INTRODUCTION
In a recent judgement, the Bombay High Court in Krishnagopal B. Nangpal v. Deputy Commissioner of Income Tax,[1] clarified the scope of income tax exemption with respect to capital gains accrued prior to 2014 amendment. The dispute revolved around whether the phrase “a residential house” in the unamended law could extend to multiple properties, and whether the 2014 amendment restricting the benefit to “one residential house” applied retrospectively. The Court held that investments made in multiple residential units before the amendment would still qualify for exemption, reaffirming a liberal and prospective reading of tax exemption provisions.
FACTUAL BACKGROUND
The facts trace back to late 80s and early 90s, when a lady executed a will in favor of her then minor son, Nangpal, giving him her Mumbai flat. In 1990, Nangpal’s mother died and a legal guardian was appointed for him as he was still a minor. After three years in 1993, Nangpal’s legal guardian entered into a sale agreement on behalf of Nangpal for the sale of the flat for Rs. 1.45 crore. In 1994, the legal guardian even obtained a “no objection certificate” from the Income Tax Department for the sale of that flat. After the sale of his mother’s flat, Nangpal’s guardian, on his behalf entered into a joint venture agreement with Samant Estate Pvt. Ltd. for construction of residential house, in their project at Pune. As per the agreement, Nangpal was set to get 5 flats in exchange of Rs. 1.45 crore, however this was later increased to 7 flats.
However, a search was carried out under section 132(1), when no ITR was filed in the year 1994-95 and 1995-96. A notice was issued under section 158BC and appellant filed the returns from 1987-88 to 1996-97 and stated nil returns for period of 1994-95 and 1995-96 and reasoned that he invested entire sale proceeds of the flat into investment through project of Samant Pvt. Ltd. In furtherance, Nangpal claimed exemption under section 54 of the IT Act, 1961. The Deputy Commissioner disallowed any exemption under section 54 for his total capital gain amounting to Rs. 1.08 crore. He approached ITAT against order of Deputy Commissioner but failed. He thus approached the Hon’ble High Court under section 260A of the Act in 2003.
ISSUES
The key issue before the Court was whether Section 54 applied to seven flats purchased by the assessee, and whether the 2014 amendment restricting exemption to ‘one residential house’ could be applied retrospectively.
COURT REASONING AND DECISION
After listening to the contentions and arguments from both sides, court resorted to Amendment act of 2014 and precedents to reach its conclusion. The court cited the explanatory note to provisions of Finance (No.2) Act, 2014, “20.5 Applicability: These amendments take effect from 1st April, 2015 and will accordingly apply in relation to Assessment year 2015-16 and subsequent Assessment years”, this note provided explicit and clear indication of prospective application of the amendment brought by Finance (No.2) Act, 2014. Thus, the amendment of “one residential house” shall not be applied retrospectively in the present case where the capital gain was accrued in the 90s.
As for the interpretation of “a residential house” as mentioned in the act prior to the amendment, the hon’ble court relied on relevant precendents such as decision of Karnataka High Court in Arun K. Thiagarajan Vs. CIT 2020 (427) ITR 190 (Karnataka) [2] and of Madras High Court in Tilokchand and Sons.[3] The court upheld the wide interpretation of unamended section 54(1) in these precedents which expressed that a residential house includes more than one house.
Therefore, in the light of the explicit applicability provision of Finance Amendment Act, 2014 and precedents, the appeal was allowed and the appellant was held entitled to the benefit of exemption under provision of unamended section 54(1) of IT Act, 1961 against his entire capital gain of Rs, 1,08,30,625.
ANALYSIS AND SIGNIFICANCE
The central contribution of the ruling lies in its interpretation of the phrase “a residential house” under unamended section 54 of IT Act, 1961. Rather than reading it narrowly, the court preferred a wide interpretation, relying on similar interpretation of other High Courts. Through such interpretation, Court emphasized that the object of section 54 is to promote reinvestment of capital gains into housing. This intent would stand frustrated if exemption benefits are denied merely because investment was spread across multiple residential properties. By doing so, the court aligned with earlier Supreme Court observations that beneficial provisions must receive liberal construction.
Equally significant is the Court’s stand on retrospectivity. The 2014 amendment, which introduced a clear restriction of exemption to one residential house is a substantive change in law and not a clarificatory one. This distinction between prospective and retrospective operation reflects a broader tax law principle that taxpayers’ rights cannot be curtailed retrospectively unless legislature explicitly mandates it.
Together, these findings strengthen the position of assessees for pre-2014 claims. At the same time, the judgement underlines a wider doctrinal point, that interpretation of tax statutes must balance literal wordings with legislative purpose.
CONCLUSION
The Bombay High Court thus reaffirmed that prior to the 2014 amendment, investment in multiple residential houses qualified for exemption under section 54. By emphasizing both legislative intent and prospective operation of amendments, the ruling secures taxpayer rights while ensuring a purposive reading of beneficial provisions.
[1] Krishnagopal B. Nangpal v. Deputy Commissioner of Income Tax 2025:BHC-OS:11546-DB
[2] Arun K. Thiagarajan Vs. CIT 2020 (427) ITR 190 (Karnataka)
[3] Tilokchand & Sons v. ITO 2019 (413) ITR 189 (Madras)
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