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Time of India
3 days ago
- Business
- Time of India
Wife pays no income tax after selling 2 houses for Rs 6 crore gifted by her husband, wins case in ITAT Mumbai; here's how it happened
Academy Empower your mind, elevate your skills How did this income tax case start? March 14, 2002: The wife purchased two flats in Hiranandani Gardens, Powai, Mumbai, for Rs 34 lakh (34,51,000) and Rs 17 lakh (17,40,00). She claimed to have purchase these properties in the joint name with her husband. The wife purchased two flats in Hiranandani Gardens, Powai, Mumbai, for Rs 34 lakh (34,51,000) and Rs 17 lakh (17,40,00). She claimed to have purchase these properties in the joint name with her husband. March 27, 2015: Husband purchased another house property in Lodha Estrella solely in his own name. Husband purchased another house property in Lodha Estrella solely in his own name. April 1, 2017: Her husband through a legal gift deed, gifted the wife his share of 50% in the said properties in Hiranandani Gardens, Powai, Mumbai. Her husband through a legal gift deed, gifted the wife his share of 50% in the said properties in Hiranandani Gardens, Powai, Mumbai. January 9, 2020: The wife sold the two house properties located in Hiranandani Gardens for Rs 5.98 crore (5,98,00,000). She calculated her long term capital gains as Rs 4 crore (4,21,83,273) and claimed Section 54 tax exemption benefits in respect of purchase of another immovable house property from her husband of Rs 3.85 crore (3,85,00,000). The wife sold the two house properties located in Hiranandani Gardens for Rs 5.98 crore (5,98,00,000). She calculated her long term capital gains as Rs 4 crore (4,21,83,273) and claimed Section 54 tax exemption benefits in respect of purchase of another immovable house property from her husband of Rs 3.85 crore (3,85,00,000). March 18, 2021: The wife used the money she got from the sale of the two Hiranandani Gardens house properties (2020) to buy her own husband's Lodha properties which had he purchased in 2015. She claimed Section 54 long term capital gains tax exemption for this purpose. What did ITAT Mumbai say? Sale agreement between husband and wife 'The Assessing officer has brought to tax long term capital gains of Rs 4,21,83,273 on sale of two flats without allowing the exemption claimed by the assessee under Section 54 amounting to Rs 3,96,55,000. The sale of flats have been executed vide agreements to sell dated January 9, 2020 and the said flats were initially purchased vide agreement to purchase dated March 14, 2002 read with registered gift deed dated April 1, 2017. The contents of these sale agreements (and purchase/gift deed) are not in dispute and the same have been executed by the assessee in her individual capacity and the consideration has been received by her in her bank account and which has been duly offered to tax by the assessee and has been brought to tax by the AO in the hands of the assessee. Ownership title transfer of the house properties 'Now, coming to exemption claimed by the assessee under Section 54 amounting to Rs 3,96,55,000, the same relates to purchase of another flat by the assessee from her husband vide registered agreement to sell dated March 18, 2021 for a stated consideration of Rs 3,85,00,000 on which the assessee has paid stamp duty of Rs 11,55,000. The factum of ownership of the said flat in the name of the husband of the assessee vide agreement to sell dated March 27, 2015 is not in dispute nor the contents of the subject registered agreement to sell dated March 18, 2021 wherein the title in the property has been transferred by him in the name of the assessee. Rotation of funds 'We find that the AO (tax department) alleging the rotation of funds has merely looked at the transactions on March 12, 2021 when the majority of the purchase consideration has been discharged and has not considered the transactions prior to that date where the money has been initially parked by the assessee in fixed deposits/with the company and thereafter, received back and out of which, the amount was paid to the husband of the assessee towards the purchase consideration. Further, we find that the capital gains which have been brought to tax relates to the flats that have been sold/ transferred by the assessee vide agreement to sell dated January 9, 2020 and the assessee has thereafter purchased another flat vide agreement to sell dated March 18, 2021 wherein the consideration has been discharged by March 12, 2021. The said purchase is thus within the stipulated time period of two years after the date on which transfer of the original asset took place as prescribed under Section 54, the claim of exemption under Section 54 cannot be denied to the assessee(wife)." How does LTCG tax exemption under Section 54 work? "Section 54 of the Income Tax Act, 1961 provides that an individual taxpayer may claim tax exemption on long term capital gains arising from a sale of residential house property/ land by way of investing the capital gains in one residential property in India. Such new house property should be purchased within a period of 1 year before or 2 years after the date of transfer of old house or should be constructed within a period of 3 years from the date of transfer of the old house. It is pertinent to note that such exemption can be claimed only in respect of one residential house property purchased/ constructed in India. However, if the long term capital gains is upto Rs 2 crore, the taxpayer can avail a once in a lifetime option of acquiring 2 house properties within the above time limit. Also, the new house property would be subjected to a lock in of 3 years. If a taxpayer claiming exemption Section 54 of Income Tax Act, 1961 and transfers the new house within 3 years from the date of its acquisition/completion of construction, then the benefit granted under Section 54 of Income Tax Act, 1961 will be withdrawn and accordingly, the cost of acquisition of the new assets would be reduced from the exempted capital gains." Amount of capital gains arising on transfer of land; or Amount invested in purchase/construction of new residential house property (including the amount deposited in Capital Gains Deposit Account Scheme) A wife managed to win an income tax case in ITAT Mumbai, even after selling two house properties gifted by her husband in Mumbai for Rs 6 crore without paying any income tax. These properties were originally bought in 2002 for Rs 34 lakh and Rs 17 lakh each, and she sold them in 2020 for Rs 6 crore. According to income tax rules, she made a long term capital gain (LTCG) of just over Rs 4 crore after factoring in indexation (inflation). However, despite this LTCG of Rs 4 crore, she didn't owe any income tax because she reinvested the money to buy her husband's Lodha house property, also located in Mumbai, by claiming Section 54 strange as it may seem, all of her transactions were completely legal, and she even paid the full stamp duty required for these real estate Income Tax Assessing Officer (AO) said in this case since the husband is the deemed owner of the said property, as per income tax clubbing provisions, the capital gain earned on sale of property counts as the income of her husband. 'One cannot claim exemption under Section 54 on purchase of one's own property.'Apart from this, the AO also raised six objections as to why this lady should be liable for income tax on the sale of her Rs 6 crore property. One of the objections relates to the money used to pay for the AO took a look at the bank account statement of the husband and wife and saw that the wife received Rs 70 lakh on March 12, 2021 from a company where both she and her husband are employed as directors. On the same date, she transferred the Rs 70 lakh to her husband's bank account. And then, on the very same day, her husband transferred back the Rs 70 lakh to the company's bank account where they both serve as AO observed: 'The same rotation was followed for another payment of Rs 3 crore or 3,00,00,000 (Rs 1.5 crore each) on the same day that is 12.03.2021. Hence, it is seen that the payment of Rs 3.7 crore was moved from the company and reached the company through the wife and husband in a single day. This is nothing but rotation of money just to evade tax. There's no actual transfer of money, no right to use the property changed, only title of the property has changed. In view of the above, it is nothing but a colourable device used to evade tax.'The Income Tax Appellate Tribunal (ITAT) Mumbai rejected the objections of the Income Tax Assessing Officer (AO) and confirmed that the wife in this case is not required to pay any income tax on the capital gains of Rs 4 crore since she claimed Section 54 tax exemption by purchasing another house from her the rotation of money, the ITAT Mumbai's judge said that the AO only focused on the transactions on March 12, 2021, when most of the purchase consideration has been discharged. The transactions prior to that date were not considered, where the assessee (wife) had initially parked the money in fixed deposits/with the company and then, received it back, which was used to pay the husband for buying the house apartment built by Lodha out what else the ITAT Mumbai had to say and how the wife managed to win her case where she had to pay no income tax despite having Rs 4 crore in capital gains from sale of the property in to the judgement order of ITAT Mumbai dated June 9, 2025, here's the timeline of events:A total of six grounds were raised by the Income Tax Assessing Officer regarding why the wife should not get Section 54 long term capital gains 'In light of aforesaid discussion and in the entirety of facts and circumstances of the case, the AO is hereby directed to allow the exemption claimed by the assessee under Section 54 of the Act.'Chartered Accountant Suresh Surana explains:Surana says: "The threshold limit of considering investment in new house property would be restricted to Rs 10 crore for the purpose of claiming deduction under Section 54 of the Income Tax Act, 1961."
Time of India
17-07-2025
- Business
- Time of India
Indian engineer wins Rs 69-lakh unexplained investment income tax case in ITAT Mumbai on these technical grounds
Academy Empower your mind, elevate your skills How did this unexplained investment case under Income Tax Act, 1961 start? FY 2014-15: An engineer working in Dubai, UAE purchased a property in Kerala for Rs 39 lakh (Rs 39,62,714) and booked an FD worth Rs 30 lakh (Rs 30,36,720). An engineer working in Dubai, UAE purchased a property in Kerala for Rs 39 lakh (Rs 39,62,714) and booked an FD worth Rs 30 lakh (Rs 30,36,720). April 20, 2022: The tax assessing officer (AO) issued a notice under Section 148 and re-opened his tax file. The tax assessing officer (AO) issued a notice under Section 148 and re-opened his tax file. May 11, 2022: The engineer filed an income tax return (ITR) in response to notice issued under Section 148 declaring income of Rs 5,85,620. The engineer filed an income tax return (ITR) in response to notice issued under Section 148 declaring income of Rs 5,85,620. March 11, 2023 to April 21 of 2024: The tax department issued him statutory tax notices under Section 142 (1) The tax department issued him statutory tax notices under Section 142 (1) March 15, 2024: The engineer filed part reply to these tax notices and therefore a show cause notice was issued and served upon him. He failed to avail the opportunity of filing submissions/explanations in response to these show cause notices. The engineer filed part reply to these tax notices and therefore a show cause notice was issued and served upon him. He failed to avail the opportunity of filing submissions/explanations in response to these show cause notices. March 31, 2024: The case was getting time barred and since the engineer did not defend his case, a best judgement order under Section 144 imposing Rs 69 lakh income as unexplained investment under Section 69 was added to his income and accordingly penalty proceedings were also initiated against him. What did the taxpayer explain about 'unexplained investments'? The Assessee being non-resident and working in Dubai, UAE from which he had made direct remittance for purchase of property in Kerala and the money transfer receipts and all the relevant documentary details were already provided; Since the income had never accrued or arisen in India the investment in property cannot be termed as unexplained investment u/s 69 of the Act. Fixed deposits of Rs 30,36,720 were made from maturity of old fixed deposits, because, since 1997 the Assessee has been staying in Dubai and working as an engineer and earning salary. The savings in fixed deposits held in India are old and being matured and reinvested during the current year and the bank statements highlighting the same were already provided. These four grounds of appeal were raised in ITAT Mumbai 'On the facts and circumstances of the case and in law, the ITO, Ward 34(3)(5), Mumbai was not having the jurisdiction over the appellant as he was a non-resident during the year and, therefore, he has erred in passing the order under Section 148A(d) and also issuing the notice under Section 148.' ' On the facts and circumstances of the case and in law, the ITO, Ward 34(3)(5), Mumbai has erred in passing the order under Section 148A(d) and also issuing the notice under Section 148 without appreciating that he was not having the jurisdiction for the same in view of Section 151A and the notification issued thereunder notifying e Assessment of Income Escaping Assessment Scheme, 2022 and, thereby, rendering the said order and the notice as well as the entire assessment proceeding as null and void.' 'On the facts and circumstances of the case and in law, the learned Assessing Officer has erred in passing the assessment order under Section 143(3) r.w.s. 144C(3) beyond the time limit provided for completion of the assessment under the provisions of Section 153.' 'On the facts and circumstances of the case and in law, the Ld. Assessing Officer erred in adding an amount of 36,12,173 under section 69 of the Act being the purchase price paid by the appellant for acquiring a property at Kerala, without appreciating the fact that the said payment was done in the earlier years and not during the assessment year under consideration.' What did ITAT Mumbai say? Here's what exactly the ITAT Mumbai said: 'We have noticed that in the order under Section 148A clause (d) dated 20.04.2022, the AO has acknowledged the response to the notice by the Assessee that he was NRI for the relevant year. Therefore, it is not the case of the Revenue that the AO who has issued the impugned notice under Section 148 was not aware that the Assessee was NRI for the relevant year.' 'Thus, we are of the considered opinion that in the arguments of the Ld. D.R. (tax department's lawyer) wherein he has tried to invoke Section 292BB, because of the above discussion and the judicial precedent relied on by the Ld. A.R., there is no merit found in the arguments from applicability of section 292BB in the case of the Assessee (engineer).' 'Further, in view of the findings of the High Court in the case of Nimir Kishore Mehta (supra) the AO who had issued the notice under Section 148 was not having jurisdiction on the case of the Assessee.' 'Therefore, the issuance of show cause notice under Section 148A(b), passing of the order under Section 148A(d) and subsequent issuance of notice under Section 148 by the AO in this case are held to be carried out without having jurisdiction over the issue and the said proceedings are bad in law and accordingly liable to be quashed. Accordingly, ground Nos.1 &2 are decided in favour of the Assessee.' What might be some key legal takeaways from this judgement? On June 27, 2025, an Indian engineer , who had been working in Dubai, United Arab Emirates since 1997 won a case of Rs 69-lakh unexplained investment under Income Tax Act, 1961 on technical grounds. The engineer had bought a property in his hometown in Kerala for Rs 39 lakh and also put Rs 30 lakh in fixed deposits (FDs). However, the income tax department claimed that both the property purchase (Rs 39 lakh) and FD investment (Rs 30 lakh) were 'unexplained investments' under Section 69 of the Income Tax Act, a result, the entire Rs 69 lakh (39+30) was added to his income and accordingly he was issued tax notices and penalty proceedings were also initiated against him. To fight against this tax notice and penalty proceedings, this engineer at first filed an appeal in the Dispute Resolution Panel (DRP) of the tax department. He explained that since the time he was working in Dubai, he had been sending remittance money back to his family in India. He also explained that this Rs 30 lakh in FDs were simply old FDs that had matured and were also explained that the funds for the property investment came entirely from his salary in Dubai, meaning the income had never accrued or arisen in India. The DRP accepted the explanation for the FD money but rejected the property investment explanation so he filed an appeal in ITAT Mumbai ITAT Mumbai heard the arguments presented by both the tax department and the engineer's lawyers, and ruled in the engineer's favour because of two technical reasons. Among the two reasons, the first reason was the time when this engineer used his Dubai money to buy this Kerala property, he was a non-resident Indian (NRI). Secondly the benefit of Section 292BB under Income Tax Act, 1961 was not applied to this engineer's find out more about the technical reasons beind ITAT Mumbai's decision not to enforce Section 292BB to this case, which led to the engineer's win and the cancellation of the entire tax notice, keep reading. This article also outlines the four grounds of appeal that were accepted by ITAT Mumbai, contributing to the taxpayer's to the order of ITAT Mumbai dated June 27, 2025, here's the details:The engineer filed an appeal in DRP against this best judgement to the order of the ITAT Mumbai, here's what the engineer taxpayer's lawyers said:(no part of the explanation has been changed or altered, everything is as per what the judgement said)DRP accepted his arguments partially and said that he has successfully explained the source of funds for the Rs 30 lakh said this about the Kerala property investment: 'As regards, the investment in property, the applicant assessee has not been able to explain the sources of investment to the extent of Rs 36,12,173 with proper documentary evidence.'He filed an appeal in Mumbai ITAT against the order of the taxpayer's lawyer raised four grounds of appeal and ground 1 and 2 were accepted by ITAT Mumbai. Since ground 1 and 2 were accepted, ground 3 and 4 were deemed insignificant and four grounds of appeal as presented by the taxpayer's lawyers are as follows:ITAT Mumbai deleted the entire income addition under Section 69 unexplained investment provisions and decided not to apply Section 292BB benefits in this tax notice was issued by the tax AO of Mumbai zone while the engineer was an NRI and hence the international taxation department AO should have issued the notice. If Section 292BB benefits were applied in this case, then this technical issue of AO's jurisdiction would not have been an Mumbai said: ' In view of the decision on ground Nos.1 & 2 in favour of the Assessee wherein the notice issued under Section 148 were held to be issued without any jurisdiction, the decision on ground Nos.3 & 4 pails into insignificance and has been rendered academic and therefore needs no adjudication The appeal of the Assessee is disposed of in favour of the Assessee in above manner. Order pronounced in the open court on 27.06.2025.'ET Wealth Online asked various experts about the key legal takeaways from this judgement. Here's what they said:"The assessee secured relief purely on technical grounds, the ITAT rightly held that the notice under Section 148 was void ab initio, having been issued by an officer without jurisdiction over an NRI. This procedural defect alone rendered the assessment proceedings invalid. That said, even on merits, the taxpayer's position was defensible. The source of funds used to purchase the property i.e. matured fixed deposits—was well-documented; hence, the allegation of unexplained investment was inherently weak."'A jurisdictional defect, whether related to territorial boundaries or the subject matter of a case, undermines the very foundation of legal authority to proceed. Such a flaw is incurable and cannot be rectified. The established legal principles affirm that jurisdiction cannot be conferred by default. Consequently, any notice issued without proper jurisdiction is considered legally void, and this invalidity remains unaffected even by provisions such as Section 292BB. Nonetheless, it remains essential that jurisdictional objections are raised within the prescribed timeframe.''In the current case, the assessee has won on technical grounds i.e. the issuance of the reassessment notices are invalid as the same has been issued by wrong jurisdiction of the tax officer (i.e. notice was issued by domestic tax officer instead of international tax officer).''The tax assessing officer (AO), in his reassessment order, had alleged that the taxpayer has not been able to explain the sources of investment in immovable property with proper documentary evidence.'The ITAT order seems to suggest that the taxpayer had made efforts to submit some documentary evidence, which eventually was not accepted by the tax officer. Since the ITAT decided the matter in favour of the taxpayer on technical grounds, the ITAT has not commented on the merits of the case (i.e. the quality of the documentary evidence).''Where the matter would have been discussed on merits (i.e. in a situation where the notice would have been issued by an International Tax officer), the taxpayer would have had an opportunity to support his claim with respect to documentary evidence as well as he could have argued on the ground that the reassessment notice was issued beyond the prescribed time limits.''This case gives a lesson that whenever an NRI taxpayer receives a notice from the tax officer, apart from adhering to the notice and providing relevant information, the taxpayer should also make efforts to check the veracity of the notice to determine whether the said notice is correct in all respects, as the same could have an overall impact on the validity of the tax proceedings initiated by the tax officer.'The non-resident has succeeded in getting a big relief, but only after years of fighting. Timely replying to the Department's notices, submitting of evidence on sources for contentious investments, such as bank statements, a flawlessly computed income statement, tax paid challan, agreement for purchase of the property, assessing officer's lack of jurisdiction and a Bombay High Court's precedent and all saved the resident taxpayers, non-resident taxpayers are also subject to reassessments. Whenever the tax department feels that there was an income that escaped assessment, it can reopen closed tax returns for reassessments. For instance, a tax return of the assessment year 2024-25 can be reopened and issue reassessment notice up to March 31, 2028, if escaped income is less than Rs. 50 lakh, i.e. within three years and up to March 31, 2030, if escaped income is more than Rs. 50 lakh, i.e. five years from the end of the relevant assessment year (the Union Budget 2024-25 reduced it from ten years to five years).Thus, either non-resident or resident taxpayers should be more cautious, especially regarding tax implications while making the investment calls, accurately filing the return of income within the due date, and keeping all the relevant documentary evidence for a longer period and be prepared to respond timely as and when the Department seek clarifications or to contend the reopening exercise.
