Husband Cannot Claim Capital Gains Exemption For Property In Wife's Name: Punjab & Haryana High Court

The Punjab and Haryana High Court on 12 August held that capital gains exemption under Section 54 of the Income Tax Act cannot be claimed where a residential property is sold and the proceeds are reinvested in another residential property purchased solely in the name of the taxpayer's wife.

A Division Bench of Justices Deepak Sibal and Rupinderjit Chahal dismissed an appeal filed by Subh Karan Yadav, a retired government employee, against the order of the Income Tax Appellate Tribunal (ITAT) denying him the benefit of capital gains exemption. The judges held:

"..exemption under Section 54 can be claimed only if the transactions of sale of the original asset and purchase of the new asset, within the stipulated time, both being residential properties, are executed by the same assessee as defined under Section 2(7) of the Act. Husband and wife are different individuals and distinct legal entities. One of the above transactions by the husband and the other by the wife cannot be clubbed for claiming exemption under Section 54 of the Act."

Yadav had sold a residential house in Rewari for Rs. 22 lakh during assessment year 2011-12. He subsequently purchased a residential plot at Bawal in his wife's name and constructed a residential house on it. The transactions were disclosed in his income tax return, and he claimed exemption on the ground that the entire sale consideration had been reinvested in the new residential property.

The Assessing Officer denied the exemption and added Rs. 22 lakh to his income. The Commissioner of Income Tax (Appeals) and subsequently the ITAT upheld the denial, following which Yadav approached the High Court.

Before the High Court, Yadav argued that the entire investment had been made from his own funds, that his wife had not contributed any amount towards the purchase and that the property was being used as the residence of Yadav and his family.

The Court, however, found that Yadav had relied on the wrong statutory provision. Since the original property sold by him was itself a residential property, it held that the claim had to be examined under Section 54, which provides exemption for capital gains arising from the sale of a residential house where the gains are reinvested in another residential property, and not Section 54F, which applies to transfer of long-term capital assets other than a residential house. It observed:

"...admittedly, the original asset and the new asset were both residential properties and therefore, to such transaction, no exemption under Section 54-F of the Act could have been claimed..."

The Bench also held that the sale of the original residential property and purchase of the new residential property must be undertaken by the same taxpayer. It observed that a husband and wife are separate and distinct legal entities for income tax purposes and that transactions undertaken by them cannot be clubbed merely because the investment was funded by the husband.

It relied on its earlier decisions in Jai Narayan v. Income Tax Officer, Commissioner of Income Tax v. Dinesh Verma, Kamal Kant Kamboj v. Income Tax Officer and Bahadur Singh v. Commissioner of Income Tax (Appeals), which held that capital gains exemption is unavailable where the new property is purchased in the name of a person other than the taxpayer.

Further, the Bench rejected reliance on the Delhi High Court's decision in Kamal Wahal, noting that the judgment had already been considered and disagreed with by the Punjab and Haryana High Court in Kamal Kant Kamboj. It also distinguished its decision in Jangpal Singh Tanwar, relied upon by Yadav. It noted that in that case, the new property was purchased jointly in the names of the taxpayer, his wife and son, with the joint owners also contributing to the investment. In the present case, however, the property was purchased solely in the wife's name.

The judges noted that the Supreme Court had dismissed the Special Leave Petition challenging the decision in Bahadur Singh, reinforcing the legal position adopted by the Punjab and Haryana High Court.

Accordingly, the High Court dismissed the appeal. No order as to costs was made.

For Appellant: Abhay Gupta, Advocate

For Respondent: Varun Issar, Sr. Standing Counsel