The Punjab and Haryana High Court has held that an assessee cannot claim capital gains exemption under Section 54 of the Income Tax Act, 1961 where the original residential property was sold by the assessee but the new residential property was purchased solely in the name of his wife.
The bench of Justice Deepak Sibal and Justice Rupinderjit Chahal has observed that the two transactions must be undertaken by the same assessee for the statutory exemption to apply.
The appellant/assessee, a retired Government employee, owned a residential house in Rewari. During the relevant assessment year 2011-12, he sold the house for ₹22 lakh. Shortly thereafter, on February 9, 2011, a residential plot at Bawal was purchased in the name of his wife, on which a residential house was subsequently constructed.
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The transactions were disclosed in the assessee’s income-tax return for assessment year 2011-12. The assessee claimed exemption from capital gains tax under Section 54F, contending that the sale consideration had been reinvested in a residential property within the prescribed period.
The Income Tax Department subsequently reopened the assessment by issuing a notice under Section 148 in 2018. As the assessee did not file a reply to the notice, the Assessing Officer concluded that he had failed to discharge the required onus and denied the exemption. An addition of ₹22 lakh was consequently made to the assessee’s declared income.
The CIT(A) dismissed the assessee’s appeal, following which he approached the ITAT. The Tribunal also rejected the claim. The matter ultimately reached the Punjab and Haryana High Court.
The central question was whether an assessee who uses his own funds to purchase a new residential property can claim exemption under Section 54 merely because the property is registered in his wife’s name.
The assessee argued that Section 54F did not expressly require the new residential property to be registered exclusively in the assessee’s own name. According to him, the entire investment had come from his own funds, his wife had contributed nothing towards the purchase and she had no independent source of income.
The assessee also relied on earlier decisions, including Pr. CIT-1, Chandigarh v. Jangpal Singh Tanwar, CIT v. Gurnam Singh, and CIT v. Kamal Wahal, to argue that beneficial exemption provisions should not be defeated merely because the property stands in the name of a spouse.
The department contended that the issue had already been settled against the assessee by several Division Bench judgments of the same High Court, including Jai Narayan v. Income Tax Officer, CIT, Faridabad v. Dinesh Verma, Kamal Kant Kamboj v. Income Tax Officer, and Bahadur Singh v. CIT (Appeals).
The Court examined Section 54F and noted that the provision applies where the capital gain arises from transfer of a long-term capital asset other than a residential house and the assessee invests in a residential house within the prescribed period.
In the present case, however, both the original asset and the new asset were residential properties. The High Court therefore held that Section 54F could not apply at all.
The Bench specifically observed that the Assessing Officer, CIT(A) and ITAT had failed to notice this distinction. Since the original property sold by the assessee was itself a residential property, the relevant exemption provision was Section 54, not Section 54F.
The High Court held that the exemption is available only when the sale of the original residential property and the purchase or construction of the new residential property are undertaken by the same assessee within the statutory period.
The Court rejected the argument that the husband and wife could be treated as one for purposes of the exemption merely because the husband supplied the funds.
According to the Bench, a husband and wife are separate individuals and distinct legal entities. Therefore, a transaction undertaken by the husband cannot simply be combined with a subsequent purchase made by the wife for claiming the statutory benefit.
The Court relied heavily on its earlier decision in Jai Narayan, where it had interpreted the expression “assessee” in the context of another capital gains exemption provision. The earlier ruling held that where the legislature intends an exemption to extend to property purchased in another person’s name, it expressly provides for such a situation.
The Bench examined a series of its own precedents concerning reinvestment of capital gains in property purchased in the name of a spouse or other family member.
In Dinesh Verma, the Court had held that an assessee could not claim the benefit of Section 54B merely because the purchase was funded from the sale proceeds of the assessee’s asset when the subsequent agricultural land was purchased in the wife’s name. The Court had emphasised that the statute requires the assessee to purchase the new asset.
The same approach was followed in Kamal Kant Kamboj, where the High Court held that purchase of agricultural land in the name of the assessee’s wife did not qualify for Section 54B exemption. The Court also declined to follow contrary views taken by other High Courts where they conflicted with binding decisions of the Punjab and Haryana High Court.
A significant argument raised by the assessee was based on the Delhi High Court’s decision in CIT v. Kamal Wahal, where exemption under Section 54F had been allowed even though the new residential house was not purchased exclusively in the assessee’s own name.
The Punjab and Haryana High Court, however, declined to follow that approach.
The Bench noted that Kamal Wahal had already been considered by the Punjab and Haryana High Court in Kamal Kant Kamboj, which had disagreed with the Delhi High Court’s interpretation. The present Bench expressly agreed with the view taken in Kamal Kant Kamboj.
The Court similarly distinguished Gurnam Singh on facts and noted that the factual circumstances in that case were materially different.
The assessee had placed particular reliance on the Punjab and Haryana High Court’s decision in Jangpal Singh Tanwar.
The Bench, however, found that decision distinguishable. In Jangpal Singh Tanwar, the reinvestment had been made jointly in the names of the assessee, his wife and his son, and the joint owners had also contributed to the reinvestment.
The present case was materially different because the new property had been purchased solely in the wife’s name. The Court also noted that the earlier decision in Jangpal Singh Tanwar had not considered the earlier judgments in Dinesh Verma and Bahadur Singh, both of which had been delivered by Benches of equal strength.
The High Court also referred to the subsequent history of Bahadur Singh.
The judgment in that case had been challenged before the Supreme Court through an SLP. The Supreme Court dismissed the Special Leave Petition on August 29, 2023, after condoning the delay and finding no merit in the petition.
The High Court therefore treated its earlier line of authority as continuing to govern the issue.
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