SANDEEP SIBAL,MUMBAI vs. INCOME TAX OFFICER, WARD 16(3)(1), MUMBAI

Since both the appeals arise from the same impugned order and involve a common issue, the same are being disposed of by this consolidated order.

The Assessee had earned long-term capital gain of Rs.9,55,46,190/- on sale of unlisted equity shares and claimed exemption of the said amount under section 54F of the Act against investment of Rs.12,00,00,000/- in residential property at Chaitanya Towers Co-operative Housing Society Ltd., Prabhadevi, Mumbai. The shares were transferred on 12.07.2021, whereas Flats Nos. A-303 and A-304 were acquired on 12.08.2021 through two registered agreements.

The Assessee consistently claimed that Flats Nos. A-303 and A-304, though covered by two registered agreements, constituted one residential house/Jodi flat. According to the Assessee, the flats had already been combined by the previous owner and were acquired on an “as is” basis as a single residential dwelling having a common passage, common kitchen and single entrance. The Assessee had furnished before the authorities, inter alia, the society letter, photographs, architect’s material, confirmation of the previous owner and other documents in support of the said claim.

The Assessing Officer, however, rejected the claim principally on the ground that the Assessee had purchased two separately identified residential flats through two separate registered conveyance deeds, having separate titles and parking spaces, and had not produced approval from the municipal/RERA authorities evidencing amalgamation of the two flats. Consequently, the entire exemption of Rs.9,55,46,190/- claimed under section 54F was disallowed.

On appeal, the Ld. Commissioner recorded that Flats Nos. A-303 and A-304 were situated side by side on the same floor and that the Assessee had joined the units by internal alteration. Nevertheless, considering the separate agreements, separate flat numbers and absence of approval from the municipal authorities, the Ld. Commissioner held that the Assessee was not entitled to exemption in respect of both flats. The Ld. Commissioner, however, held that exemption could not be denied altogether and restricted the exemption to 50% of the claim. Accordingly, out of the total claim of Rs.9,55,46,190/-, an amount of Rs.4,77,73,095/- was allowed and an equal amount was sustained as disallowance.

The Revenue has challenged the relief of Rs.4,77,73,095/- granted by the Ld. Commissioner, contending, inter alia, that the two flats constituted two distinct residential houses acquired through independent conveyance deeds and that the Assessee was, therefore, not entitled even to the relief granted by the Ld. Commissioner.

The Assessee, on the other hand, has challenged the balance disallowance of Rs.4,77,73,095/-. The Assessee contends that the Ld.

We have heard the parties, perused the material available on record and considered the orders of the authorities below as well as the judicial precedents cited before us. The principal issue requiring determination is whether, on the peculiar facts of the case, Flats Nos. A-303 and A-304 constitute “one residential house” within the meaning of section 54F of the Act notwithstanding that the two units bear separate flat numbers and were acquired through separate conveyance deeds.

Section 54F, as applicable to the year under consideration, provides exemption where the prescribed investment is made in “one residential house in India.” The proviso denies exemption, inter alia, where the Assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset. Thus, while the post- 2014 provision restricts the benefit to one residential house, the statute does not prescribe that such residential house must necessarily comprise only one municipal flat number, be acquired through one registered instrument or have only one independent legal schedule.

The distinction, therefore, is between acquisition of multiple independent residential houses and acquisition of two or more units which, in their real, physical and functional character, constitute one composite residential dwelling. The number of conveyance deeds, registration entries or flat numbers may constitute relevant evidence, but cannot by themselves conclude the statutory enquiry.

In this context, we find our decision in Mrs. Chanda Runwal v. ACIT, ITA No.6467/Mum/2024, order dated 23.05.2025, A.Y. 2018-19, particularly relevant. In the said case, the Assessee had acquired two flats, one above the other in the same building, and claimed them to constitute one duplex residential house. After considering the judicial precedents on the issue, the Co-ordinate Bench, comprising one of us, held that deduction under section 54F can be allowed in respect of multiple floors/flats/units forming part of one house in the same building, including a duplex or triplex house consisting of multiple floors/flats/units.

In Chanda Runwal (supra), the Revenue had also contended that the flats were separate units and that the Assessee had failed to establish, through sanctioned plans, that the units stood joined before acquisition. After examining the material on record, the Co-ordinate Bench found no material sufficient to dislodge the Assessee’s case that the flats constituted one residential house and allowed the claim under section 54F. Thus, the existence of separate units or absence of the municipal plan relied upon by the Revenue was not treated, on the facts of that case, as conclusive against the claim.

The present case also involves adjoining units situated side by side on the same floor. The Assessee’s consistent case is that the previous owner had already combined the flats and was using the same as one residential dwelling; that the Assessee acquired the property in the same condition; and that it has a common passage, one common kitchen and single entry. These facts were supported before the authorities by the society letter, photographs, architect’s material and previous-owner confirmation.

The subsequent decision of the Co-ordinate Bench in ACIT v. Amit Mahensaria, ITA No.8684/Mum/2025, order dated 28.07.2026, A.Y. 2022-23, further fortifies the legal position. There, the Revenue challenged section 54F deduction in respect of two adjoining flats acquired through separate sale deeds on the ground that there was no evidence of structural merger, internal combination or municipal/builder approval. The Tribunal noted the categorical finding that the adjoining units were acquired and used as one composite residential house and that no positive material had been brought by the Revenue to establish their separate residential use. It was held that separate sale deeds and separate ownership records, by themselves, were not determinative.

Similarly, in Sunil Indravadan Shah v. ITO, ITA No.7276/Mum/2025, order dated 24.08.2026, the Co-ordinate Bench dealt with two residential flats situated on different floors of the same building. The Tribunal held that, in the facts before it, the two flats constituted one residential house for the purposes of section 54F and allowed the claim in respect of the second flat.

We also take note of DCIT v. Priyanka Bhaskar Shah, ITA No.659/Mum/2024, order dated 13.08.2024, wherein the Revenue relied upon the approved layout and an “open to sky” space between the flats. Noticing the factual controversy regarding actual combination of the flats and absence of physical verification by the authorities, the Co- ordinate Bench restored the issue for physical verification with the specific direction that, if both flats were found combined, deduction under section 54F should be allowed.

Even the decision of the Special Bench in ITO v. Sushila M. Jhaveri, 107 ITD 327 (Mum)(SB) recognises the distinction between purchase of independent residential houses and purchase of adjacent units which are converted into one residential house. The Special Bench held that where more than one unit is purchased, the units are adjacent to each other and are converted into one house for residential purposes by having common passage, common kitchen, etc., it would constitute investment in one residential house.

Applying the aforesaid principles, we are unable to accept the proposition that separate conveyance deeds necessarily override the actual physical and functional character of the residential accommodation. Section 54F does not prescribe municipal amalgamation approval, a single conveyance deed or one flat number as independent statutory conditions for exemption. What is contemplated is investment in “one residential house”. Where two units, on the established facts, together constitute one residential dwelling, the statutory requirement can stand satisfied.

We also find merit in the Assessee’s contention that the authorities cannot distinguish the relevant precedents merely on the basis of the amendment made by the Finance (No.2) Act, 2014. The amendment substituted the expression “a residential house” with “one residential house in India”, thereby restricting the exemption in respect of multiple independent residential houses. However, it does not necessarily follow that a composite residential house consisting of two interconnected units becomes two residential houses merely because it bears separate flat numbers or is covered by separate conveyance deeds. Significantly, Chanda Runwal (supra) itself related to A.Y. 2018-19, i.e., the post- amendment period.

We shall now deal with the objection under the first proviso to section 54F. The Assessee has specifically pleaded that, on the date of transfer of the original asset, he owned only one residential house other than the new asset, namely the Goregaon property. The statutory bar contained in clause (a)(i) of the proviso applies where the Assessee owns more than one residential house, other than the new asset on the date of transfer. Ownership of one other residential house, therefore, does not attract this prohibition. Once Flats Nos. A-303 and A-304 are treated as one new residential asset, the existence of one pre-existing Goregaon house would not, by itself, attract the said clause.

The Revenue has also relied upon the fact that the new property was registered jointly in the names of the Assessee and his wife. The Assessee’s consistent case before the authorities is that the purchase consideration was borne by him and that his wife did not make any financial contribution towards the acquisition. There is no contrary material brought on record by the Revenue demonstrating contribution by the wife. In these peculiar facts, mere inclusion of the spouse’s name in the conveyance documents does not, by itself, alter the fact of investment made by the Assessee for the purposes of section 54F.

Thus, on the legal issue, we hold that separate conveyance deeds, separate flat numbers, separate parking spaces or absence of a separate municipal/RERA amalgamation approval, by themselves, cannot be treated as conclusive for denying exemption under section 54F where the units, in fact, constitute one composite residential house.

Insofar as the Revenue’s appeal is concerned, we find no justification to interfere with the exemption of Rs.4,77,73,095/- already granted by the Ld. Commissioner. The Revenue has failed to demonstrate any legal or factual basis warranting withdrawal of the said relief. Accordingly, the grounds raised by the Revenue are dismissed.

However, insofar as the Assessee’s appeal seeking exemption under section 54F in respect of the balance amount of Rs.4,77,73,095/- is concerned, we notice that a factual controversy still survives in the assessment record regarding the actual physical configuration of Flats Nos. A-303 and A-304, particularly with reference to the alleged “open to sky” space, their internal interconnection and the manner in which the two units physically function as a dwelling. Though the Assessee has placed considerable material on record and has consistently asserted that the units had already been combined by the previous owner and were acquired as one residential house, we, keeping in mind the course adopted by the Co-ordinate Bench in DCIT v. Priyanka Bhaskar Shah (supra), wherein the claim under section 54F was directed to be allowed subject to physical verification of the flats, consider it appropriate, as an abundant precaution, to have this limited factual aspect physically verified.

Accordingly, while accepting the Assessee’s legal contention as recorded hereinabove, we restore the limited factual issue to the file of the Jurisdictional Assessing Officer (JAO) solely for physical verification of Flats Nos. A-303 and A-304.

The JAO shall, either himself or through an authorised Income Tax Inspector/appropriate officer, physically inspect the premises and verify:

The verification shall remain strictly confined to the aforesaid factual aspects. The JAO shall not deny the claim merely on the ground that there are two registered conveyance deeds, two flat numbers, separate parking spaces or absence of a separate municipal/RERA amalgamation approval, since those circumstances, by themselves, are not determinative of the issue under section 54F in view of the legal principles discussed hereinabove.

The Assessee shall be afforded a reasonable opportunity of being present at the time of physical inspection and of producing the relevant documents already relied upon or any other material necessary for such limited verification. The JAO shall thereafter record a brief factual finding based upon the physical inspection and the material available on record.

In case the physical verification establishes that Flats Nos. A-303 and A-304 are physically interconnected and constitute and are used as one composite residential house, the JAO shall allow the Assessee’s claim under section 54F in its entirety and consequently delete the balance disallowance of Rs.4,77,73,095/- sustained by the Ld. Commissioner.

In case the physical verification establishes otherwise, the relief already granted by the Ld. Commissioner to the extent of Rs.4,77,73,095/- shall nevertheless remain undisturbed, since the Revenue’s appeal against the said relief stands dismissed. The limited verification directed by us pertains only to the Assessee’s claim for the balance exemption of Rs.4,77,73,095/-.

In the result, the Revenue’s appeal stands dismissed, whereas the Assessee’s appeal is allowed for statistical purposes in the aforesaid terms.