Wife paid husband Rs 7.5 crore after selling her shares and bought his Mumbai property, filed ITR claiming 54F tax exemption, got tax notice; she fought and won the case in ITAT Mumbai

When Smt Motwani from Juhu sold her shares, she made a whopping Rs 8.31 crore in long term capital gains (LTCG). However, instead of paying taxes on this gain, she decided to reinvest Rs 6.91 crore to buy a property in June 2021, claiming a tax exemption under Section 54F. The property is located on Juhu Tara Road, Santacruz (West), Mumbai. However, this move sparked a tax dispute with the Income Tax Department.

The issue arose because the property she bought to offset the tax on the sale of her unlisted shares, was owned by none other than her husband, Mr Motwani. So she sold her assets (unlisted shares) and reinvested the gains into a property owned by her husband and ended up not paying any income tax.

Additionally, she had no plans to live in this house which she bought from her husband. She intended to use this house as an investment property and rent it out in the future. Currently, she lives on her husband's parental property.


The Income Tax Department flagged the entire arrangement as a colourable device used to evade taxation.

On December 30, 2022, the Income Tax Assessing Officer (AO) completed her assessment under Section 143(3) in conjunction with Section 144B and denied the tax exemption she claimed under Section 54F for Rs 6.91 crore, which resulted in that amount being added to Smt Motwani's total income.

The Section 54F tax deduction was denied by the AO on the ground that Smt Motwani had purchased the property from her husband with a view to avoid taxes by claiming exemption under Section 54. The husband would have been able to adjust the short term capital gains against his business losses.

Ultimately, she won the case in ITAT Mumbai on July 17, 2026. This article explains why she won the case.

Also read: Wife sells house for Rs 2.85 crore, buys new one with husband, pays zero income tax, wins ITAT Mumbai case

How to use Section 54F to save tax

Section 86 of the Income Tax Act, 2025, (corresponding to Section 54F of the Income Tax Act, 1961) 1961, permits an individual or HUF to claim tax exemption from long-term capital gains arising from the transfer of a capital asset other than a residential house where the prescribed amount is invested in a new residential house, subject to fulfilment of the stipulated conditions.

The main conditions for getting this tax exemption are as follows:

• The asset transferred/sold must be a long-term capital asset, but not a residential house. The new residential property acquired for claiming exemption must be located in India.
• The assessee should, within:

1. One year before or two years after the date of transfer, purchase a residential house in India, or
2. Three years after the date of transfer, construct a residential house in India.

Feature	Section 86 of Income Tax Act, 2025 (corresponding to Section 54F of Income Tax Act, 1961)
Asset Sold	Any Long-Term Capital Asset other than a residential house (e.g., gold, stocks).
Investment Required	Taxpayers must invest the Net Sale Consideration to claim the exemption as per the specified computation mechanism
Exemption Calculation	Exemption = Amount Invested / Net Sale Consideration X Capital Gains
Re-investment Benefit in two residential properties	No such benefit exists.

Also read: Wife pays no income tax after selling two houses for Rs 6 crore gifted by her husband, wins case in ITAT Mumbai; here’s how it happened

Summary of the judgement

Chartered Accountant Suresh Surana told ET Wealth Online: The taxpayer, an individual, sold unlisted/unquoted equity shares during AY 2021-22 and reported long-term capital gains of approximately Rs 8.31 crore.

Smt Motwani invested Rs 7.50 crore in purchasing a residential property from HP Trading, which was a sole proprietorship concern of her husband, and claimed exemption of approximately Rs 6.92 crore under Section 54F. The transaction was supported by a registered transfer deed, payment of applicable stamp duty and payment of the purchase amount.

Smt Motwani also explained the source of funds used for acquiring the property. She said that the property was different from the house she was residing in and had been acquired for her future security and possible renting out.

Smt Motwani's husband reported short-term capital gains of approximately Rs 4.85 crore from the sale of the property. A part of these gains was set off against a business loss of approximately Rs 3.56 crore in his hands.

The Income Tax Assessing Officer considered the purchase and sale between the spouses to be a family arrangement involving the rotation of funds for avoiding tax. According to the Assessing Officer, the arrangement allowed Smt Motwani to claim exemption under Section 54F while allowing her husband to set off the capital gains against his business losses.

The Assessing Officer therefore disallowed the Section 54F exemption of Rs. 6.92 crore. The CIT(A) upheld the move, which led Smt Motwani to approach the ITAT.

The main question before the Mumbai ITAT was whether an otherwise valid purchase of residential property from Smt Motwani's husband could be treated as a colourable device and the Section 54F exemption denied merely because the taxpayer's husband obtained a set-off of his business loss against the capital gains arising from the transaction.

Also read: She sold her house for Rs 2.7 crore to buy seven new flats and paid no income tax, wins case in ITAT Delhi; Know how

The ITAT Mumbai observed that the only basis for disallowing the exemption was the Assessing Officer's suspicion that the spouses had entered into a pre-arranged transaction to avoid tax. However, the factual chronology did not support this allegation.

The property was transferred to the taxpayer in June 2021, whereas the business loss in the husband's hands arose only on March 31, 2022. Therefore, on the date of the property transaction, the business loss had neither accrued nor could it reasonably have been anticipated. The subsequent set-off of the business loss against the short-term capital gains was consequently regarded as arising in the normal course.

The tax tribunal also noted that the husband had not set off the entire capital gain against his business losses; only a part of the gain was adjusted. More importantly, the Income Tax Department had not disputed the registration of the transaction, payment of stamp duty, payment of the actual consideration, valuation of the property or the taxpayer's source of funds. There was therefore no proof that the purchase was fictitious, sham or merely an accommodation entry.

The ITAT Mumbai held that the Income-tax Act does not prohibit a taxpayer from purchasing a residential property from a spouse or another family member for claiming exemption under Section 54F.

Surana says: "A genuine transaction cannot be disregarded merely because it takes place between related parties or results in a tax benefit. Legitimate tax planning carried out within the framework of law cannot, by itself, be treated as tax evasion or a colourable device."

In reaching this conclusion, the ITAT relied upon the decisions in Nidhi Siddharth Kejriwal v. DCIT and Kavita Manoj Damani v. ITO, where exemption under sections 54/54F was allowed in respect of residential properties purchased from relatives or family members.

The tax tribunal acknowledged that the ruling in the McDowell & Co. Ltd. v. CTO case doesn't make every legal transaction that lowers a taxpayer's tax burden unacceptable.

Why did Smt Motwani win the case?

Surana says Smt Motwani won the case because the property transaction was genuine, adequately documented and undertaken within the legal framework. There is no statutory restriction under Section 54F against purchasing a new residential property from one's spouse.

Also, the Income Tax Department failed to establish that the transaction was sham or pre-arranged, and its allegation of tax avoidance was contradicted by the chronology of events i.e. the husband's business loss arose several months after the property transaction and could not have been anticipated at the time of sale.

Accordingly, the ITAT Mumbai held that the transaction could not be characterised as a colourable device merely on the basis of suspicion or the tax consequences arising in the hands of the spouses. ITAT Mumbai directed the Assessing Officer to delete the disallowance of approximately Rs 6.92 crore and allowed Smt Motwani's claim for exemption under Section 54F.