The Mumbai bench of the Income-Tax Appellate Tribunal (ITAT) has ruled that two residential flats located on different floors of the same building can be considered as ‘one residential house.’ This decision allows taxpayers to claim deductions under Section 54F of the Income-Tax Act, which pertains to the sale of property and the subsequent investment in residential property. This clarification may impact how individuals approach property investments and tax planning in the future.
S Shah, the taxpayer, sold six commercial units during the financial year 2019-20, which resulted in a long-term capital gain of nearly Rs 5 crore. Subsequently, he purchased two flats (on different floors) in Wing A — each having a purchase price of more than Rs 2.5 crore. The I-T officer allowed the section 54F deduction for one flat but disallowed the Rs 2.5 crore attributable to the second.
Referring to judicial precedents including that of Delhi High Court , the tax tribunal said the expression ‘a residential house’ should be examined by looking at the substance and functional character of the accommodation. Section 54F provides for exemption from long-term capital gains arising from the transfer of a long-term capital asset (other than a residential house), where the net sale consideration is invested in purchasing or constructing ‘a residential house’ in India, subject to prescribed conditions. The flats were purchased directly from the developer of the housing complex. The term ‘a residential house’ has often been discussed by ITAT benches and courts and decided in favour of the taxpayer. However, generally these units are adjoining flats, with a common kitchen. In this case, the Commissioner (Appeals), National Faceless Appeal Centre, upheld the disallowance, reasoning that the flats were separate units, located on different floors, had separate entrances and were separately assessed for stamp duty. The taxpayer argued that the two flats were acquired as a single residential accommodation for his family. Given Mumbai’s limited availability of residential space, adjacent flats were not available, and the family opted for units in the same wing connected by a common lift.
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