No LTCG tax on Rs 1.32 crore house bought only at Rs 45 lakh:
Homebuyer wins LTCG tax exemption case at Delhi ITAT after 7 years fight
Jul 8, 2025
Synopsis
A homebuyer faced legal and tax challenges after buying a Delhi property, including a dispute over the sale agreement and issues with income tax exemptions. Despite initial setbacks, he secured partial victories in the Delhi High Court and ITAT, particularly regarding Section 54 LTCG tax exemption and a notice related to purchasing the property below circle rate. Know more about this case.
When Mr Dwivedi sold his house in Lucknow to buy another one in Delhi back in 2013, he had no idea that his decision would lead to a series of nightmares that would haunt him for nearly 7 years. The first nightmare started when the original owner of the Delhi property passed away and his son contested the legal validity of the sale agreement that had been signed by his father and Dwivedi.
The second nightmare started when the income tax department denied Mr Dwivedi’s claim for the Section 54 long term capital gains (LTCG) tax exemption, as he claimed to have forgotten to mention the Section 54 tax exemption while submitting his income tax return (ITR).
The third nightmare began when his income tax assessing officer issued him a notice regarding undisclosed income, as he had purchased the Delhi property for Rs 45 lakh, while the circle rate valuation was Rs 1.32 crore. Therefore, according to the tax department, Dwivedi had undisclosed gains of Rs 86 lakh (Rs 1.32 crore minus Rs 45 lakh) by buying the property at a price lower than the circle rate.
Dwivedi fought both the cases in Delhi High Court (CS(OS) No.195/2008) and Delhi Income Tax Appellate Tribunal (ITAT) (ITA No.6293/Del/2018) and managed a partial victory.
In the Delhi High Court case, the court allowed the two daughters of the deceased original house owner to sell their shares of the house to Dwivedi. However, the original house owner’s son is still in the fight and so the final judgement has not been announced yet.
In the Delhi ITAT, the request for a Section 54 capital gains tax exemption was granted and the income addition of Rs 86 lakh (Rs 1.32 crore circle rate-45 lakh sale value) was deleted.
One of the reasons why Dwivedi won the Section 54 capital gains tax exemption case in ITAT was due to the interpretations of Section 45(1) and section 54(1)(ii) of the Income Tax Act, 1961.
Delhi ITAT said: “…As per the provision of section 45(1) and section 54(1)(ii), the assessee will be entitled for deduction under Section 54 as claimed by him since the amount of Long Term Capital Gain is less than the purchase cost paid by the assessee for the new property, which was paid one year prior to the purchase of the Lucknow property, as required under the said provisions.”
One of the reasons why Dwivedi won the Rs 86 lakh income addition case (where the purchase price was lower than the circle rate) at ITAT was due to the way the Section 56(2)(vii)(b) was interpreted. The interpretation put forth by Dwivedi’s legal team was upheld by the Delhi ITAT, leading to the cancellation of the income tax notice.
Dwivedi’s lawyers said this to Delhi ITAT: “First proviso to section 56(2)(vii)(b), stated that once the date of agreement fixing the amount of consideration for transfer of immovable property and date of registration are not same, the stamp duty value on the date of agreement may be taken for the purpose of subclause i.e. 56(2)(vii)(b).”
However, it must be noted that all of these victories will only be accepted on the basis of the pending Delhi High Court case’s final judgement.
Check out the legal reasoning behind Dwivedi win this property dispute case, which involves Section 54 LTCG tax exemption and tax notice due to difference in cost of acquisition of the property and the circle rate.
How did he calculate the LTCG Section 54 tax exemption amount?
Dwivedi calculated his long-term capital gains from the sale of the Lucknow property to be Rs 17 lakh (17,13,015) as he sold the Lucknow property for Rs 45 lakh (45,95,177) and claimed Rs 28 lakh (28,82,162) as indexed cost of acquisition. Indexation benefits are applied to capital gains transactions to factor in the effect of inflation on the purchasing power of money.
How did this Section 54 capital gains tax exemption case start?
Here we are talking about the tax case in Delhi ITAT and not the property title case pending in Delhi High Court. According to the order of the Delhi ITAT dated June 12, 2025, this is the timeline of the events:
February 21, 2005: Dwivedi signed an agreement of sale for purchase of the now disputed Delhi property. He agreed to pay Rs 68 lakh in full and final consideration for this Delhi house and paid Rs 2 lakh via cheque as token money.
March 20, 2005: The original house owner died leaving behind his last will and testament, which was also registered. His will bequeathed the aforesaid portions of the said property unto 1) 1st daughter 2) 2nd daughter and 3) his son.
2005: The original house owner’s son alleged that the sale agreement signed in February 2005 is forged and fabricated. He also alleged that his sisters and Dwivedi were putting pressure on him for selling his portion of the house property. He filed a case in the High Court soon after this.
May 2013: Delhi High Court allowed the sisters to sell their portion of the property to Dwivedi for Rs 21 lakh each i.e. Rs 42 lakh in total consideration. The legality/validity of the ‘Agreement to Sell’ dated February 21, 2005 is yet to be decided.
December 2013: Dwivedi sold his Lucknow house for Rs 45.95 lakh and earned a long term capital gain of Rs 17.13 lakh.
July 16, 2015: Dwivedi filed an ITR declaring his income to be Rs 19.43 lakh. His ITR was selected for scrutiny and a tax notice under Section 142(1) was sent to him.
November 29, 2016: Dwivedi filed a response to the Section 142(1) tax notice. He acknowledged that he genuinely forgot to claim Section 54 tax exemption in his original ITR and hence now he filed a revised computation.
December 2016: The Income Tax Department assessing officer (AO) did not allow the claim of deduction under Section 54 on the ground that the said claim was not made either in the original ITR or by way of a revised ITR.
The AO also made an addition of Rs 86.66 lakh to his total income being the difference in cost of acquisition of the property and Delhi circle rate at that time.
Dwivedi filed a case against the orders of the tax department first in CIT (Appeals) and then later in Delhi ITAT.
What did Delhi ITAT say about Section 54 LTCG tax exemption?
The Delhi ITAT said: “The only objection of the Assessing Officer is that the assessee had not disclosed the above transaction in its original return of income and also did not file any revised return in respect of the above transaction.”
Here’s what the Delhi ITAT said about Section 54:
The above Section does not mandate that for claiming deduction under Section 54 filing of the claim in the return (ITR) is a mandatory condition.
Further, without going into the controversy as to whether the above transaction regarding Long Term Capital Gain in respect of Lucknow property and the investment in Delhi property for claiming deduction under Section 54 was intentional or unintentional, the fact remains that as per the provisions of Section 45 ,the capital gains arising on the sale of Lucknow property shall inter alia be effected in the previous year save as otherwise provided in sections 54.
As per the provision of Section 45(1) and Section 54(1)(ii), the assessee will be entitled for deduction of Rs 17,13,015 under Section 54 as claimed by him since the amount of Long Term Capital Gain of Rs 17,13,015 is less than the purchase cost of Rs 22,30,000 paid by the assessee for the new Delhi property, which was paid one year prior to the purchase of the Lucknow property, as required under the said provisions.
Accordingly, we hold that the assessee is entitled for deduction of Long Term Capital Gain of Rs 17,13,015 under Section 54 and therefore the addition of Rs 17,13,015 made by the AO and confirmed by the Ld. CIT(A) is deleted. Accordingly, grounds no.1 and 2 of the appeal is allowed.
What did Delhi ITAT say about properties purchased below circle rates?
Dwivedi’s lawyers said before Delhi ITAT:
"First proviso to Section 56(2)(vii)(b) states that once the date of agreement fixing the amount of consideration for transfer of immovable property and date of registration are not the same, the stamp duty value on the date of agreement may be taken for the purpose of sub-clause i.e. 56(2)(vii)(b).”
“The second proviso to Section 56(2)(vii)(b) says that first proviso to Section 56(2)(vii)(b) shall apply only in a case where the amount of consideration referred to thereof, has been paid by any mode other than cash on or before the date of the agreement for the transfer of such property. It was submitted by the ld. AR that both the two conditions are satisfied in the case of the assessee and therefore the addition of Rs 86,66,666 should be deleted.”
After hearing the interpretation of Dwidevi’s lawyers, Delhi ITAT said: “The first and second proviso to Section 56(2)(vii)(b) squarely applies in the case of the assessee….Further, the stamp duty of the Delhi property claimed by the assessee at Rs 39,87,348, which is less than the purchase consideration of Rs 45,33,334 paid by the assessee has not been disputed by the lower authorities and therefore the provisions of section 56(2)(vii)(b) of the Act will not be applicable in this case.”
Delhi ITAT refers to this case judgement: "This view (above) is also supported by the decision of the Pune Tribunal in the case of Sanjay Dattatraya Dapodikar vs ITO, in ITA No.1747/Pune/2018 [2019] 107 taxmann.com 2019 (Pune Trib.), wherein, on similar facts, the Tribunal decided the claim in favour of the assessee.”
Delhi ITAT final Judgement
The Section 54 claim and tax notice for buying a property below the circle rate was deleted by Delhi ITAT subject to the outcome of the pending Delhi High Court judgement.
Delhi ITAT said:
The Delhi High Court in its order dated 01.05.2013 in CS(OS) No.195/2008 in para no.8 had stated that while passing the present order that the Court had not expressed any opinion on the merits of the case and/or the legality/validity of the ‘Agreement to Sell dated 21.02.2005’ relied upon the by the assessee (plaintiff) and disputed by the defendant- son of late house owner.
Therefore, the above contention of the assessee in ground no.3 that the agreement to sell the Delhi property in 2005 was admitted/confirmed by the Delhi High Court while delivering a decision on specific performance of the contract is not correct.
Further, the relief of Rs 86,66,666 granted as above on the basis of available facts will be subject to the outcome of the decision of the Hon’ble Court.
The Assessing Officer will be at liberty to take necessary action as per law upon the receipt of the outcome of the Hon’ble Court on the legality/validity of the Agreement dated 21.02.2005 Ground no.3 of the appeal is allowed with the above observations.
What is the significance of this judgement for house property buyers?
ET Wealth Online has asked various experts about the significance of this judgement for property buyers, here’s what they said:
Punit Shah, Partner, Dhruva Advisors, says: This case establishes that substantive compliance with the conditions of Section 54 takes precedence over procedural lapses, such as delayed disclosure. It also clarifies that the “date of purchase” for exemption purposes is the date of completed and legally effective purchases. This distinction is crucial in situations involving litigation, delayed possession, or long intervals between agreement and registration.
ITAT ruled that section 54 does not mandate filing of the income-tax return for claiming exemption. Instead, the exemption can be validly claimed during assessment proceedings, even if it was not declared earlier. The ITAT further emphasized that a registered sale deed constitutes a valid purchase for exemption purposes. An earlier agreement to sell holds no legal weight in this context. Since the homebuyer completed the property purchase within the prescribed timeframe, the exemption was allowed.
Sanjay Kumar, Director, Nangia Andersen LLP says: The Delhi ITAT ruled in favour of homebuyer Dwivedi, granting him the Section 54 exemption on long-term capital gains even though the claim was not made in his original or revised return.
The Tribunal noted that the law does not require such a claim to be included in the return itself, and since the capital gains were reinvested in a new residential property within the prescribed time frame, the exemption could not be denied on procedural grounds.
It further clarified that the Delhi property was effectively purchased in December 2013 when the sale deed was registered and possession was handed over not in 2005, when only an “agreement to sell” was signed and subsequently contested. As the reinvestment occurred within one year prior to the sale of the original property, and all substantive conditions under Section 54 were satisfied, the Tribunal allowed the exemption.
The ruling reinforces that under Section 54 capital gains exemption can be allowed even if not claimed in the return, provided the core conditions are fulfilled. It also clarifies that the decisive date for exemption is when the sale deed is executed and possession is taken and not the date of an earlier agreement to sell.
This will guide similar cases where the distinction between “agreement to sell” and “sale deed execution” is under litigation. Overall, the judgment sets a taxpayer-friendly precedent, underscoring the principle that substance should take precedence over procedural form.
Chartered Accountant Gopal Bohra, Partner, Direct Tax, N.A. Shah LLP, says: This decision again emphasizes that the taxpayer should not be deprived of his rights to claim legitimate deductions or relief due to ignorance of the law and only legitimate tax must be assessed and collected.
It is a settled position and in fact instruction by the CBDT to the tax officers that the tax department must not take advantage of ignorance of the taxpayer as to his rights and it is one of their duties to assist a taxpayer in claiming and securing reliefs.
In this case before Delhi ITAT, since the tax department has accepted the long-term capital gain declared by the taxpayer in revised computation during the assessment proceeding, the deduction under section 54 is consequential once the conditions prescribed in the said section are satisfied by the taxpayer.
The ITAT has rightly observed that section 54 does not mandate that filing of return is mandatory for claiming deduction under section 54 of the Act, when the computation of long-term capital gain is not in dispute.
Mihir Tanna, associate director, S.K Patodia LLP, says: Unintentional procedural mistakes by taxpayers can not be reason for denial of any tax benefit and the same was considered by courts in several matters. Courts have always emphasized on the fact that if conditions prescribed by the income tax act are fulfilled, procedural mistakes (like providing appropriate details in ITR, submitting required forms etc) done by taxpayers can be disregarded.
In the given case, two important aspects are considered by the Delhi Tribunal. Firstly, Section does not mandate that for claiming deduction u/s 54 of the Act (by investing gain earned from property transferred into another property), filing of the claim in the return is a mandatory condition. Secondly, immovable property can be acquired below stamp duty value if certain conditions are fulfilled as per Sec 56(2)(vii)(b) [now replaced with Sec 56(2)(x)].
In spite of several judgments, taxpayers are always advised to file requisite forms and show correct details in ITR, as such kind of relief is usually given at 2nd/3rd level of appeal and cost of litigation can be substantial for small taxpayers.
[The Economic Times]
