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On January 8, 2026, a taxpayer won her Rs 83 lakh Section 54F capital gains tax exemption case in ITAT Mumbai as the income tax officer made an error by not mentioning the specific reason for re-opening the taxpayers’ file.
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The taxpayer (Smt Shah), had claimed capital gains tax exemption under section 54F on long-term capital gains from sale of shares and using the gains to buy a house. The Income Tax assessing officer reopened her assessment under section 147 based on information from the Investigation Wing about large investments, share buyback transactions, and possible mismatch between income and investments.
However, when the reassessment was actually completed, the tax assessing officer did not make any addition on the issues mentioned in the reopening reasons. Instead, the only addition made was by denying the section 54F tax exemption, even though this issue was not part of the recorded reasons for reopening.
Feeling aggrieved, she filed an appeal before the Commissioner (Appeals) (CIT A) who in turn upheld the order of the Assessing Officer by relying on Explanation 3 to Section 147 to hold that Assessing Officer was allowed to make addition without making any addition in respect of the ‘original items’ stated in the reasons recorded for reopening the assessment. She filed an appeal in ITAT Mumbai after feeling aggrieved with this decision of CIT A.
On January 8, 2026 she won the case in ITAT Mumbai. CA Piyush Chhajed represented the taxpayer Smt Shah in ITAT Mumbai.
Section 54F of the Income-tax Act, 1961 allows tax exemption on long-term capital gains when the gains arose from the transfer of any long-term capital asset other than a residential house property. This is applicableas long as the assessee, either an individual or a Hindu Undivided Family (HUF), invested the net proceeds to buy or construct a residential house in India. Here are the key conditions:
- The asset transferred must be a long-term capital asset, but not a residential house.
- The assessee should, within: One year before or two years after the date of transfer, buy a residential house in India, or three years after the date of transfer, build a residential house in India.
The extent of tax exemption would be as follows:
- If the entire net consideration was invested in the new residential house, the whole of the capital gain was exempt. If only a part of the net consideration was invested, the exemption was proportionate, i.e. capital gain × (amount invested ÷ net consideration).
- If the new residential house was transferred within three years from the date of purchase or construction, the exemption would be withdrawn.
Also read: Lady sells listed equity shares for Rs 26 crore and constructs house, pays no capital gains tax; ITAT Kolkata rules in her favour
Summary of the judgement
Shah filed her ITR for AY 2012-13 claiming capital gain tax exemption under Section 54F of the Income-tax Act on long-term capital gains arising from investment in a residential house.
The ITR was originally processed under Section 143(1). Subsequently, the Assessing Officer reopened the assessment under Section 147 based on information received from the Investigation Wing regarding large investments, high-value buyback of shares of a private company, multiple bank accounts, and an alleged mismatch between investments and declared income.
During the reassessment proceedings, however, the AO did not make any addition on the issues which were cited as reasins for reopening the assessment. Instead, the reassessment resulted in addition of ₹83.43 lakh, by disallowing the exemption claimed under Section 54F, an issue that was not mentioned in the reasons recorded for reopening.
The Commissioner (Appeals) upheld the reassessment, relying on Explanation 3 to Section 147, holding that the Assessing Officer could make additions on other issues even if no addition was made on the original reasons.
On further appeal, the ITAT Mumbai held that where no addition is made on the issues for which the assessment was reopened, the Assessing Officer lacks jurisdiction to make any other addition. Relying on a binding Bombay High Court precedent, the ITAT Mumbai quashed the disallowance of Section 54F exemption and allowed her appeal.
Also read:ITAT Delhi rejects Rs 2.53 crore STCG on reduced property interest caused by share dilution; Lady succeeds in ITAT for this reason
ITAT Mumbai analysis and discussion
Paragraph 4 of the recorded reasons by the tax officer said:
The AIR details show investment of Rs 9,75,50,000/- and the 26AS details show receipts of Rs 24,63,563/-.The assessee has declared Rs 2,52,000/-as House Property income and Rs. 22,72,602/-as income from other sources. The source of income for making the investment of Rs 9,75,50,000/- is not commensurate with the income declared by the assessee and needs to be verified.
Paragraph 5 said:
Thus, it is evident from the above facts that the assessee has failed to offer the income from the above transaction to tax for the assessment year under consideration. Therefore, on the basis of the above information and findings, I have reason to believe that income of more than Rs 1,00,000/-has escaped assessment for A.Y 2012-13 within the meaning of Explanation 2 (b) to Section 147 of the Act.
ITAT Mumbai said that on perusal of the reasons recorded, they found that they made no reference to the Section 54F capital gains tax exemption claimed by her.
ITAT Mumbai said that one of the reasons (paragraph 4) recorded a reference has been made to the income of Rs 2,52,000 declared by her under the head ‘Income from House Property’ and that too in the context of sufficiency of source of income for making investment of Rs 9,75,50,000.
ITAT Mumbai said: “Therefore, we accept the contention of the Assessee and hold that the Assessing Officer had made addition/disallowance in respect of exemption claimed by the Assessee under Section 54F of the Act even though the same was not one of the issues/reasons for reopening the assessment.”
ITAT Mumbai said it is an admitted position that the addition/disallowance was the solitary addition/disallowance made by the Assessing Officer and that no other addition/disallowance was made in respect of any of the issues/reasons recorded for reopening the assessment for the Assessment Year 2012-2013.
ITAT Mumbai also noted that Shah had challenged the validity of the reassessment proceedings before CIT(A) and had relied on the judgment of the Bombay High Court in the case of Commissioner of Income-tax-5, Mumbai vs. Jet Airways (I) Ltd. 331 ITR 236 (Bombay)/[2011].
The CIT(A) rejected ground number 4 raised by the Assessee challenging the validity of the reassessment proceedings.
ITAT Mumbai said that they find that the CIT(A) has not disputed the position that no addition was made by the Assessing Officer in relation to issue/reason recorded for reopening assessment.
The CIT(A) relied on Explanation 3 to Section 147 of the Act to hold that the AO was allowed to make addition by disallowing the exemption claimed by the Assessee under Section 54F of the Act without making any addition in respect of the ‘original items’ stated in the reasons recorded for reopening the assessment.
According to Taxmann research, ITAT Mumbai said that the Bombay High Court (in its Jet Airways judgement) had said that in case after issuing a notice under Section 148, the Assessing Officer accepts the contention of the assessee and holds that the income which the AO had initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him to independently assess some other income of such assessee.
ITAT Mumbai said that this is the situation in this case also. Not having made any addition/disallowance on any of the issues/reasons recorded for reopening the assessment for the assessment year 2012-13, the AO did not have jurisdiction to make some other addition/disallowance in the hands of the assessee. [Para 11]
Judgement: In view of the judgments of the Jurisdictional High Court in Commissioner of Income Tax v. Jet Airways (I) Ltd. [2010] 195 Taxman 117 (Bombay)/[2011] 331 ITR 236 (Bombay), same are squarely applicable to the facts of the instant case. Respectfully following the same it is held that addition made by the Assessing Officer by disallowing exemption claimed by the assessee under section 54F cannot be sustained and is hereby quashed.
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