Summary of this article
Mumbai ITAT validates tax exemptions for merged Jodi flats.
Amalgamated adjacent apartments qualify as one residential house.
Supplementary agreements and unified kitchens secure capital gains relief.
Having a large home is an aspiration for most Indians. However, it is a rarity in metro cities due to the rising cost of real estate and the prevalence of high-rise flats. Thus, many individuals end up purchasing flats adjacent to each other and combining them. Unofficially, such residential purchases are known as 'Jodi Flats’.
Despite being a common practice, many homebuyers do not completely understand the tax implications of buying 'Jodi Flats'. This is especially true when it comes to claiming capital gains exemption under Section 54 (from the sale of a residential property) and Section 54F (from the sale of long-term capital assets like shares) of the Income Tax Act, 1961.
Notably, Section 54 and Section 54F of the Income Tax Act, 1961 allow taxpayers to claim exemptions on capital gains when the sale proceeds are invested in a new residential property. However, a recent ruling by the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) shows that homebuyers can claim an exemption for such residential properties.
What Happened In The Case
The matter arose in the case of Deputy Commissioner of Income Tax 6(1)(2), Mumbai vs Amit Mahendrakumar Mehta. On December 17, 2020, Mehta sold a flat and two garages at Casa Grande, Malabar Hill, Mumbai, for Rs 43 crore. He originally purchased the property on June 28, 2000, and computed a Long Term Capital Gain (LTCG) of Rs. 26.59 crore. In addition, he earned a capital gain of Rs. 2.09 crore on the sale of equity shares.
On December 31, 2020, two purchase agreements were executed with developer K. Raheja for properties which were booked in the name of the assessee and his son for Rs. 22.56 crore, and the other in the name of Mehta’s wife and his son for Rs. 17.84 crore.
Later, on March 25, 2022, a registered Supplementary Agreement was entered into with the developer to combine both adjacent apartments into a single composite flat. The agreement delineated ownership of the combined unit as 70 per cent for the assessee and 30 per cent for his wife.
In his tax returns, the assessee claimed an exemption of Rs. 26.59 crore under Section 54 against the house sale and an exemption of Rs. 1.86 crore under Section 54F against the share sale.
However, later, when he filed his tax returns, the Assessing Officer disallowed the claims in part, holding that Section 54 only applies to one single flat and restricting the exemption to the purchase consideration of the second flat.
The AO rejected the Section 54F exemption of Rs. 1.86 crore, asserting that Flat No. 3101 was legally purchased in the name of the assessee's wife and son. Ultimately, the Commissioner of Income Tax (Appeals) overturned the decision, admitting the registered supplementary agreement to conclude that the two units were merged into one single residential home.
Arguing against the relief granted by the first appellate authority, the Senior Departmental Representative for the Revenue contended that procedural rules were violated.
"The Ld. CIT(A) erred in admitting and relying upon additional evidence, including the Supplementary Agreement dated 25.03.2022 and bank statements, without satisfying the stringent conditions laid down under Rule 46A of the Income Tax Rules, 1962," the Senior Departmental Representative said.
Challenging the ownership and title of the adjacent property, the Revenue added that the benefits should not apply retroactively.
"The Ld. CIT(A) failed to recognise that the legal ownership of the new asset must vest with the assessee to qualify for exemption, and a subsequent 'Supplementary Agreement' cannot be used to retrospectively shift ownership for the sole purpose of taking benefits of tax," the representative said.
The Revenue also mentioned in court that the law explicitly restricted exemptions on multiple homes exceeding a specific threshold.
"Deduction under section 54 and 54F are legally two distinct residential units and thereby the Ld. CIT(A) failed to appreciate the proviso to Section 54(1) (applicable from AY 2021-22), which restricts the claim for two houses only to cases where the Capital Gain does not exceed Rs. 2.00 Crores," the representative noted.
However, Mehta’s representative highlighted the physical and legal integration of the two properties into one residential unit and argued that the separate flats no longer existed.
"There is only one residential unit having one entry and one kitchen. On amalgamation of both the flats, the flat No. 3101 lost its identity," Mehta’s counsel said.
The representative explained that the combined flat became a single unit for which additional stamp duty had been paid on the merged area.
ITAT Mumbai Ruling On Jodi Flats
The Mumbai ITAT Bench comprising Judicial Member Shri Pawan Singh and Accountant Member Shri Girish Agrawal dismissed the revenue's appeal and ruled entirely in Mehta’s favour.
Upholding the findings that the adjacent flats ceased to exist as two separate apartments, the Tribunal observed the new legal standing of the property.
"After the supplementary agreement, the assessee acquired composite flat bearing No. 3102. As per clause No. 2(c) & (e) of the supplementary agreement, the carpet area of flat No. 3102 is now 6769 square feet and the purchase consideration is of Rs. 40.40 Crore. Further, due to amalgamation, the area of the flat is increased by 9.66 square meters, on which the assessee paid additional stamp duty, and flat No. 3101 has lost its existence," ITAT Mumbai said.
Rejecting the Revenue's challenge on additional evidence under Rule 46A, the Tribunal affirmed the reliance on established jurisprudence.
"Alleged additional evidence is crucial, and its consideration and appraisal would render substantial justice to the assessee and was admitted for his consideration. Hence, we find that there is no infirmity or illegality in the order of ld CIT(A)," ITAT Mumbai said.
What This Means For Homebuyers
The ruling shows that if two adjacent flats are modified and amalgamated into a single habitable residential unit featuring a single kitchen, combined entry, and common living space, they legally qualify as a residential house under Section 54 and Section 54F.
While I-T rules restrict exemptions on two separate houses to cases where capital gains are under Rs. 2 crore, this ceiling does not bar taxpayers from buying a jodi flat if the property is structured and registered as one unified composite residence.
Additionally, homebuyers are allowed to contribute funds towards adjacent apartments booked alongside family members, provided a legal agreement defines composite ownership and reflects the actual capital invested.
For homebuyers who wish to achieve the dream of having a large home by combining two flats, being aware of the tax provisions can save them lakhs of rupees in capital gains taxes. Consolidating property titles through registered supplementary agreements, demonstrating unified layout changes, and documenting clear fund trails prevent the tax department from splitting a single home into multiple taxable units.
