A Bombay High Court-backed ruling has shown how a specific detail in tax law can save homeowners a fortune. By focusing on a property’s allotment date instead of its registration date, a homeowner successfully saved ₹1.42 crore in taxes under Section 54 of the Income Tax Act.
Thank you for reading this post, don't forget to subscribe!A ₹1.42 Crore Tax Demand Overturned
The case involved a homeowner who sold two flats in Malad, Mumbai. The Income Tax Department initially demanded ₹1.42 crore, arguing that the sales were subject to high short-term capital gains (STCG) tax. Their reasoning was based on the fact that the flats were only registered years after the purchase.
However, the homeowner’s legal counsel, CA Nitish Kaushik, proved that the client had received allotment letters for the properties back in October 2005, well before the sale in FY 2009-10. This crucial detail meant the properties were held for more than three years, making the gains long-term capital gains (LTCG).
The Income Tax Appellate Tribunal (ITAT) agreed with this argument, ruling that the allotment date determines the holding period. This reclassification not only removed the tax demand but also made the homeowner eligible for the Section 54 exemption.
What is Section 54?
Section 54 of the Income Tax Act allows individuals and Hindu Undivided Families (HUFs) to get an exemption from LTCG tax on the sale of a residential property. To qualify, you must reinvest the sale proceeds into another house in India within a specific time frame (1 year before the sale, or 2 years after the sale for purchase, or 3 years for construction).
By leveraging this section, the homeowner was able to:
- Get a full exemption from the ₹1.42 crore tax.
- Benefit from indexation, which adjusted the original cost of the property for inflation, further reducing the taxable amount.
- Reinvest in two homes instead of just one, a benefit available for capital gains up to ₹2 crore.
This case highlights the immense value of proper documentation like an allotment letter, which can be the key to saving a substantial amount in taxes.
