Case at a Glance
A taxpayer sold agricultural land in Nashik for ₹10 crore and claimed exemption under Section 54F on long-term capital gain of about ₹8.82 crore by buying two adjoining flats in Goregaon, Mumbai, which he joined into one home. The Assessing Officer treated them as two houses and allowed exemption for only one. The ITAT Mumbai held that “the character of the accommodation has to be determined after considering the physical integration” of the premises, and that the absence of a revised municipal plan is not a statutory bar. The CIT(A)’s order allowing the full claim and an improvement cost of ₹15,22,844 was upheld.
The assessee sold agricultural land at Village Gangavarhe, Nashik for ₹10,00,00,000 and computed long-term capital gain of ₹8,81,55,966, claiming it fully exempt under Section 54F. He had invested ₹13,32,05,622 in Flat Nos. 4903 and 4904 in Tower A of Oberoi Esquire, Goregaon (East), bought under separate agreements dated 23 August 2021. He said the flats were adjoining, the wall between the halls had been removed, and the family used them as one residence. He also claimed indexed cost of improvement of ₹15,22,844 for levelling and fencing done in earlier years.
The Assessing Officer, relying on separate agreements, sanctioned plans, possession letters, electricity connections, municipal bills and parking allotments, treated the flats as two houses, halved the qualifying investment to ₹6,66,02,811, allowed ₹6,03,31,927 under Section 54F, and disallowed the improvement cost for want of bills. The CIT(A) reversed both findings. The Revenue appealed, arguing that the flats retained separate identities, that photographs could not replace revised municipal approvals, and that the assessee owned another house at Krishna Ganga Apartments on the date of transfer.
The Key Question Before the Court
Can two adjoining flats bought on the same day under separate agreements and physically combined into one dwelling be treated as ‘one residential house’ for exemption under Section 54F?
Physical Integration, Not Paperwork, Decides the Character of a House
The Tribunal held that “the character of the accommodation has to be determined after considering the physical integration” of the premises; flat numbers and separate service connections are relevant but not decisive. “Where adjoining flats are combined and constitute one residential house on the facts”, the investment is considered as a whole. It relied on Nakul Aggarwal v. ACIT, which applied this to the amended Section 54F, and noted CIT v. Raman Kumar Suri, (2012) 11 BOM CK 0143 as a case under the earlier provision. It cautioned that “This approach does not extend the deduction to separate houses” merely because family members occupy them.
The Tribunal also held that “The absence of a revised municipal plan also cannot be treated as an independent statutory disqualification” under Section 54F. Owning one other house at Krishna Ganga Apartments did not attract the proviso, and the office premises were commercial. As the investment exceeded the net consideration of ₹9,90,00,000 used in the computation, halving the cost had no basis. On the improvement cost, “the material reasonably available in respect of old expenditure has to be considered together”, so the absence of vouchers alone did not justify rejection.
What the Court Actually Held
- Adjoining flats that are physically combined and used as one dwelling can be treated as one residential house for Section 54F.
- Separate agreements, flat numbers and utility connections are relevant but not decisive; the absence of a revised municipal plan is not a statutory disqualification.
- Owning one other residential house on the date of transfer does not attract the Section 54F proviso; commercial office premises are not counted.
- The Revenue’s appeal was dismissed; the full Section 54F exemption and the improvement cost of ₹15,22,844 allowed by the CIT(A) were upheld.
Why This Judgment Matters
- Buyers in metros often combine adjoining flats; this ruling supports full Section 54F relief where they truly form one home.
- It clarifies that municipal paperwork does not override actual physical integration.
- It shows how old improvement expenses can be allowed on available material even without vouchers.
What Should Advocates Take Away From the Judgment?
For Taxpayers
- If you combine adjoining flats, keep evidence of physical integration such as photographs, a single entrance and common use.
- Buy and register the units close together and treat them as a single investment.
- Keep ledgers and bank records for old improvement costs, even if bills are unavailable.
For Tax Practitioners
- Rely on Nakul Aggarwal v. ACIT for the amended ‘one residential house’ wording.
- Check the number of other houses owned on the date of transfer against the proviso.
- Non-jurisdictional High Court rulings were treated as persuasive; cite them with care.
Key Takeaways
- Combined adjoining flats can be one residential house under Section 54F.
- Physical integration matters more than separate paperwork.
- No revised municipal plan is not a bar to exemption.
- The Revenue’s appeal was dismissed in full.
Frequently Asked Questions
Does this mean any two flats qualify as one house?
No. The Tribunal said the approach does not extend to separate houses merely because family members own or occupy them. The flats must be physically combined and used as one dwelling.
What did the Assessing Officer rely on?
Separate agreements, sanctioned plans, possession letters, electricity connections, municipal bills and parking allotments. The Tribunal held these relevant but not decisive.
Was the cost of improvement on the land allowed?
Yes. The Tribunal upheld the CIT(A)’s allowance of ₹15,22,844, holding that available material on old expenditure must be considered together.
Conclusion
The ITAT Mumbai has looked at how a family actually lives rather than how many sale agreements it signed. Where two adjoining flats have become one home, Section 54F treats them as one residential house.
Practical takeaway: Taxpayers combining flats to claim Section 54F should document the physical merger and common use from the start; that evidence, not municipal paperwork, decided this case.
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