S. 54 Deduction Can’t Be Restricted Merely Because New House Is Purchased Jointly With Spouse: ITAT

The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) has held that an assessee cannot be denied the full benefit of deduction under Section 54 of the Income Tax Act merely because the new residential property was purchased jointly with a spouse, when the entire investment was made from the assessee’s own funds. The bench of Laliet Kumar (Judicial Member) and Krinwant Sahay (Accountant Member) also ruled that the tax authorities could not completely reject a claim of indexed cost of improvement merely because decades-old bills and vouchers were unavailable. The dispute arose after the assessee sold a residential property situated at Sector 33-A, Chandigarh. For the purpose of computing long-term capital gains, the assessee claimed indexed cost of acquisition and improvement amounting to ₹1.03 crore, deduction under Section 54 of ₹2.12 crore for investment in a residential property at Pune, and deduction under Section 54EC of ₹50 lakh for investment in specified bonds. During assessment proceedings, the Assessing Officer questioned the claim relating to improvement expenditure and the deduction under Section 54. According to the department, the assessee failed to produce supporting bills and vouchers relating to construction and improvement expenses allegedly incurred during various financial years beginning from the mid-1980s. The Assessing Officer also noted that the Pune residential property had been purchased jointly in the names of the assessee and her husband. On that basis, the officer restricted the Section 54 deduction to 50% of the investment and excluded several charges such as GST, infrastructure charges, utility charges, cluster fund contributions, club charges and other incidental expenses while calculating the eligible cost. As a result, substantial additions were made to the assessee’s income. The first appellate authority affirmed the assessment order, holding that the assessee had failed to substantiate the cost of improvement and that deduction under Section 54 could only be allowed to the extent of the assessee’s ownership share in the jointly held property. Before the Tribunal, the assessee argued that the existence of the residential structure itself demonstrated that construction and improvements had in fact been undertaken over the years. It was submitted that the authorities could not reject the claim solely because old records were unavailable. The assessee further contended that the entire sale consideration had been invested in the Pune property and that the complete payment had been made from her own bank account. Therefore, merely including her husband as a joint holder could not reduce the available deduction under Section 54. Examining the facts, the Tribunal observed that the Chandigarh property originally consisted of a plot purchased in 1985, on which substantial construction and improvements were carried out over subsequent years. Importantly, the sale deed executed in 2016 itself recorded the existence of a residential house having a covered area of approximately 3,300 square feet. The stamp valuation authority had also separately valued the constructed portion while determining the property’s value for stamp duty purposes. The Tribunal noted that these facts conclusively established the existence of a substantial superstructure on the property. In such circumstances, it held that the tax authorities were not justified in rejecting the entire claim of indexed cost of improvement simply because bills and vouchers from decades earlier were unavailable. The Bench observed that preservation of complete documentary evidence for construction activities undertaken many years ago may not always be possible and that such claims must be examined pragmatically. Accordingly, the Tribunal directed the Assessing Officer to recompute the cost of construction and indexed cost of improvement by considering the covered area reflected in the sale deed and applying appropriate Public Works Department (PWD) rates prevailing during the relevant years in which acquisition, construction and improvements were carried out. The assessee was directed to be granted consequential indexation benefits in accordance with law. On the Section 54 issue, the Tribunal found that the entire investment of ₹2.12 crore in the Pune residential property had been made from the assessee’s own bank account using the sale proceeds received from the transfer of the original capital asset. The evidence on record showed that the consideration, including the one-time premium, GST, stamp duty and registration charges, had been paid from the assessee’s funds. The Revenue could not establish that the husband had contributed any amount towards the acquisition. The Tribunal further held that payments towards GST, stamp duty, registration charges, utility charges, infrastructure charges, cluster fund contributions and environmental fund charges were directly connected with the acquisition of the residential property and therefore formed part of the eligible investment for Section 54 purposes. However, club membership charges were treated differently. The Bench observed that club membership was optional in nature and not a mandatory condition for acquiring or enjoying the residential property. Consequently, club charges and related taxes were held to be ineligible for deduction under Section 54. Relying on judicial precedents including the decisions of the Karnataka High Court in CIT v. Jennifer Bhide and the Delhi High Court in CIT v. Ravinder Kumar Arora, the Tribunal reiterated that the source of investment and substance of the transaction are the decisive factors for Section 54 relief. Merely because a spouse or family member is included as a joint owner does not disentitle the assessee from claiming the full exemption when the investment has been made exclusively from the assessee’s own funds. Holding that the department had wrongly restricted the deduction solely because the property stood in joint names, the Tribunal deleted the restriction imposed by the Assessing Officer and upheld the assessee’s entitlement to Section 54 deduction on the entire eligible investment, except for the amount attributable to optional club membership charges and related taxes. Case Details Case Title: Jugesh Saluja Versus The Dy. CIT Citation: JURISHOUR-1478-ITA-2026(CHAN) Case No.: ITA No. 1217/Chd/ 2024 Date: 20/05/2026 Counsel For Appellant: Tejmohan Singh, Advocate Counsel For Respondent: Vivek Vardhan, Addl. CIT, Sr. DR Click Here To Read Order Read More: 28% GST on Online Gaming, Fantasy Sports and Betting Platforms: Supreme Court

S. 54 Deduction Can’t Be Restricted Merely Because New House Is Purchased Jointly With Spouse: ITAT

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