Bought Two Flats With Capital Gains? ITAT Explains When Section 54 Relief Can Cover Both

Can a taxpayer claim Section 54 exemption after investing capital gains in two flats? The answer may depend on whether the properties remain separate homes or are combined into one residential unit.

In a recent case, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) allowed the taxpayer’s full claim after finding that two adjoining flats had been legally and physically amalgamated. Amit Mahendrakumar Mehta’s tax case pertained to assessment year 2021-22.

Why The Tax Department Cut The Claim

The taxpayer sold his Malabar Hill home for Rs 43 crore and worked out the long-term capital gain at Rs 26.59 crore after indexation.

He then claimed that the entire gain was exempt under Section 54, as the money had gone into two flats next to each other—Flat Nos. 3101 and 3102—in a project at Lower Parel, Worli, according to a recent report by Mint.

The Assessing Officer (AO), however, viewed them as two different houses. The officer allowed exemption of Rs 22.56 crore relating to Flat No. 3102 but treated the remaining Rs 4.03 crore as taxable long-term capital gains.

The department relied on the rule that permits investment in two residential houses only when the capital gain does not exceed Rs 2 crore. This is a once-in-a-lifetime option. Since the taxpayer’s gain was considerably higher, the AO held that relief could not cover two separate properties.

How Two Flats Became One House

The taxpayer later produced a registered supplementary agreement, dated March 25, 2022, executed with the developer. The document showed that the two adjoining flats had been merged.

Following the merger, Flat No. 3101 ceased to have a separate identity. The combined residence continued under Flat No. 3102 and had a single entrance and kitchen. Bank statements showing the taxpayer’s contribution towards the purchase were also placed on record.

After examining the papers, the Commissioner of Income Tax (Appeals) held that the merged flats formed a single residential house. The tax department subsequently challenged this finding before the ITAT.

What The ITAT Decided

The Tribunal agreed that the flats had not continued as two independent houses. Their legal and physical amalgamation had created one composite residential unit. The restriction governing investments in two separate houses, therefore, did not apply.

The ITAT upheld the Section 54 exemption of Rs 26.59 crore and dismissed the department’s appeal.

The ruling does not mean that purchasing any two flats will automatically qualify as buying one house. The taxpayer must be able to demonstrate that the adjoining units genuinely function as a single residence. Registered agreements, an approved amalgamation, the physical layout and evidence of payment may become important in supporting such a claim.

For current transactions, another limit must also be kept in mind. From assessment year 2024-25, the amount of investment considered for exemption under Section 54 is capped at Rs 10 crore.

FAQs

1. Can Section 54 exemption be claimed for buying two flats?
Yes, if the adjoining flats are legally and physically merged and function as a single residential house.

2. What documents can support such an exemption claim?
A registered amalgamation agreement, approved layout, bank statements, and evidence showing a common entrance and kitchen can help establish that the flats form one home.

3. What is the current exemption limit under Section 54?
From assessment year 2024-25, the investment considered for Section 54 exemption is capped at Rs 10 crore.