Section 54F on a Flat Bought From Your Spouse: ITAT Mumbai Rejects the Colourable-Device Charge

Can you claim the Section 54F exemption on a flat bought from your own spouse? The Income Tax Department said the purchase was a “colourable device”. On 17 July 2026 the Mumbai Bench of the Income Tax Appellate Tribunal disagreed. It deleted a disallowance of ₹6,91,52,369. The timing of the husband’s later business loss was decisive.

The facts

The assessee reported long-term capital gains of ₹8,31,47,788 on the transfer of unlisted shares. She claimed Section 54F exemption of ₹6,91,52,369 for investment in a residential flat in Juhu, Mumbai. The flat was bought from HP Trading, her husband’s sole proprietorship, for ₹7.50 crore:

• deed of transfer dated 30 March 2021, registered on 30 June 2021;
• consideration paid on 27 May 2021.

She explained that she had not bought the house she lives in. That one is her husband’s parental property. She bought a different house for her future security and intended to let it out. She also explained how she raised the funds.

Her husband reported a short-term capital gain of ₹4,85,41,828 on the sale in his return for AY 2022-23. He set part of it off against a business loss of about ₹3.56 crore.

The Assessing Officer disallowed the exemption, relying on McDowell & Co. Ltd. v. CTO, (1985) 154 ITR 148 (SC). In his view the couple had arranged the sale so that she could claim the exemption and he could absorb the gain against his loss. The CIT(A) upheld the disallowance.

What the Tribunal held

1. The timing of the loss defeats the allegation

The only reason for the disallowance was the husband’s set-off. But the flat was sold to the assessee in June 2021, while his business loss arose only on 31 March 2022. On the date of the sale, the loss had not accrued and could not have been anticipated. The later set-off was “in the normal course of business”. The Tribunal also noted that only part of his gain was set off against the loss.

2. A family transaction within the law is not a colourable device

The Tribunal said the transactions between the spouses “are made in the normal circumstances and it cannot be termed as a colourable devise specially when such transaction is made within the four corners of law”.

3. Followed two Mumbai decisions

The Tribunal applied two earlier Mumbai Bench decisions:

• Nidhi Siddharth Kejriwal v. DCIT(ITA 5043/Mum/2025, AY 2022-23, 9 April 2026). There, Section 54F was allowed on a flat bought from relatives. The chain of transactions was supported by corroborative evidence. The Tribunal held the deduction “cannot be denied only because the transaction of purchase/sale was between the relatives or related parties”, nor “only on the ground of doubt or surmise”.
• Kavita Manoj Damani v. ITO, [2025] 175 taxmann.com 723 (Mum-Trib.). There, Section 54 was allowed on a flat bought from the assessee’s husband, after considering McDowell.

The disallowance of ₹6,91,52,369 was deleted and the appeal allowed.

Practical takeaways

• A family relationship is not proof of avoidance. The transaction is judged on its documents and conduct.
• Document as if the buyer were a stranger. That means:
  • a registered deed and stamp duty;
  • payment from the buyer’s own funds, with the source explained;
  • a price you can support;
  • the seller reporting the gain.
• Chronology matters.Keep a dated record of each step. The Department’s case here failed on dates.
• Check every Section 54F condition separately. A genuine transfer does not, by itself, satisfy them.

How RDA can help

RDA Tax Advisory Services advises on property transactions within families and on Section 54 and 54F claims. It also helps build the evidence file a related-party purchase needs. See our guide to the Section 54 exemption, the Hyderabad ruling on a Section 54F claim not made in the return and capital gains advisory.

General information only. Whether an exemption is available depends on the facts, the evidence and the conditions applicable to the assessment year. This is not a case-specific opinion.