ITAT Mumbai · Case Study
S Shah ITAT Case Study: Section 54F Deduction on Two Flats as ‘One Residential House’
Can two separate flats on different floors of the same building qualify as a single residential house for a long-term capital gains exemption? In a significant relief for taxpayers, the ITAT Mumbai said yes.
Case at a glance
- Forum
- Income Tax Appellate Tribunal (ITAT), Mumbai Bench
- Provision in dispute
- Section 54F, Income Tax Act, 1961
- Financial year
- FY 2019-20
- Income in question
- Long-term capital gains of nearly ₹5 crore on the sale of six commercial units
- Deduction claimed
- Section 54F exemption on two flats, each costing over ₹2.5 crore, in the same wing but on different floors
- Outcome
- Deduction allowed; orders of the AO and CIT(A) set aside
Issue Involved
The question before the ITAT Mumbai was whether a taxpayer can claim exemption under Section 54F after reinvesting capital gains in two separate flats situated on different floors of the same building.
Section 54F exempts long-term capital gains arising from the sale of any asset other than a residential house, provided the net sale consideration is invested in purchasing or constructing “a residential house” in India. The dispute turned entirely on how far that expression stretches.
Facts of the Case
- The taxpayer, S Shah, sold six commercial units during FY 2019-20, earning a long-term capital gain of nearly ₹5 crore.
- To claim relief, he purchased two flats directly from the developer, each costing more than ₹2.5 crore, both in “Wing A” of the same building.
- The two flats were on different floors, registered under separate instruments and separately assessed for stamp duty.
- The Assessing Officer allowed the deduction for one flat and disallowed the ₹2.5 crore exemption attributable to the second.
- The CIT(A) at the National Faceless Appeal Centre upheld that disallowance, after which the taxpayer appealed to the Tribunal.
Arguments Before the Tribunal
The Department’s case
Two doors, two houses
“A residential house” means one single, undivided unit. The flats were distinct physical units on different floors, with separate entrances, separate agreements and separate stamp duty assessments — so only one of them could qualify.
The taxpayer’s case
One family, one home
Both flats were bought for the single purpose of housing his family as one residential accommodation. Flats on different floors were taken only because adjacent, side-by-side units were unavailable with the developer at the time.
Observations of the Tribunal
The ITAT Mumbai ruled in favour of the taxpayer, applying a practical, substance-driven reading of the provision.
Substance over structural form
The expression “a residential house” has to be tested against the substance and functional character of the accommodation, not merely its structural layout on a building plan.
A single registered document is not required
Section 54F nowhere requires the residential house to be evidenced by one registered instrument. Stamp duty having been paid separately on two agreements does not, by itself, defeat the exemption.
One undivided physical unit is not mandatory
A home need not be a single undivided physical unit. Where a family uses both flats functionally as one home because of space constraints, physical separation such as being on different floors does not disqualify the claim.
Judgment of the Tribunal
Two flats purchased on different floors of the same building qualify as “one residential house”, and the Section 54F deduction is allowable on both flats taken together.
- The exemption under Section 54F was allowed on the combined investment in both flats.
- The orders of the Assessing Officer and the CIT(A) restricting the claim to a single flat were set aside.
- Full relief of the disallowed ₹2.5 crore exemption was granted to the taxpayer.
Note: Section 54F has been amended over the years — the statutory wording now reads “one residential house in India”, and from AY 2024-25 the investment eligible for exemption is capped at ₹10 crore. The reasoning in this ruling goes to how functional unity is judged, so any claim should still be tested against the provision as it stands for the relevant year.
Key Learnings from the Judgment
“A residential house” is flexible
Buying more than one unit to accommodate a family can still amount to one residential house, provided the use is single and unified.
Vertical integration is valid
If adjacent flats are unavailable, buying vertically in the same building need not jeopardise a Section 54 or 54F claim, as long as the intent is to use them as one home.
Documentation is not the whole story
Separate agreements, separate entrances and separate stamp duty do not automatically make the properties multiple houses. End use defines the character of the asset.
Record the reason for the structure
The unavailability of adjoining flats mattered here. Contemporaneous evidence of why the purchase was split strengthens the claim considerably.
Conclusion
The structural limitations of a building should not strip a taxpayer of a benefit the statute intends to give.
Tax authorities often read capital gains exemptions through a rigid, literal lens, while appellate tribunals look at the genuine, practical intent behind the reinvestment. For anyone reinvesting significant gains into real estate, the lesson is to align the investment structure and the paper trail before the purchase, not after the notice arrives.
Reinvesting capital gains in property? Get the structuring right.
We will help you align your documentation and investment structure with the latest position on Sections 54 and 54F, before you commit.
Talk to Shahnawaz & Associates
