Not a sham: ITAT allows capital gains tax exemption against property bought from in-laws

Mumbai: In a significant ruling on capital gains tax exemptions, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that purchase of a residential property from close relatives cannot be treated as a sham transaction merely because it results in tax benefits.The tax tribunal allowed a Rs 41.5 crore exemption claimed under Section 54F by an individual who had purchased a flat from her in-laws, setting aside the tax department's allegation that the deal was a colourable device.Section 54F allows an individual to claim exemption from long-term capital gains arising from the sale of any asset other than a residential house if the net sale proceeds are invested in purchasing or constructing a residential house within the prescribed time.In this case, the taxpayer had sold unlisted shares that resulted in long-term capital gains, which were reinvested in a high-value residential property in Mumbai. The I-T officer had denied the exemption, arguing that the transaction was an artificial arrangement within the family to avoid tax. The I-T officer had pointed to factors such as common residence, the role of a family member acting under power of attorney for both buyer and seller, and the fact that the sellers had no effective tax liabilityHowever, the ITAT found that the core transactions: sale of shares and purchase of property were fully supported by documentary evidence, including a registered agreement, payment of stamp duty, demat records, to name a few.The ITAT observed that there is no bar under the I-T Act on purchasing property from relatives for claiming Section 54F benefits. It held that suspicion, however strong, cannot substitute for evidence, and that family relationships or perceived "unnatural conduct" cannot be the basis for denying a statutory exemption in the absence of concrete proof of wrongdoing.The bench also clarified that lawful tax planning cannot be equated with tax evasion merely because it results in a reduced tax liability. It added that the seller's tax position, including cases where capital gains are offset due to indexation, has no bearing on the buyer's eligibility to claim exemption.Importantly, the tribunal noted that the tax authorities had not identified any legal infirmity in the transaction itself, nor had they invoked general anti-avoidance provisions (GAAR). In such circumstances, it held, the benefit of a beneficial provision like Section 54F cannot be denied. Allowing the appeal, the ITAT directed deletion of the entire addition made by the I-T officer. Tax experts point out that the ruling reinforces that genuine intra-family transactions, when backed by proper documentation and carried out within the framework of law, cannot be disregarded solely on suspicion of tax avoidance.