Section 54F: Buying a House from Your Spouse Can Still Qualify for Exemption
Mumbai ITAT says a genuine, fully paid transaction cannot be branded a colourable device merely because the buyer and seller are spouses
Can you claim exemption under Section 54F if you purchase a residential house from your own spouse?
The answer, according to a recent decision of the Mumbai Bench of the Income Tax Appellate Tribunal, is yes, provided the transaction is genuine and satisfies the statutory conditions.
In Neha Karan Motwani v. ITO, ITA No. 4342/Mum/2026, Assessment Year 2021-22, order pronounced on 17 July 2026, the Mumbai ITAT dealt with a case where the assessee purchased a residential flat from a proprietary concern belonging to her husband and claimed exemption under Section 54F. The Revenue treated the transaction as a colourable device for tax avoidance. The Tribunal disagreed and directed deletion of the disallowance.
The transaction that attracted attention
The assessee had declared substantial long-term capital gains from the sale of shares. Against the capital gains, she claimed exemption under Section 54F by investing in a residential flat.
The flat was purchased from HP Trading, a proprietary concern of her husband, for ₹7.50 crore.
The transaction was supported by the relevant transfer documents and the consideration was paid through banking channels.
The Revenue did not dispute merely the existence of the property transaction. Its principal objection was that the transaction was part of a family arrangement designed to reduce the overall tax burden.
Why?
The husband had subsequently earned short-term capital gain on the sale of the flat and, in the following year, set off part of that gain against a business loss.
The Assessing Officer considered this subsequent tax treatment and invoked the principle laid down in McDowell & Co. Ltd. v. CTO to treat the transaction as a colourable device.
The Section 54F exemption of approximately ₹6.92 crore was consequently denied.
The CIT(A)/NFAC confirmed the disallowance.
The matter then reached the Mumbai ITAT.
The Tribunal looked at the timing
This became the crucial point.
The Tribunal noted that the property was sold to the assessee in 2021, whereas the business loss against which the husband subsequently set off part of his gain arose only on 31 March 2022.
In other words, when the property transaction was entered into, the subsequent business loss had not yet arisen.
That timing was significant.
The Tribunal reasoned that a loss which arose almost a year after the transaction could not reasonably be treated as something which had been built into the original arrangement merely to facilitate the Section 54F claim.
The subsequent set-off therefore could not, by itself, convert an otherwise genuine property transaction into a colourable device.
A spouse-to-spouse transaction is not automatically suspicious
This is perhaps the most useful takeaway from the decision.
The fact that the buyer and seller are husband and wife does not, by itself, make the transaction artificial.
Tax law does not prohibit a person from purchasing a residential property from his or her spouse.
Similarly, the mere fact that the transaction produces a legitimate tax consequence does not make it impermissible tax avoidance.
The Tribunal observed that the transaction was carried out in normal circumstances and was supported by payment through banking channels. The fact that the parties happened to be spouses could not, by itself, justify denial of the statutory exemption.
The Tribunal therefore directed the Assessing Officer to delete the disallowance.
What about McDowell?
The Revenue’s reliance on McDowell & Co. Ltd. v. CTO is understandable.
The Supreme Court has indeed drawn a distinction between legitimate tax planning and transactions which are colourable devices designed to defeat the law.
But the expression “colourable device” cannot be used as a magic phrase.
There must be facts and evidence demonstrating that the apparent transaction is not what it purports to be.
If a property is genuinely transferred, the transfer is legally documented, the consideration is actually paid, the property changes hands and the statutory conditions for Section 54F are otherwise satisfied, the mere existence of a tax benefit does not automatically establish a colourable arrangement.
This distinction has been recognised in several decisions dealing with purchases of residential properties from relatives.
Earlier Mumbai ITAT decision also supports the principle
The Mumbai Tribunal had considered a similar issue earlier in Nidhi Siddharth Kejriwal v. DCIT, ITA No. 5043/Mum/2025, order dated 9 April 2026.
There too, the Revenue had alleged that a purchase of property from close family members was an artificial arrangement designed to obtain Section 54F benefit.
The Tribunal examined the documentary evidence supporting the transaction and observed that the purchase was supported by registered documentation and other corroborative evidence. It held that the exemption could not be denied merely because the transaction was between relatives or because the Revenue suspected tax avoidance in the absence of cogent evidence showing that the transaction was artificial.
The principle is not new
The Mumbai ITAT in Neha Karan Motwani also referred to Kavita Manoj Damani v. ITO, [2025] 175 taxmann.com 723 (Mumbai-Trib.), where exemption under Section 54 was allowed in respect of a flat purchased from the assessee’s husband.
In that case too, the Assessing Officer had questioned the transaction because the property was purchased from the husband and had alleged that the movement of funds represented an arrangement for avoiding tax.
The Tribunal, however, held that the relationship between the buyer and seller, by itself, was not sufficient to deny the statutory exemption where the transaction otherwise satisfied the legal requirements.
The Mumbai Tribunal’s reasoning has also drawn support from decisions including Kalawati Vijaykumar Agarwal of the Pune ITAT, where the Tribunal held that a Section 54F claim cannot be denied merely because the purchase and sale are between relatives when the transactions are within the permissible legal framework and the Revenue cannot establish artificiality with cogent evidence.
But taxpayers should not misunderstand the ruling
The decision does not mean that every transaction between spouses will qualify for Section 54F.
Section 54F has its own statutory conditions.
The taxpayer must still establish, among other things, that:
• there was a transfer of the original eligible capital asset;
• the resulting capital gain satisfies the conditions of Section 54F;
• the investment was made in the prescribed residential house;
• the purchase/construction was within the prescribed time;
• the conditions relating to ownership of other residential houses are satisfied; and
• the consideration and other relevant aspects of the transaction are genuine and properly documented.
A transaction involving relatives may naturally receive closer scrutiny where there are unusual circumstances, circular movement of funds, absence of actual payment, doubtful ownership, undervaluation, lack of possession or other evidence suggesting that the transaction is merely on paper.
Therefore, the relationship between the parties is not the end of the enquiry—but neither is it the beginning and the end of the conclusion.
The subsequent tax treatment matters—but has to be examined carefully
The interesting feature of Neha Karan Motwani is that the Revenue relied upon what happened after the original property transaction.
The husband subsequently set off part of his short-term capital gain against a business loss.
But the business loss arose only later.
The Tribunal therefore found it difficult to treat that subsequent event as evidence that the original transaction itself had been designed around that future loss.
This is an important practical lesson.
An event occurring after a transaction cannot automatically be used to rewrite the intention behind the transaction at the time it was entered into.
The entire factual timeline has to be examined.
Keep the paperwork stronger than the relationship
For taxpayers contemplating a genuine property transaction with a spouse or other relative, the safest approach is not to rely upon the family relationship.
Instead, the transaction should stand independently on its documentation.
The sale deed or agreement should clearly establish the property and consideration. Payment should preferably be through identifiable banking channels. Stamp duty and registration requirements should be properly complied with. Possession and ownership should be capable of being demonstrated. The source of funds should be explainable. Corresponding entries should appear consistently in the records of both parties.
In short, a family transaction should have the paperwork of an independent commercial transaction.
The takeaway
The Mumbai ITAT’s decision sends a useful message:
Buying a residential property from one’s spouse does not, by itself, destroy a claim under Section 54F.
If the transaction is genuine, the consideration is actually paid, the property is genuinely acquired and the statutory conditions are satisfied, the exemption cannot be denied merely because the buyer and seller are spouses or because the transaction results in a legitimate tax benefit.
More importantly, a subsequent event—such as a business loss arising after the transaction—cannot automatically be used to conclude that the original transaction was a colourable device.
Tax planning is permissible when it operates within the framework of law.
The real question is therefore not:
“Did the transaction save tax?”
The better question is:
“Was the transaction genuine, legally permissible and actually carried out?”
In Neha Karan Motwani, the Mumbai ITAT answered that question in favour of the taxpayer and directed deletion of the Section 54F disallowance of ₹6,91,52,369.
One family transaction may attract scrutiny. But scrutiny is not proof of a colourable device.
The copy of the order is as under:
