Sold House for Rs 67 Lakh but Declared Rs 1,690 Income? ITAT Rules in Favour of Taxpayer
A man named Dilip sold his house for Rs 67 Lakh and, in his income tax return (ITR), he declared an income of Rs 1,690 and a loss of Rs 8.7 Lakh. This looked suspicious, so the Income Tax Department sent a notice to him and then started investigating his transactions. During the review, they saw that Dilip had claimed a tax exemption under Section 54 for long-term capital gains (LTCG). The problem was not with claiming the exemption itself, but with the way he had claimed it.
If taxpayers have sold a residential property for a profit and have long-term capital gains, they can claim an exemption under Section 54 of the Income Tax Act if they reinvest the gains in another residential property within the specified period.
In calculations, Dilip declared that he had spent Rs 15.99 lakh as the cost of improving the house, adjusted for inflation (indexed cost of improvement). But he could not give any bank statement to prove that he actually spent the money. Apart from this, over several years, the payments were made in cash. So he showed some documents like contractor bills and details of the work done, as that was the only proof he had. However, the income tax officer was still not satisfied with this.
The income tax officer also observed a mismatch in the sale value of the house. The property’s stamp duty value was Rs 67 lakh, but Dilip had sold it for just Rs 41 lakh. Also, the officer highlighted that there were 5 co-workers at the property. One of them was Dilip and his minor daughter. However, the new property was purchased jointly in his wife’s name, and he did not even mention clearly how much share each of them had. Due to this, the officer decided to give an exemption of 50% of the total investment amount instead of the full amount. Based on the correct sale consideration under Section 50C and after rejecting the claimed cost of improvement of the sold house, the tax officer calculated the LTCG at Rs 15.99 lakh. This amount was added to his taxable income. Being aggrieved by this, Dilip filed an appeal before the CIT(A), which recalculated the total LTCG at Rs 9 lakh. The CIT(A) partially allowed his appeal. Due to this, Dilip approached the Income Tax Appellate Tribunal (ITAT) in Ahmedabad.
The ITAT Ahmedabad said the assessing officer and the ld. CIT(A) did not consider Dilip’s contention about how the new property investment was divided. It was observed that Dilip and his wife jointly purchased the new property, but Dilip has claimed that the investment was made in a 2:1 ratio. This corresponded to their respective shares in the sale proceeds of the original property, which included the share of the minor daughter whose income was clubbed with Dilip. He also submitted an affidavit from both co-owners to support this claim, stating that the entire investment was made from the sale proceeds of the old property.
The ITAT Ahmedabad, regarding Dilip’s claim for the indexed cost of improvement, said that while he paid for the improvement cost in cash and these payments were not shown in his bank records, he had submitted contractor bills and other documents as proof. As the improvements were made almost 20 years ago, the tribunal agreed it would not be fair to expect old bank statements. Based on the evidence submitted by the assessee (Dilip), the ITAT decided to allow the cost of improvement claim in the interest of justice.
The appeal was partly allowed, and the order was announced in Open Court on 25 August 2025. Dilip Won the Case, and the ITAT directed the tax officer to allow the claim for the exemption under section 54 after verifying the actual contributions made by Dilip and his wife for the new property.
