Tribunal Allows Tax Relief on Two Flats Bought as One Home

• The Mumbai ITAT allowed Section 54F deduction for two residential flats purchased by a taxpayer.
• The flats were located on different floors of the same building and had separate entrances.
• The tribunal said the law should consider the actual residential use of the property rather than only its physical configuration.

Mumbai: In a significant ruling that could provide relief to taxpayers investing capital gains in residential property, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that two residential flats located on different floors of the same building can be treated as “one residential house” for claiming deduction under Section 54F of the Income-Tax Act.

The case involved a taxpayer, identified as S Shah, who had sold six commercial units during FY 2019-20. The transactions resulted in a long-term capital gain of nearly ₹5 crore. The taxpayer subsequently purchased two residential flats in Wing A of the same building, with each flat costing more than ₹2.5 crore.

The taxpayer claimed the benefit of Section 54F on the investment made in both flats. The provision allows exemption from long-term capital gains when the sale proceeds of a qualifying asset are invested in purchasing or constructing a residential house in India, subject to specified conditions.

However, the Income Tax Officer allowed the deduction for only one of the two flats and disallowed the amount attributable to the second flat.

The taxpayer challenged the decision before the appellate authorities. The Commissioner (Appeals), National Faceless Appeal Centre, upheld the disallowance, treating the two flats as separate residential units.

The Mumbai ITAT bench disagreed with the authorities and ruled in favour of the taxpayer.

According to the tribunal, the expression “a residential house” under Section 54F should not be interpreted solely on the basis of whether the property consists of one physical unit or multiple independently identifiable units.

The tribunal noted that the two flats were situated on different floors of the same building, had separate entrances, and were separately assessed for stamp duty. Despite these characteristics, the taxpayer argued that the properties were acquired as a single residential accommodation for his family.

A key factor was that the flats were adjacent residential units and were intended to serve the taxpayer’s family accommodation needs.

The tribunal observed that Section 54F does not necessarily require a residential house to be evidenced by a single registered instrument or to constitute only one undivided physical unit.

Instead, the expression should be examined by considering the substance and functional character of the accommodation.

In this case, the tribunal accepted the taxpayer’s contention that the two flats were acquired as one residential accommodation for his family.

The ruling is important for taxpayers who invest substantial capital gains in multiple residential units that collectively function as a single home.

It indicates that the tax treatment may depend not merely on the number of sale deeds or physical units, but also on factors such as location, intended use, functional integration and the circumstances in which the properties were acquired.

However, the ruling should not be interpreted as a blanket exemption for every purchase of two or more flats. The eligibility for Section 54F depends on the specific facts of each case and the statutory conditions applicable to the taxpayer.

The decision provides a broader interpretation of the term “one residential house” and could be particularly relevant to high-value property buyers who purchase multiple flats for use as a single family residence.

It also highlights the importance of examining the actual nature and purpose of a property investment while determining eligibility for capital gains exemptions.

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