 54 of the Act has its origins in the policy goal of encouraging housing investment. From its inception, the provision has sought to ensure that taxpayers who replace their residential property within a specified period are not burdened with immediate capital gains tax. Over the times, amendments have been made to refine its scope, for instance, the Finance Act, 2014 restricted the exemption to investments in one residential house in India, while other changes clarified timelines for construction and conditions under the Capital Gains Accounts Scheme (CGAS). Notably, Statute has never imposed a restriction on purchasing the new property from a related party. This legislative choice suggests that the identity of the seller is irrelevant so long as the transaction is genuine and the reinvestment requirements are met. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Income Tax--Capital Gains

Exemption Under Section 54 and Spouse-to-Spouse Transactions : Legislative Intent, Judicial Trends, and Compliance Safeguards

CS. Ayush Rathi

The exemption under section 54 of the Income Tax Act, 1961 (Hereinafter referred to as the 'Act') has always been a cornerstone relief provision, enabling taxpayers to roll over long-term capital gains into a new residential property without immediate tax incidence. While the statute is silent on whether the new property can be purchased from a close relative or spouse, revenue authorities have often challenged such transactions, alleging they are artificial or designed solely to avoid tax. This article examines the legislative framework, policy considerations, and judicial approach to section 54 of the Act in the context of spouse-to-spouse property purchases, with a brief illustrative case from the ITAT Mumbai.

1. Legislative Intent and Evolution of section 54

Section 54 of the Act has its origins in the policy goal of encouraging housing investment. From its inception, the provision has sought to ensure that taxpayers who replace their residential property within a specified period are not burdened with immediate capital gains tax. Over the times, amendments have been made to refine its scope, for instance, the Finance Act, 2014 restricted the exemption to investments in one residential house in India, while other changes clarified timelines for construction and conditions under the Capital Gains Accounts Scheme (CGAS). Notably, Statute has never imposed a restriction on purchasing the new property from a related party. This legislative choice suggests that the identity of the seller is irrelevant so long as the transaction is genuine and the reinvestment requirements are met.