Sunil Indravadan Shah Vs ITO (ITAT Mumbai)
Summary: The Section 54F controversy before the Mumbai Bench of the Income Tax Appellate Tribunal concerned whether two residential flats purchased on different floors of the same building and in the same Wing-A could constitute one residential house. The assessee had sold six commercial units between 13.06.2019 and 05.07.2019 for net consideration of Rs.5.32 crore, giving rise to Long-Term Capital Gain of Rs.4,97,90,808/-, and claimed deduction under section 54F. Two flats, A-601 and A-1801, each admeasuring 1,334.19 sq. ft., were purchased from M/s Safal Realtors & Developers Pvt. Ltd. under agreements executed and registered on 29.09.2020, with consideration of Rs.2.65 crore for each flat. The Assessing Officer allowed the deduction for one flat but disallowed Rs.2,51,31,621/- attributable to the second flat, and the CIT(A) upheld the disallowance on the basis that the flats were separate units on different floors with separate entrances and separate stamp duty. The Tribunal considered the ratio of CIT v. Gita Duggal and Pr. CIT v. Lata Goel, and held that separate identification, entrances and stamp duty do not by themselves determine whether the units constitute one residential house. Since both flats were acquired on the same date, from the same developer, in the same building and Wing-A, with identical area and consideration, and the assessee stated an intention to use them as a single residential accommodation, the Tribunal held that the facts justified treating the two flats as one residential house for section 54F. It therefore set aside the CIT(A) order, directed the Assessing Officer to allow the deduction under section 54F in accordance with law, and allowed the appeal.
Two Flats on Different Floors Can Constitute “One Residential House”: Mumbai ITAT Allows Full Section 54F Deduction
The Mumbai ITAT held that two residential flats situated on different floors of the same building can be treated as “one residential house” for claiming deduction under Section 54F, where the surrounding facts demonstrate their intended use as a single residential accommodation.
The assessee sold six commercial units, earning long-term capital gains of ₹4.98 crore, and invested the proceeds in two residential flats—Flat Nos. A-601 and A-1801—in the same Wing-A of the same building at Parel, Mumbai. Both flats had an identical area of 1,334.19 sq. ft., were purchased from the same developer, for the same consideration of ₹2.65 crore each, and were registered on the same date.
The AO allowed Section 54F deduction for only one flat and disallowed ₹2.51 crore relating to the second flat because the flats were located on different floors, had separate entrances and were covered by separate registered agreements.
The Tribunal observed that Section 54F uses the expression “a residential house” and not “a residential unit.” The provision does not require the residential house to comprise a single physically undivided unit, be acquired under one registered document, or have only one entrance. The fact that separate stamp duty was paid or that the flats had separate identification and entrances was not conclusive.
Following CIT v. Gita Duggal and Pr. CIT v. Lata Goel, the Tribunal held that the real test is whether, viewed in substance, the units constitute a single residential accommodation. Considering the simultaneous acquisition, common building and wing, identical area and consideration, and the assessee’s intention to use both flats as one family residence, the two flats qualified as one residential house.
The Tribunal accordingly deleted the ₹2.51 crore disallowance and directed the AO to allow the full deduction under Section 54F.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against order dated 16.09.2025 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi for assessment year 2021-22, raising following grounds:
1. On the facts and circumstances of the case and in law, the learned CIT(A), NFAC, Delhi [“the learned CIT(A)] erred in confirming total income assessed by the assessing officer at Rs.2,74,21,671/-, as against the total income of Rs.22,90,050/- declared in the return of income.
2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of Rs.2,51,31,621/-u/s 54F of Income Tax Act on the second residential flat purchased by the appellant.
3. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating that both the residential flats purchased simultaneously were situated in the same A-Wing of the building, having access through common lift and the two flats constituted one residential house for the family, as there was no disruption of the family and also there was unity of building structure.
4. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating the ground realities of real estate in Mumbai, where constraints of construction, design and availability often compel the purchaser to buy more than one flat, even on different floors, for use as a single residence for the family.
5. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating the ratio of judicial precedents including:
-
- CIT v. Gita Duggal(357 ITR 153) (Del.),
- Shri Navin Jolly v ITO ITA No. 320 of 2011 (Karnataka)
- Mohammadanif Sultananali Pradhan v DCIT ITA No,1797/Ahd/2017,
which held that where more than one unit residence for the family, the same shall be treated as one purchased/constructed which are capable of being used as a single residential house.
6. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating that section 54F is an incentive provision and moreover the flats were purchased when Covid-19 was at its peak and there were restrictions on moving out in Mumbai city. The seeks permission to add, modify, amend or delete any ground of appeal.
2. The solitary effective controversy before us is whether, on the facts of the present case, the assessee is entitled to deduction under section 54F of the Income-tax Act, 1961 [in short, “the Act”] in respect of investment made in two residential flats situated on different floors of the same building, which, according to the assessee, constitute one residential house for the purposes of the said provision.
3. Briefly stated, facts of the case are that the assessee an individual, filed return of income for the year under consideration on 22.03.2021 declaring total income at Rs. 22,92,050/- after claiming deduction of Rs. 4,97,90,808/- under section 54F of the Income-tax Act, 1961 [in short, “the Act”]. The return filed by the assessee was selected for scrutiny and statutory notices under the Act were issued and served upon the assessee.
3.1 During assessment proceedings the Assessing Officer noticed that the assessee sold six commercial units situated at Solitaire Chambers, Kalbadevi Road, Mumbai, during the period from 13.06.2019 to 05.07.2019 for a net consideration of Rs.5.32 crore, giving rise to Long-Term Capital Gain of Rs.4,97,90,808/-. Against the said capital gain, the assessee claimed deduction under section 54F amounting to Rs. 4,97,90,808/-. For availing the said deduction, the assessee purchased two residential flats in the building known as “22 Dholera”, Parel, Mumbai, from M/s Safal Realtors & Developers Pvt. Ltd., under two agreements executed on 29.09.2020. Both flats are situated in Wing-A of the same building, bearing Flat Nos. A-601 and A-1801. Each flat admeasures 1,334.19 sq. ft. and the consideration for each was Rs.2.65 crore. Both agreements were registered on the same date.
3.2 The Assessing Officer accepted the eligibility of the assessee for deduction under section 54F in respect of one residential flat but denied the claim in respect of the second flat, holding that section 54F contemplated investment in only one residential house. Consequently, deduction of Rs.2,51,31,621/- attributable to the second flat was disallowed. The learned CIT(A) affirmed the disallowance, principally on the ground that the two flats were separate units, situated on different floors, having separate entrances and separately subjected to stamp duty. The relevant finding of ld CIT(A) is reproduced as under:
“ 5.4 The appellant has given reasoning for purchasing two residential flats that as compared to the demand for houses, the space available for construction is extremely limited and the buyer is dependent on the builders who construct the flats as per their convenience and as per approved plans by the competent authorities. It is quite realistic in Mumbai for an assessee to buy more than one unit in a building, maybe even on different floors, and yet use both the units as one house for the family as the lifts can be conveniently used to move from one floor to the other floor, and structure of the family is not disrupted on account of flats being on different floors. Under the circumstances, it would be unwarranted to adopt a narrow approach and stick to the view that both the units should be adjacent to each other so as to constitute one house, especially considering the ground realities and scarcity of houses in Mumbai. The appellant highlighted the fact that in Mumbai, a buyer can buy two flats on different floors of the same building for residential use of his family. In other words, this would not result in disruption of the family structure, and therefore the two flats would for all intents and purposes constitute one house only. The appellant submitted before the AU that due to circumstances beyond his control, the appellant had to buy two units on different floors in the same building, since option of buying two adjacent flats was not available. Further, in view of the geographical situation of Mumbai City, real estate is in scarcity and options available for a suitable accommodation in a proper location for the family are limited. Therefore; it would be logical to allow exemption u/s 54F by treating the two independent units existing in the same Wing-A of the building ’22 Dhuleva” as one residential house for use of the assessee’s family. Moreover, as both the flats acquired by the appellant are located in the same Wing-A of the building which are connected through a common lift, there is a unity of structure.
5.5 Here, it would be relevant to go through the relevant section of 54F of the Act under which the appellant has claimed deduction as under:
Section 54F(1) in the Income Tax Act, 1961
(1)[Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), 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, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt within accordance with the following provisions of this section, that is to say,-
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset, 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:
[Provided that nothing contained in this sub-section shall apply where-
(a) the assessee,-
(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii) purchases any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; or
(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and
(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property.]
5.6 After going through the above provision, it is established beyond doubt that on the capital gain arises from the transfer of any long-term capital asset, not being a residential house, the assessee is eligible for deduction u/s 54F of the Act only if 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, a residential house. However, the said deduction shall not be allowed if the assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or purchases any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; or constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset. Hence, it is an established fact from the plain reading of the Income Tax Act, 1961, that deduction u/s 54F is not allowed if the assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset. Section 54F of Income Tax Act clearly states that exemption can be claimed in respect of only one residential house property purchased/constructed in India. Therefore, as per the Act, the appellant is not eligible for deduction u/s 54F claimed on second house property.
5.7 Further, after going through the submission of the appellant and other material it is found that for availing deduction u/s 54F, the appellant has purchased two residential flats/units on 29.09.2020, in the building known as “22 Dhuleva”, G. D. Ambekar Marg, Parel, Mumbai- 400 012 from the builder and developer M/s Safal Realtors and Developers Pvt. Ltd. for total consideration of Rs.5,67,93,320/-. Both the flats, being flat no. A-601 and flat No. A-1801, are located in the same Wing-A of the building, i.e., “22 Dhuleva”, G. D. Ambekar Marg, Parel, Mumbai-400012. It is an undisputed fact that the appellant has purchased two different flats who is on different floors with separate entries. Further, the appellant has paid Stamp duty separately for both the flats. And just because these two different properties are connected with common lift, does not change its character that they are two different properties. The appellant has claimed deduction as per his requirement and understanding. The Govt. Of India provide multiple deductions to different categories of assessee considering the benefits of the assessee and the development of the nation and these deductions can be claimed by the assessee at the time of filing of return of income. However, the government also specifies some pre-conditions that needs to be fulfilled by the assessee and only after that the assessee becomes eligible to claim such deductions. Here, the conditions necessary for claiming deduction u/s 54F of the Act are not fulfilled by the appellant.
5.8 In view of the foregoing discussion I find no infirmity in the addition made by the Assessing Officer. The appellant has failed to submit anything substantive in his support. Considering all these facts discussed above, it is found that the AO was right in making additions/disallowance of Rs.2,51,31,621/- claimed u/s 54F by the appellant on the second house property. Hence, the ground nos. 1 to 3 of appeal raised by the appellant is dismissed.
5.9 Ground no. 4 and 5 of the appeal is relating to initiating penalty. In this regard, it is informed that initiating penalty is consequential in nature. Hence, these grounds of appeal are dismissed.
4. Before us, the learned counsel submitted that the two flats were acquired as a single residential accommodation for the assessee’s family. The learned counsel submitted that assessee and his wife were ageing and facing health issues, especially with wife being obese, weighing 116 kg with restricted movement, so staying of the family together was crucial. It was submitted that the assessee had intended to acquire adjacent flats capable of being interconnected, but such flats were not available in the building. He submitted that ground realities of the real estate in Mumbai were explained to the Assessing Officer where there is high dependency on the builders to construct properties as per the approved plans. He submitted that in absence of adjacent flats, the family members decided to purchase two units even on different floors of the same wing to accommodate all members of the family so as to maintain the family structure and, therefore, two units were purchased in the same wing, though situated on different floors.
4.1 The learned counsel submitted that before the learned CIT(A), the assessee relied on the decision of the Hon’ble Delhi High Court in CIT vs. Gita Duggal (2013] 357 ITR 153 (Delhi), decision of the Coordinate Bench of the Ahmedabad Tribunal in the case of Mohd. Hanif Sultan Ali Pradhan vs. DCIT in ITA No. 1797/AHD/2018 (AY 2015-16), and the assessee also placed reliance on the decision of Coordinate Bench of Tribunal in the case of Naveen Jolly vs. ITO in ITA No. 320 of 2011. The learned counsel referred to the decision of the Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax (Central-1) vs. Lata Goel in ITA 127/2025 & CM No. 25518/2025, wherein the Hon’ble High Court referred to the decision of Gita Duggal (supra) and decision of Hon’ble Madras High Court in the case of CIT vs. V.R. Gumanmal Jain (supra). The learned counsel submitted that in those decisions, even the flats in separate towers have been considered as one residential house, whereas case of the assessee is on better footing where both the flats are in same tower.
5. We have considered the rival submissions and perused the material available on record. The assessee has claimed deduction under section 54F of the Act in respect of investment in two residential flats on different floors of a tower considering both flats as constituting one residential house. Before us the learned counsel for the assessee has relied on the decision of the Hon’ble Delhi High Court in the case of Gita Duggal (supra) and Lata Goel (supra), wherein two residential units not located in the same building have been held to be constituting a residential house eligible for deduction under section 54F of the Act.
5.1 The expression “a residential house” occurring in section 54F has been judicially understood in a manner which does not make the eligibility of the deduction depend upon the artificial circumstance that the residential accommodation must necessarily comprise a single physical unit or be situated on a single floor. What is relevant is the substance and functional character of the residential accommodation and whether the units, in the facts of the case, constitute one residential house. In CIT v. Gita Duggal, (supra), the Hon’ble Delhi High Court considered the expression “a residential house” and held, in substance, that the fact that the residential accommodation consisted of more than one unit did not, by itself, disentitle the assessee from claiming the benefit of section 54F, where the units constituted one residential house. The emphasis was on the character and use of the accommodation rather than on a hyper-technical construction of the expression.
We have considered the facts and taken note of the rival submission. To complete the narration of facts, it needs to be noticed that the assessee was the owner of property at A/22, Westend Colony, New Delhi comprising of the basement, ground floor, first floor and second floor. She was deriving rental income from the property. On 08.05.2006 she entered into a collaboration agreement with M/s Thapar Homes Ltd. for developing the property. According to its terms, the assessee being desirous of getting the property redeveloped/reconstructed and not being possessed of sufficient finance and lacking in experience in construction, approached the builder to develop the property for and on behalf of the owner at the cost of the builder. The builder was to ing StruCOURT OF demolish the existing structure on the plot of land and and develop, construct, and/or put up a building consisting of basement, ground floor, first floor, a building second floor and third floor with terrace at its own costs and expenses. In addition to the cost of construction incurred by the builder on development of the property, a further payment of four crores was payable to the assessee as consideration against the rights of the assessee. The builder was to get the third floor. The assessee accordingly handed over vacant physical possession of the entire property along with 22.5% undivided interest over the land. The handing over of possession of the entire property was however only for the limited purpose of development; the undivided interest in the land stood transferred to the developer/builder only to the extent of 22.5% for his exclusive enjoyment. It was on these facts that the assessing officer first took the view that the sale consideration for the transfer of the capital asset should be taken not merely at four crores which was the cash amount received by the assessee, but the cost of construction incurred by the developer on the development of the property amounting to ₹3,43,72,529/- should also be added to the sale consideration. The assessee thereupon claimed that if the cost of construction incurred on incurred by the builde rred by the builder is to be added to the sale price, then the same should also be correspondingly taken to have ne should also be correspor the residential been invested in the residential house namely the two floors which the assessee was to get in addition to the cash amount under the agreement with the builder, and the amount so spent on the construction should be allowed as deduction under Section 54 of the Act. It was at this stage that the assessing officer rejected the claim for deduction under Section 54 on the footing that the two floors obtained by the assessee contained two separate residential units having separate entrances and cannot qualify as a single residential unit. He agreed that the assessee was eligible for the relief under Section 54F in respect of the cost of construction incurred on one unit. He noted that the assessee has retained the ground floor and the basement. He therefore, apportioned the construction cost of 3,43,72,529/- to have been incurred on the basement, ground floor, first floor and second floor in the ratio of 1:1:1:0.5 for second floor, first floor, ground floor, basement respectively. Since he was allowing the relief under Section 54F of the Act only in respect of one unit, he added *98,20,722/- which is the figure arrived at by dividing the total cost of construction of ₹3,43,72,529/- by 3.5. This is how the assessment was made. What in effect the assessing officer had done was to reject the assessee’s claim for deduction under Section 54/54F of the Act in respect COURT OF of the house/units in the first and second floors holding that they were separate and independent residential units having separate entrances and cannot be considered as one unit to enable the assessee to claim the deduction. This was disapproved by the CIT(Appeals) on the basis of the judgment of the Karnataka High Court (supra) and his decision was approved by the Tribunal. The Tribunal expressed the view that the words “a residential house” appearing in Section 54/54F of the Act cannot be construed to mean a single residential house since under Section 13(2) of the General Clauses Act, a singular includes plural.
8. It is the correctness of the above view that is questioned by the revenue and it is contended that the interpretation placed by the Tribunal gives rise to a substantial question of law. The assessee strongly relies upon the judgment of the Karnataka High Court (supra) which, it is stated, has become final, the special leave petition filed by the revenue against the said decision having been dismissed by the Supreme Court as reported in the annual digest of Taxman publication. The judgment of the Karnataka High Court supports the contention of the assessee. An identical contention raised by the revenue F the revenue before that Court was rejected in the following terms:
“A plain reading of the provision of section 54(1) of the Income-tax Act discloses that when an individual-assessee or Hindu undivided family- assessee sells a residential building or lands appurtenant thereto, he can invest capital gains for purchase of residential building to seek exemption of the capital gains tax. Section 13 of the General Clauses Act declares that whenever the singular is used for a word, it is permissible to include the plural.
The contention of the Revenue is that the phrase “a” residential house would mean one residential house and it does not appear to the correct understanding. The expression “a” residential house should be understood in a sense that building should be of residential in nature and “a” should not be understood to indicate a singular number. The combined reading of sections 54(1) and 54F of the Income-tax Act discloses that, a non residential building can be sold, the capital gain of which can be invested in a residential building to seek exemption of capital gain tax. However, the proviso to section 54 of the Income-tax Act, lays down that if the assessee has already one residential building, he is not entitled to exemption of capital gains tax, when he invests the capital gain in purchase of additional residential building.”
This judgment was followed by the same High Court in the decision in CIT Vs. Smt. K G Rukminiamma in ITA No.783/2008 dated 27.08.2010.
8. There could also be another angle. Section 54/54F uses the expression “a residential house”. The expression used is not “a residential unit”. This is a new concept introduced by the assessing officer into the section. Section 54/54F requires the assessee to acquire a SCOURT OF “residential house” and so long g gas the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans and requirements. Most of the houses are constructed according to the needs and requirements and even compulsions. For instance, a person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or differentent floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. We are therefore, unable to see how or why the physical structuring of the new residential house, whether it is lateral or vertical, should come in the way of considering the building as a residential house. We do not think that the fact that the residential house consists of several independent units can be permitted to act as an impediment to the allowance of the deduction under Section 54/54F. It is neither expressly nor by necessary implication prohibited.
For the above reasons we are of the view that the Tribunal took the correct view. No substantial question of law arises for our consideration. The appeal is accordingly dismissed with no order as to costs.
5.2 The same principle has been reiterated by the Hon’ble Delhi High Court in Pr. CIT v. Lata Goel, (supra). The principle emerging from these decisions is that the mere fact that residential units are separately identifiable does not conclude the matter; the factual question is whether, viewed in substance, the units constitute one residential accommodation.
5.3 Applying the aforesaid principle to the facts before us, the case of the assessee stands on a materially stronger footing. Both flats were acquired on the same date, from the same developer, in the same building and in the same Wing-A, with identical area and identical purchase consideration. The only distinguishing feature is that they are situated on different floors. The common location within the same building and wing, coupled with the simultaneous acquisition and the assessee’s stated intention to use the two units as a single residential accommodation, cannot be disregarded merely because the flats have separate identification and entrances.
5.4 The learned CIT(A)’s reasoning that separate stamp duty was paid for the two flats or that the flats have separate entrances, by itself, does not answer the substantive question whether the two units constitute one residential house for purposes of section 54F. The statutory provision does not prescribe that a residential house must necessarily be evidenced by a single registered instrument or must comprise one undivided physical unit.
5.5 We, therefore, find that the facts of the present case, considered in the light of the ratio laid down by the Hon’ble Delhi High Court in Gita Duggal (supra) and Lata Goel (supra), justify treating the two residential flats as constituting one residential house for the purposes of section 54F. The disallowance made in respect of the second flat is, accordingly, not sustainable.
5.6 We, therefore, set aside the order of the learned CIT(A) and direct the Assessing Officer to allow the deduction under section 54F in accordance with law. The ground raised by the assessee is accordingly allowed. 6. In the result, appeal of the assessee is allowed.
Order pronounced in the open Court on 24/08/2026.
