How homeowner saved Rs 1.42 cr under Section 54 of I-T Act; CA explains how he did it

A recent ruling by the Bombay High Court and the Income Tax Appellate Tribunal (ITAT) has reaffirmed how a technical detail in tax law can save homeowners crores. At the center of the case was Section 54 of the Income Tax Act, which provides exemption from long-term capital gains (LTCG) tax if the proceeds from selling a residential property are reinvested in another house.

Tax expert CA Nitish Kaushik shared how his client avoided a crushing Rs 1.42 crore tax demand after selling two flats in Malad, Mumbai, for Rs 43 lakh each. The Income Tax Department had initially treated the gains as short-term capital gains (STCG) because the flats were registered only in FY 2015-16, years after purchase.

“I saw everyone dismissing it as STCG. But the client had allotment letters dated October 2005,” Kaushik explained. “That meant he held the flats for more than three years before selling them in FY 2009-10.”

Kaushik relied on judicial precedents, including the ITAT Mumbai ruling in Anita D. Kanjani (ITA 2291/Mum/2015), to argue that the allotment date—not the registration date—determines the holding period. He produced 152 pages of records, including payment slips, allotment letters, and agreements, proving continuous ownership since FY 2005-06.

The ITAT accepted his arguments, ruling that both sales qualified as LTCG and were therefore eligible for Section 54 exemption. The entire Rs 1.42 crore tax addition was struck down.

“By using Section 54, my client not only saved tax but also got indexation benefits and the option to reinvest in two homes,” Kaushik said. “A hopeless case turned into a Rs 1.42 crore win.”

The Anita D. Kanjani precedent

On March 24, 2025, ITAT Mumbai delivered a landmark ruling that clarified a long-disputed issue: for capital gains taxation, the allotment date of a property, not the registration date, determines whether the gain is long-term or short-term.

In that case, a Mumbai resident sold two Malad flats in FY 2009-10 for Rs 43 lakh each. Though the properties were registered only in FY 2015-16, they were originally allotted on October 7, 2005. The seller declared the profits as LTCG and claimed Section 54 exemption, which was initially accepted. However, the Assessing Officer (AO) later reclassified them as STCG and raised the taxable income by Rs 1.42 crore.

On appeal, ITAT reversed the AO’s decision, holding that allotment confers ownership rights sufficient to establish the holding period. With this, the ₹1.42 crore STCG addition was deleted.

Section 54 Explained

Section 54 of the Income Tax Act allows individuals and Hindu Undivided Families (HUFs) to claim exemption from LTCG tax when selling a residential property, if the gains are reinvested in another house in India.

Key conditions:

The property sold must be a long-term capital asset (held for more than 24 months).

The new house must be purchased within 2 years or constructed within 3 years of sale.

A property bought up to 1 year before the sale also qualifies.

If the gain is up to ₹2 crore, exemption can be claimed for two houses, but only once in a lifetime.

The maximum exemption available is ₹10 crore.

This case highlights the importance of documentation. An allotment letter, often overlooked, can make the difference between paying crores in tax or claiming a full exemption.