Nilesh Ramesh Modi Vs ITO (Bombay High Court)
Denial of Section 54F Exemption Does Not Make Entire Flat Cost Taxable: Bombay HC
The Bombay High Court has held that the entire purchase price of a flat could not be added to income merely because the investment was excluded while computing exemption under Section 54F of the Income-tax Act, 1961. The computation had to follow the proportionate exemption mechanism under Section 54F(1)(b).
In Nilesh Ramesh Modi v. Income Tax Officer, Ward-16(3)(1), Mumbai & Others, Writ Petition No. 4898 of 2026, decided on 2 November 2026, the Court reduced the payment required for stay from ₹38,75,018 to ₹6,50,108.
Significantly, the Court did not decide whether two adjoining flats qualified as one residential house. Its intervention was confined to the incorrect computation underlying the stay condition.
Background: Exemption Claimed for Two Adjoining Flats
During the previous year relevant to Assessment Year 2024-25, the petitioner transferred tenancy rights in two properties for ₹2.30 crore. He also sold shares held as long-term capital assets for approximately ₹8.75 crore and certain short-term shares for ₹1,69,721.
The aggregate consideration from the transfers was ₹11,07,02,110.
The petitioner agreed to purchase two adjoining flats in the Piramal Mahalaxmi project in Mumbai. Flat No. 4106 cost ₹4,88,82,168, while Flat No. 4107 cost ₹4,78,45,668.
He maintained that his intention from inception was to use both flats as one residential house. His return declared total income of ₹1,17,32,274, including long-term capital gains of ₹37,84,378, after claiming exemption of ₹9,99,99,793 under Section 54F.
Assessing Officer Allowed Investment in Only One Flat
The Assessing Officer treated the flats as separate residential units. The Revenue relied on separate sale agreements and information from the developer showing separate entrances and kitchens, although the intervening gypsum wall could be dismantled.
The officer allowed exemption with reference to the higher investment in Flat No. 4106, together with ₹32,72,000 deposited in the Capital Gain Savings Scheme.
However, the investment in Flat No. 4107 was excluded. The officer then added its entire purchase consideration of ₹4,78,45,668 to the petitioner’s income, determining total income at approximately ₹5.96 crore.
A further discrepancy appeared in the accompanying computation sheet. It reflected total income of approximately ₹14.04 crore, including capital gains of ₹13,24,63,226. Those gains exceeded even the aggregate consideration received from the capital asset transfers.
Appeal, Rectification and Conditional Stay
The petitioner challenged the assessment before the Commissioner of Income Tax (Appeals). He also sought rectification under Section 154, disputing both the addition and the tax computation.
His case was that, even assuming exemption was available for only one flat, the tax consequences had to be calculated under Section 54F. The entire cost of the excluded flat could not automatically become taxable income.
The rectification application was rejected because the grievances were also pending in appeal.
Separately, the Assessing Officer granted a stay of 80% of the outstanding demand, conditional upon payment of 20%, quantified at ₹38,75,018, within seven days. The petitioner approached the High Court against these orders.
Section 54F Requires Proportionate Computation
The High Court examined Section 54F(1)(b). Where the cost of the qualifying residential house is lower than the net consideration, the exempt portion of capital gains is determined proportionately.
The relevant relationship is:
Exempt capital gains = Capital gains × Cost of qualifying new asset ÷ Net consideration
Consequently, excluding an investment from the qualifying cost requires recalculation of the exemption. It does not justify adding the entire excluded investment as capital gains.
The petitioner furnished a revised computation showing capital gains of ₹2,93,47,526 on this basis. The Revenue’s counsel did not dispute that computation.
The Court therefore held that adding ₹4,78,45,668, representing the purchase price of Flat No. 4107, was manifestly incorrect.
Corrected Figures Reduced the Stay Payment
Based on the computation considered by the Court, total income worked out to ₹3,72,43,511. After credit for advance tax and self-assessment tax, the tax payable was ₹32,50,541.
Accordingly, 20% amounted to ₹6,50,108.
The Court also noted that the Revenue had not explained how capital gains of ₹13,24,63,226 appeared in the computation sheet when the assessment order contained no reference to that figure.
It directed payment of ₹6,50,108 within one week and stayed recovery of the balance amount specified in its order, ₹32,24,910, pending disposal of the appeal and for four weeks thereafter. The CIT(A) was requested to decide the appeal expeditiously, preferably by 31 March 2027.
Two-Flats Exemption Issue Remains Open
The judgment establishes the need for correct computation before imposing a stay condition. It does not settle the petitioner’s substantive entitlement to exemption for both flats.
The Court expressly left open the competing arguments concerning “one residential house” and the effect of the amendment effective from 1 April 2015. Those questions remain for appellate adjudication.
Cases Discussed
- PCIT Central-1 Vs Lata Goel, 2025 SCC OnLine Del 7765 (Delhi High Court). Relied upon by the assessee before the Assessing Officer regarding the treatment of multiple residential units as one house. The Revenue distinguished the decision on the basis of the amendment effective from 1 April 2015. The Bombay High Court expressed no opinion on its applicability.
- CIT Vs Gita Duggal, (2013) 357 ITR 153 (Delhi High Court); 2013 SCC OnLine Del 752. Relied upon by the assessee on the interpretation of a residential house for purposes of capital gains exemption. The Revenue contended that the decision concerned the earlier statutory wording. The Bombay High Court did not decide that issue.
FULL TEXT OF THE ORIGINAL JUDGMENT OF BOMBAY HIGH COURT
1. Rule. After hearing counsel for the parties we felt that this Petition could be disposed off on a narrow issue and, hence, with the consent of parties, we propose to do so as under and, accordingly, make the Rule returnable forthwith.
2. During the previous year relevant to the Assessment Year 2024-25, the Petitioner had transferred tenancy rights in respect of two properties for which the aggregate consideration received by him was Rs.2,30,00,000/-. He had also sold certain shares which were held by him as long-term capital assets for an aggregate consideration of Rs.8,75,32,389/-. Likewise, shares of a company called Olectra Greentech Limited, which was a short-term capital asset, were sold for a sum of Rs.1,69,721/-. Thus, the aggregate consideration of the capital assets transferred during the year was Rs.11,07,02,110/-. On 13th July, 2023 the Petitioner entered into an understanding with the developers of a property situated at Mahalaxmi wherein he undertook to purchase two Units, viz., Flat No. 4106 and Flat No. 4107 in the North Tower, i.e. Tower No.3, in a residential project known as Piramal Mahalaxmi for a consideration of Rs.4,88,82,168/- for Flat No. 4106 and a consideration of Rs.4,78,45,668/- for Flat No. 4107.
3. From the inception the Petitioner’s intention was always to use the two flats as one residential house as is spelt out from the letter dated 13th July 2023 a copy whereof is at page 73 of the Petition. A copy of the floor plan annexed at page 71 of the Petition would seem to suggest that the two flats could be used as one residential unit. According to the Revenue, however, the letter dated 13th July 2023 itself acknowledged that the two units were separate units, separate agreements for sale were executed in respect of each flat, and, in response to information called for under Section 133(6) of the Income Tax Act, 1961 (“the Act”) the developer stated that the two flats were separate units having separate entrances and kitchens, although the adjoining wall was of gypsum and could be dismantled.
4. The Petitioner filed his return of income on 27th October 2024 declaring a total income of Rs.1,17,32,274/- which included a long-term capital gain of Rs.37,84,378/-. This long-term capital gain was arrived at after claiming an exemption under Section 54F in a sum of Rs.9,99,99,793/- the particulars whereof are set out at page 77 of the Petition.
5. The Petitioner’s case was picked up for a scrutiny assessment and after considering the detailed replies submitted by the Petitioner, Respondent No.1 framed an assessment under Section 143(3) read with Section 144B on 20th February 2026 by which order the total income of the Petitioner was computed at Rs.5,95,77,948/-. Respondent No.1 rejected the Petitioner’s claim for an exemption under Section 54F in respect of the monies spent for acquiring both the flats and held that the Petitioner would be entitled to an exemption only in respect of the investment made in one flat. According to the Petitioner, contrary to the mandate of Section 54F, Respondent No.1 added a sum of Rs.4,78,45,668/- being the consideration for the purchase of Flat No.4107 to the total income. Inspite of determining the total income at page 16 of the assessment order at a sum of Rs.5,95,77,950/-, Respondent No.1 in the computation sheet annexed to the return of income determined the total income at Rs.14,03,59,210/- which included a capital gain of Rs.13,24,63,226/- and on that basis determined the tax payable at Rs.1,53,07,716/- as is apparent from pages 148 and 149 of the Petition. It may be apposite to mention here that the gains so determined was even in excess of the aggregate consideration of Rs.11,07,02,110/-.
6. The Revenue has stated in its affidavit-in-reply that during the assessment proceedings, notices under Sections 143(2) and 142(1) of the Act were issued, a video-conference hearing was afforded, and a Show Cause Notice dated 16th January 2026 proposing to disallow the claim under Section 54F in respect of Flat No.4107 was issued, to which the Petitioner responded on 27th January 2026. Information was also called for from the developer under Section 133(6) of the Act. According to the Revenue, Respondent No. 1 allowed the exemption under Section 54F in respect of Flat No.4106, being the higher investment of Rs.4,88,82,168/-, together with a sum of Rs.32,72,000/- deposited in the Capital Gain Savings Scheme, and disallowed the claim in respect of the cost of Flat No.4107 amounting to Rs.4,78,45,668/-, on the footing that the two flats were separate units which could not be treated as one residential house merely on the basis of the future proposal to combine them. The Revenue further states that the judgments relied upon by the Petitioner, including CIT V/S Gita Duggal [(2013) SCC Online 752 (Del)] and PCIT Central-1 V/S Lata Goel [(2025) SCC Online 7765 (Del)], were distinguished in the assessment order as relating to assessment years prior to the amendment with effect from 1st April, 2015 by which the expression “a residential house” in Section 54F was substituted by “one residential house”.
7. Being aggrieved by the said assessment order the Petitioner has preferred an appeal to the Commissioner of Income Tax (Appeals) on 28th March 2026 which appeal is pending hearing and final disposal. The Petitioner has also filed an application for rectification in terms of Section 154 inter alia pointing out that assuming the investment in Flat No.4107 is to be disregarded for the purpose of allowing exemption under Section 54F on the footing that it is a separate residential house and the exemption under Section 54F is available only in respect of one residential house, nevertheless, the amount that could be added to the Petitioner’s income could only be Rs.1,77,41,254/-. It was also submitted that the tax payable that was determined in the computation sheet is factually incorrect inasmuch as Respondent No.1 has proceeded on the footing that the income under the head “capital gains” is Rs.13,24,63,226/- which, as noted earlier, is far in excess of the sale proceeds that the Petitioner received on the transfer of the capital assets during the previous year. Accordingly, the Petitioner requested Respondent No.1 to rectify the assessment order and determine the correct tax payable.
8. The Revenue states that the rectification application was filed on 17th March 2026, and contends that the issues raised therein, namely, whether the two flats can be treated as one residential house and whether only the capital gains and not the entire investment ought to have been added, are also raised in the pending appeal before the CIT(A). This necessarily involves examination of the factual and legal position, and cannot be treated as mistakes apparent from the record within the meaning of Section 154 of the Act. According to the Revenue, Section 154 cannot be used as a substitute for appellate adjudication.
9. The Petitioner also filed, on 6th April 2026, an application for stay of recovery of the demand raised pursuant to the assessment order and it was submitted that having regard to the circulars issued by the Central Board of Direct Taxes as well as the principle enunciated by this Court in its earlier judgments, a stay of recovery of the entire demand ought to be granted.
10. During the pendency of the rectification application as well as the application for stay, the Petitioner received a communication dated 6th July 2026 from the office of the CIT (A) asking him to furnish his written submissions in support of the grounds raised in the appeal. In response thereto, the Petitioner had furnished his submissions on 25th July 2026.
11. By a communication dated 9th September, 2026 Respondent No.1 informed the Petitioner that an amount of Rs.1,93,75,019/- was due from him. The Petitioner was also informed that if any rectification application filed by him was pending, a copy of the same should be forwarded to him. The Petitioner was also informed that in the event he had filed an appeal against the assessment order for the Assessment Year 2024-25, he should immediately pay 20% of the demand and furnish proof thereof. In the event the Petitioner failed to do so, recovery proceedings would be initiated against the Petitioner.
12. Immediately thereafter, on 16th September 2026, the Petitioner wrote to Respondent No.1 and pointed out that he had requested for a stay of the recovery of the demand as well as filed an application for rectification which were both pending disposal. These two applications, thereafter, came to be disposed of by Respondent No.1. By an order dated 17th September 2026, the Petitioner’s rectification application was rejected on the ground that the Petitioner had filed an appeal to CIT(A) wherein the grievances raised in the application for rectification were also the subject matter of appeal and, hence, the rectification application was not maintainable. The Petitioner’s application for stay was disposed of under Section 220(6) of the Act by granting a stay of 80% of the demand outstanding subject to the Petitioner paying 20% of the demand outstanding which was computed at Rs.38,75,018/- within a period of seven days of receipt of the order.
13. According to the Revenue, the stay application was not rejected in toto, the order having been passed after considering the application CBDT instructions, and the stay was made subject to conditions regarding the Petitioner’s cooperation in the early disposal of the appeal. The Revenue further states that the rectification order requested the Petitioner to co-operate in the appellate proceedings.
14. Being aggrieved by the said orders, the Petitioner has approached this Court seeking certain reliefs as sought for in prayers (a) to (g) of the Petition.
15. We make it clear that we are expressing no opinion whatsoever on the merits of the Petitioner’s claim that he is entitled to claim an exemption under Section 54F in respect of the investments made by him for purchase of two contiguous residential units which are to be used as a single residential house. It is the case of the Petitioner that the said claim is supported by various judgments but as we are not deciding this aspect of the matter, we are not adverting to the same. The Revenue, on its part, contends that the said judgments pertain to assessment years prior to the amendment with effect from 1st April 2015 whereby the expression “a residential house” was substituted by “one residential house” in Section 54F, and were distinguished on that ground in the assessment order. We express no opinion on this contention as well.
16. The only issue on the basis of which we propose to dispose of this Petition is on the footing that the amount of tax payable at 20% of the demand has not been determined properly. Section 54F of the Act provides, in so far as is relevant for the purpose of the above Petition, that where an Assessee, being an individual, has earned capital gains from the transfer of any long term capital asset not being a residential house and the Assessee has, within a period of one year before or two years after the date on which the transfer took place, purchased, or has within a period of three years after that date, constructed one residential house in India, the capital gains shall be dealt with in accordance with the provisions of this section. Clause (a) of sub-Section (1) has no relevance to the present case and, accordingly, it is Clause (b) that would apply which provides that if the cost of the new residential house is less than the net consideration in respect of the residential asset, then, so much of the capital gain as bears to the whole of the capital gain, the same proportion as the cost of the new asset bears to the net consideration shall not be charged under Section 45 of the Act.
17. In Exhibit “A” to the affidavit-in-rejoinder the Petitioner has determined that if effect is given to the provisions of Section 54F(1)(b), the correct amount of capital gains would be Rs.2,93,47,526/- which computation is not disputed by the learned counsel appearing for the Revenue. This is also apparent from the plain language of the section and, therefore, the addition of Rs.4,78,45,668/- being the amount invested in purchase of Flat No.4107 is manifestly incorrect. Thus, the total income would come to Rs.3,72,43,511/- on which, the tax payable, after giving credit for the advance tax and self-assessment tax paid is Rs.32,50,541/-. 20% thereof is Rs.6,50,108/-. Respondent No.1 in his Affidavit in Reply has not in any manner pointed out that as to how the figure of Rs.13,24,63,226/- was determined as the capital gain in the computation sheet when in the assessment order itself there is no reference to such figure. All that is stated in the Affidavit in Reply is that the assessment order records the addition of Rs.4,78,45,668/- and the assessed total income of Rs.5,95,77,950/-, that the computation sheet is a separate sheet accompanying the assessment order containing the tax computation and demand figures, and that any computational issue is subject to the remedies provided under the Act and the pending appeal.
18. Therefore, in the peculiar facts and circumstances of the present case, we direct that the interest of justice would be served if the Petitioner is called upon to pay a sum of Rs.6,50,108/- within one week from the date of this order and the recovery of the balance demand of Rs.32,24,910/- is stayed pending the disposal of the appeal by the CIT(A) and for a period of four weeks thereafter. We also request the CIT(A) to dispose of the appeal as expeditiously as possible and preferably by 31st March 2027, especially having regard to the fact that written submissions have already been filed before him in response to his notice dated 6th July 2026.
19. Rule is made absolute in the aforesaid terms, and the Writ Petition is also disposed of in terms thereof. However, there shall be no order as to costs.
20. This order will be digitally signed by the Private Secretary/Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.
