Homebuyer asked to pay penalty for not correctly calculating his tax exemption claim under Section 54F; ITAT Ahmedabad gives relief to him
Nov 27, 2025
Synopsis
The ITAT Ahmedabad has cleared Mr. Sanghvi from tax penalty by declaring it null and void. The penalty was based on allegations of misreporting income due to a mishap with his Section 54F capital gains tax exemption claim. However, the tribunal found that a mere calculation error in Section 54F does not indicate any intention of misreporting.
On October 30, 2025, the ITAT Ahmedabad bench provided relief to Mr. Sanghvi by quashing the penalty that was imposed on him for allegedly misreporting his income due to an incorrect claim for the Section 54F capital gains tax exemption claim. The reason Mr. Sanghvi won the case because the ITAT determined that a mistake in calculating Section 54F does not equate to misreporting income under Section 270A(9).
The details of this case show that Mr. Sanghvi had sought an income tax exemption for capital gains earned under Section 54F by investing in a new property. While his claim, he sought tax deduction for the full amount he had invested in buying a new house property for Rs 1.17 crore (1,17,92,358).
According to the tax officer, Mr. Sanghvi was entitled to deduction / exemption under Section 54 only on a proportionate basis and not for the entire amount. The tax officer’s reasoning was that the capital gain Mr. Sanghvi earned should be eligible for deduction in proportion to the amount of sale consideration received that was reinvested in the new asset, that is the new property.
According to the tax officer, Mr. Sanghvi was eligible for deduction or exemption of only Rs 91 lakh (91,60,046), which was significantly less than his claim of Rs 1.17 crore (1,17,92,358). As a result of the disallowance of part of the Section 54F capital gain tax exemption claim for the excess amount claimed, the tax department imposed a penalty. This penalty was for mis-reporting income as a result of under-reporting in terms of Section 270A(9).
Kunal Savani, Partner, Cyril Amarchand Mangaldas, says that in the case at hand, the taxpayer had claimed the entire investment amount as deductible instead of considering it on proportionate basis (ie capital gain in proportion to cost of new asset in relation to the net sale consideration).
Savani says that the tax officer alleged taxpayer that he has misrepresented and suppressed the facts and therefore, invoked provisions related to mis-reporting of income under the IT Act and levied penalty on the difference in the amount claimed vs. the eligible amount.
Savani says: "However, the ruling emphasizes that, the taxpayer had made a fair disclosure of relevant facts relating to capital gains earned and its re-investment in a new asset and therefore, it should not tantamount to misrepresentation or suppression of facts and accordingly, penalty levied by the tax officer for misreporting be disallowed."
Naman Singh Bagga, Partner, C&S Partners, explains that Section 54F provides an exemption on capital gains from the transfer of a long-term capital asset (other than a residential house) if the net sale consideration is reinvested in a residential property in India within the prescribed timelines.
According to Bagga, if the net sale consideration is more than the amount invested in the new residential property, the entitlement of adjustment of capital gains arising out of the said transfer of long term capital asset is provided on a pro-rata basis.
Bagga says that in the present case, the Assessing Officer and ITAT, Ahmedabad observed that the Assessee had sought adjustment of whole of the capital gain amount as opposed to proportionate adjustment. Both authorities permitted only proportionate deduction and disallowed the excess claimed.
Accoridng to Savani, under the provisions of the Income Tax Act 1961, any capital gain arising on account of transfer of any long-term capital asset (other than residential house property) shall not be charged to tax in case such gains are reinvested in a residential house property provided the individual/hindu undivided family owns only one residential house property at the time of transfer.
Savani says that such residential house property should be acquired within one year prior to transfer or two years from the date of transfer and in case of under construction residential house property within 3 years from the date of transfer. In case the cost of new asset is less than the net sale consideration then, the amount not chargeable under capital gains shall be in proportion of cost of new asset (which shall not exceed to Rs 10 crores from financial year 2023-2024 onwards) to the net consideration.
Savanai explains the concept with an example. For instance, an individual sold a long-term capital asset for Rs 5 crore (net of transfer related expenses) which was bought for Rs 1 crore, and later he reinvested Rs 3 crore for purchase of new residential house property. The amount of capital gain eligible for exemption shall be Rs 2.4 crores [long-term capital gain (ie Rs 4 crore)*amount invested in residential house property (ie Rs 3 crore) / Net sale consideration (ie Rs 4 crore)].
ITAT Ahmedabad said this
ITAT Ahmedabad said in its judgement (I.T.A. No. 1285/Ahd/2025) dated October 30, 2025 said that it is clear that Mr. Sanghvi’s case does not fall within any of the instances specified in Subsection (9) of Section 270A as reproduced above.
ITAT Ahmedabad said: “It is neither a case of misrepresentation or suppressions of facts, since, the assessee (Mr. Sanghvi) had fairly disclosed all facts relating to the capital gains earned by it and invested in the acquisition of new assets. The assessee’s only fault was in relation to the calculation of claim of deduction. The assessee’s case also does not fall within any other clauses of Sub-section (9) of Section 270A.”
ITAT Ahmedabad said that the orders of the authorities below i.e. both the AO and the CIT(A), also do not specify which particular condition, the assessee fulfilled for charging him with mis-reporting of income.
ITAT Ahmedabad judgement: “In the light of the same, the penalty levied u/s.270A(9) is held to be not sustainable in law and is directed to be deleted. In the result, appeal filed by the assessee is allowed.”
What was the key finding of the ITAT Ahmedabad in this matter?
Aditya Chopra, Managing Partner, The Victoriam Legalis (TVL), says that this matter was neither a case of ‘misrepresentation’ nor ‘suppression’ of facts. Since the assessee had fairly disclosed all facts including the assessee’s capital gains, and the assessee’s investment in the acquisition of new asset, the criteria required to fulfilled for penalty under misreporting of income being applicable could not be fulfilled.
Chopra says: "The assessee’s only fault was in relation to the calculation of claim of deduction. Further, the Tribunal also noted that the orders of the Assessing Officer and the Commissioner of Income Tax (Appeals) failed to specify the criterion under which the assessee’s case would fall within the purview of “mis-reporting” of income as required under section 270A(9) of the Income Tax Act, 1961."
[The Economic Times]
