Summary of this article
ITAT ensures tax exemptions on ancestral land sales.
Commercial properties don't disqualify Section 54F residential exemption claims.
Urban agricultural land remains eligible for Section 54B deductions.
Land ownership and home ownership are major financial decisions. However, realising the gains from the sale of inherited land is usually an emotional decision. Often, landowners do not factor in the tax-related consequences of selling the property they own. Notably, this often includes incorrectly reporting long-term capital gains tax.
The Income-tax Act, 1961, also provides certain exemptions to individuals to reduce the tax they need to pay upon the sale of such assets. A recent decision by the Chandigarh Bench of the Income Tax Appellate Tribunal showed that if a taxpayer claims such exemptions, tax authorities cannot reject the claims on technicalities if a taxpayer has the necessary documentary proof.
Capital Gains Exemption On Sale of Land
The taxation framework provides relief through distinct statutory provisions depending on the nature of the reinvestment. Under Section 54B of the Income Tax Act, 1961, proceeds from the transfer of land used for agricultural purposes are tax-exempt if the taxpayer uses the money generated from the sale for buying more agricultural land within a period of two years.
On the other hand, Section 54F offers an exemption on LTCG arising from the transfer of any capital asset other than a residential house. However, the proceeds have to be invested in the construction of a residential house. Additionally, the benefit under Section 54F is subject to a strict proviso and disqualifies any taxpayer who owns more than one residential house on the date of transfer.
These laws became the grounds for dispute in the case of Sushil Tiwari before the tax authorities (Sushil Tiwari vs The Income Tax Officer (ITO), Ward 3, Panchkula (ITA No. 21/CHD/2025, Assessment Year 2018-19).
What Happened In This Case
Tiwari derived income from his residential property, business, and capital gains, among other sources. During the Assessment Year 2018-19, Tiwari sold a parcel of agricultural land he had inherited for Rs 8 crore.
After adjusting for the indexed cost of acquisition, he computed his net capital gain at Rs 7,72,80,000 and claimed deductions under Section 54F for acquiring a residential property and Section 54B for acquiring agricultural land.
However, the Assessing Officer (AO) flagged the return and disallowed both claims. Instead, the AO alleged that sufficient evidentiary documentation was not present in the tax return. The rejection added a tax of Rs 6.36 crore to Tiwari's returned income.
Tiwari then moved his appeal to the Commissioner of Income-tax (Appeals) (CITA) and tried to seek relief through complete purchase deeds and bank records under the Capital Gains Accounts Scheme.
While the CITA accepted the Section 54B claim in part, it rejected two agricultural land purchase deeds and disallowed the entire Section 54F claim of Rs 2.63 crore rupees. The tax authority mentioned that Tiwari reported income from a shop-cum-office named SCO seven in Zirakpur under the head income from house property, inferring that he owned more than one residential house on the transfer date. The conflict then compelled Tiwari to challenge the additions before the appellate tribunal.
What The ITAT Said In The Matter
During the appellate proceedings, the Chandigarh Bench of the ITAT directed the tax department to conduct an on-ground verification of the properties through a comprehensive remand report.
"Upon considering the rival submissions, this Tribunal, vide order dated 13.08.2026, found that the issues under sections 54B and 54F required verification of the relevant documents and factual position," Judicial Member Laliet Kumar said.
The field inspection conducted by the tax inspector showed that SCO seven was a commercial shop-cum-office that had housed a restaurant called Grill Inn rather than a residential dwelling. Observing that a commercial establishment could not trigger the condition of the statute, the bench overturned the disallowance under Section 54F.
"Once the said property is found to be commercial in nature, it cannot be taken into account as a residential house for the purpose of determining whether the assessee owned more than one residential house on the date of transfer of the original asset," ITAT said.
The tribunal then verified the disallowance under Section 54B concerning two parcels of land. Emphasising the actual agricultural usage of the purchased parcels, the tribunal dismissed the revenue department's objection regarding their location.
"Mere location of an agricultural property in an urban area, in the absence of material establishing that the property was not agricultural in character, cannot by itself be a sufficient basis for denying the benefit claimed under section 54B," ITAT said.
What This Ruling Means For Taxpayers Selling Land
The ruling shows that reporting commercial rental income under the head of house property does not automatically convert commercial premises into a residential unit for the restrictive proviso of Section 54F for the tax department. Additionally, the decision reinforces that the taxpayer has a right to claim Section 54B deduction on agricultural land located within municipal limits as long as the actual agricultural character of the asset is verified through records.
