Buying two separate flats does not necessarily mean losing the tax benefit available for investment in a residential house. The Mumbai bench of the Income-Tax Appellate Tribunal (ITAT) in its recent ruling held that two flats in the same building can together be considered a single residential house for the purpose of claiming exemption under Section 54F of the Income-Tax Act.
The ruling came in the case of S Shah, who had generated long-term capital gains of almost Rs 5 crore after selling six commercial units in 2019-20. He subsequently invested the money in two residential flats in the same wing of a housing project. Each flat cost more than Rs 2.5 crore and both were bought directly from the developer.
The tax department accepted the Section 54F claim for one flat but denied it for the other. The taxpayer challenged the decision, arguing that the two units were effectively being used as one home for his family.
The case raised an important question: Does a “residential house" under Section 54F necessarily have to be a single physical housing unit? The Mumbai ITAT said no.
According to the tribunal, the way the property is physically divided is not the only factor that matters. What needs to be examined is the substance and functional use of the property.
In Shah’s case, several circumstances supported treating the two flats as one residential accommodation. Both were purchased on the same day, from the same developer and in the same wing. Their areas and purchase prices were also identical. The taxpayer had explained that the two units were acquired to accommodate his family amid Mumbai’s limited availability of larger residential properties.
The fact that the flats were on different floors and had separate entrances did not, by itself, prevent them from being treated as one residential house, the tribunal held.
The ITAT also pointed out that Section 54F does not specifically require the residential house to be covered by a single registered document or to exist as one physically undivided unit.
The decision is significant for taxpayers who use more than one residential unit as a single family home. It suggests that the functional character and circumstances surrounding the purchase can be more important than whether the property consists of one or multiple separately identifiable units.