The ITAT Chandigarh eventually ruled substantially in the man’s favour on both questions. (Image for representative purpose only)
When selling assets and claiming long-term capital gains, it is important to understand if you are eligible and under what conditions can you claim LTCG. A man sold his family’s ancestral agricultural land and claimed long-term capital gains exemption because he purchased two properties from the money. However, his exemptions under Section 54B and Section 54F were denied, leading to tax additions and a notice.
What the case is about
The man, a resident of Panchkula, disposed of his family farm land in a village for Rs 8 crore in 2017. Heathen bought two properties in Chhat and Sanoli villages and sought long-term capital gains (LTCG) tax relief under Sections 54B and 54F. The man also owned a restaurant in Dhakoli, which had his office as well. In the tax return that he filed, the man declared LTCG of Rs 7.73 crore after accounting for certain expenses. He claimed tax exemptions of Rs 2.64 crore under Section 54F, which relates to residential property, and Section 54B, applicable to agricultural property. However, the Assessing Officer (AO) was not satisfied with the documents that were submitted by the taxpayer to support his claims. The AO disallowed Rs 2.64 crore under Section 54F and Rs 3.73 crore under Section 54B. This led to total additions of approximately Rs 6.36 crore for the assessee and he faced a tax notice. The man challenged the AO’s assessment before the Commissioner of Income Tax (Appeals) [CIT(A)]. The appellate authority allowed him partial relief on his Section 54B claim. But, it rejected the exemption which the man had sought under Section 54F. The key reason behind this rejection was the CIT(A)'s view that the man owned more than one residential house when he sold the original asset. The CIT(A) treated the man’s property in Dhakoli, Zirakpur, as a residential house. However, the property was actually being used for commercial purposes, and housed the man’s restaurant and office. The man therefore approached the Income Tax Appellate Tribunal (ITAT), Chandigarh, challenging the decision.
Why did he win the case?
The classification of the Dhakoli, Zirakpur property emerged as the central point of dispute before the tribunal. It had to determine whether a commercial property could be regarded as a residential house for the purpose of restricting his Section 54F LTCG exemption. Another issue was whether agricultural land acquired in an urban area could be considered eligible for relief under Section 54B. The ITAT Chandigarh eventually ruled substantially in the man’s favour on both questions. He won the case on September 1, 2026. Under Section 54B of the Income-tax Act (ITA), 1961, taxpayers can claim complete exemption from long-term capital gains tax on the sale of agricultural land, provided it was used for agricultural activities during the two years immediately before the sale. The exemption is available when the long-term capital gains are reinvested in another agricultural property within two years of the original sale. However, the Section 54B benefit is limited to the amount invested in the replacement agricultural land. If that newly acquired land is sold within three years, the earlier tax benefit is effectively reversed through a reduction in its cost of acquisition. The Income-tax Act, 2025 came into effect from April 1, 2026. The corresponding provision is now covered under Section 83 of the new law. Chartered Accountant Suresh Surana told ET that the ITAT Chandigarh decided to establish the actual nature of the properties through a physical inspection. Accordingly, the tribunal directed the Income Tax Assessing Officer (AO) to conduct an on-ground verification and ascertain the facts. Following the inspection, the AO prepared a remand report confirming that the man’s property in Dhakoli, Zirakpur, was located in a commercial zone and was being used for commercial activities. With this fact established, the ITAT Chandigarh concluded that the property could not be classified as a “residential house” solely for assessing the man’s eligibility for the Section 54F exemption. Section 54F allows taxpayers to claim long-term capital gains tax exemption when they sell a long-term capital asset other than a residential house and invest the net sale consideration in buying or constructing a residential house in India. However, one of the conditions for claiming this benefit is that the taxpayer must not own more than one residential house. The distinction lies in the term residential. In this case the property in Zirakpur was commercial in nature. Surana says: “The restriction under section 54F concerns ownership of residential houses, not every type of immovable property owned by a taxpayer.” The case succeeded because the Income Tax Department’s own verification established the commercial character of the Dhakoli, Zirakpur property. This meant that the factual ground relied upon by the CIT(A) to reject his exemption claim was no longer valid. Consequently, the ITAT Chandigarh deleted the disallowance of Rs 2.64 crore under Section 54F, subject to fulfilment of the remaining statutory requirements. For Section 54B related to sale of agricultural land, the man maintained that he had fulfilled this requirement. In support of his claim, he produced purchase deeds recording investments of Rs 80 lakh and Rs 45 lakh in 2018, towards the acquisition of agricultural properties. The physical inspection ordered by the ITAT Chandigarh verified that both transactions had taken place and that the properties in question were agricultural land. The Income Tax Department nevertheless questioned the exemption, pointing out that two of the properties were located within an urban area. The tribunal did not consider this objection sufficient to reject the claim. It held that the mere fact that land is situated in an urban area cannot, on its own, be a valid ground for denying relief under Section 54B. The tribunal permitted the Section 54B deduction to the extent of the qualifying investment substantiated through the purchase deeds and other supporting material. According to Surana, the ITAT Chandigarh decision underlines that eligibility for capital gains tax exemptions must be assessed on the basis of the property’s actual nature and the evidence available. Its description in the income tax return, geographical location or an assumption regarding its use should not be the deciding factor.
