RITESH ARORA,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 2(2), SURAT, SURAT

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ITA 365/SRT/2025Status: DisposedITAT Surat13 October 2026AY 2017-1810 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal allowed the appeal of the assessee. The Tribunal noted that the facts of the present case were similar to the decision in Nakul Aggarwal, where the Mumbai Tribunal allowed the benefit of Section 54F. In the present case, the assessee had expressed the desire to combine the flats into one unit at the time of booking in August 2016. Although two separate agreements were executed due to the builder's plan approval stage, the assessee intended to purchase only one flat. The revised approval plan was taken from MHADA on 24.11.2000 (this date appears to be a typo in the judgment and likely refers to a later date, possibly related to the amalgamation approval). The Tribunal found that the assessee had the intention to purchase one flat only, and on paper, it appeared to be separate agreements. The Tribunal distinguished the case of Rahul Garg, stating that the Delhi Tribunal's decision did not consider whether the local authority's plan approval was given separately and categorically mentioned the merger of two properties. Therefore, the deduction claimed by the assessee under Section 54F should have been allowed by the Assessing Officer.

What were the facts?

The assessee, Ritesh Arora, filed an appeal against the order of the CIT(A) for AY 2017-18. The assessee had declared a total income of INR 30,90,430. The case was selected for scrutiny. The Assessing Officer (AO) initiated assessment proceedings and later issued notices regarding the claim of exemption under Section 54F and foreign assets. The assessee explained that he was a shareholder in a company converted to an LLP, offered his capital/current account balance as income on a conservative basis, and utilized these proceeds to purchase a residential house, claiming exemption under Section 54F. The AO questioned the exemption, stating the assessee invested in two residential houses instead of one. The assessee argued that the two adjacent properties were intended and modified to be a single residential house, with the builder registering them separately due to limitations. The AO disagreed, and the CIT(A) upheld the disallowance.

What were the issues?

1. Whether the purchase of two adjacent residential properties, which were subsequently modified and intended to be used as a single residential house, qualifies for exemption under Section 54F of the Income Tax Act, 1961, despite being registered through separate sale deeds. - Assessee's contention: The assessee argued that the intention was always to purchase one residential unit, and modifications were made to merge the two flats into a single residential house for occupancy. They relied on the principle of liberal interpretation of provisions aimed at promoting economic growth and judicial discipline, citing precedents where multiple units were treated as one residential house. - Revenue's contention: The revenue contended that the flats were purchased through separate registered sale deeds, had separate sanctioned plans, kitchens, and electricity connections. The application for amalgamation was filed after the assessment order, and the three-year period for investment under Section 54F had expired before the amalgamation process was initiated. They relied on the decision in ACIT vs Rahul Garg.

Which sections of the Income-tax Act were involved?

Section 54F,Section 143(2),Section 234A,Section 234B,Section 270A

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, SURAT BENCH, SURAT

Before: MS. SUCHITRA KAMBLE & SHRI B.M. BIYANI

Pronounced: 13.10.2026

IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT BEFORE MS. SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI B.M. BIYANI, ACCOUNTANT MEMBER ITA No.365/SRT/2025 (निर्धारण वर्ा/Assessment Year: 2017-18) RITESH ARORA, ASSISTANT COMMISSIONER FLAT 1501, A WING, RUSTOMJEE OF INCOME-TAX, ELEMENTS, NEW D N NAGAR, CIRCLE 2(2), SURAT ANDHERI WEST, 6TH FLOOR, MUMBAI, AAYAKAR BHAWAN, Vs. MAHARASHTRA-400053 NEAR MAJURA GATE, OPP NEW CIVIL HOSPITAL, SURAT-395001, GUJARAT अपीलधर्थी Appellant प्रत्यर्थी Respondent

Permanent Account Number of Assessee: AFYPA2845J

अपीलधर्थी द्वारा/Appellant represented by: Shri Saurabh Soparkar, Sr. Advocate with Shri Parin Shah, CA प्रत्यर्थी द्वारा/Respondent represented by: Shri J.K. Chandnani, CIT(DR) सुनवाई की तारीख / Date of conclusion of hearing: 16.07.2026 घोषणा की तारीख / Date of pronouncement: 13.10.2026 O R D E R PER : SUCHITRA KAMBLE, J M: The appeal filed by the assessee is against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [in short “CIT(A)”] dated 22.01.2025 for the Assessment Year (in short “AY”) 2017-18.

2.

The assessee has raised the following grounds of appeal: “Ground 1: General

ITA No.365/SRT/2025 (A.Y. 2017-18) RITESH ARORA 1. The order of the learned CIT(A) is based on incorrect application of facts and wrong interpretation of law and therefore, is bad in law.

Ground 2: Disallowance of exemption claimed under section 54F of the Act

2.

The learned CIT(A)/AO have failed to appreciate that the purchase of one residential house with modifications of two adjacent properties would amount to single residential house and therefore, the Appellant was eligible for exemption under section 54F of the Act.

3.

The learned CIT(A)/AO has erred in law and in facts, in stating that the Appellant had purchased two residential house properties instead of a single residential house without appreciating that merging of two adjacent properties to one residential house is not a violation of condition for claiming exemption under section 54F of the Act.

4.

The learned CIT(A)/AO has failed to appreciate the fact that the Appellant had always intended to purchase one residential unit and has in fact purchased one house for the purpose of his residence although the builder had registered it through two separate purchase deeds due to limitations at the end of the builder.

5.

The learned CIT(A)/AO has erred in law and in facts, by failing to appreciate that a residential house can consist of several units and so long as it constitutes one residential house for the purpose of residence, the Appellant shall be eligible to claim exemption under section 54F of the ITA.

6.

The learned CIT(A) has erred in law and on facts and purely on presumptions stated that the Appellant had no intention to convert the two adjacent flats into a single residential house at the time of purchase and the claim for exemption under section 54F of the Act was merely an after-thought following the assessment proceedings by the Ld. AO, despite contrary facts brought to their notice.

. The learned CIT(A)/AO has erred in law and on facts, by not applying the principles and ratio laid down by various courts which have stated that where the provisions are introduced with the intention of promoting economic growth, such provisions or sections needs to be Interpreted liberally, 50 as to advance the objective of the section and not to frustrate it.

8.

The learned CIT(A)/AO has erred in law and on facts, by not applying the principles of judicial discipline wherein the judgements of the Hon'ble Tribunal are binding on the authorities functioning within the jurisdiction of Surat.

Ground 3: Conversion of Company into LLP is a not a taxable transfer under the Act

ITA No.365/SRT/2025 (A.Y. 2017-18) RITESH ARORA 9. The learned CIT(A)/AO had failed to appreciate that conversion of company into LLP is not a taxable transfer under the Act. Once it is not a taxable transfer, no capital gains would accrue on account of such conversion.

10.

The learned AO has erred in law in not assisting the Appellant and trying to collect higher tax without appreciating that only legitimate taxes are collected that are due and not to collect excess tax.

11.

The learned CIT(A) / AO has erred in law and facts, by failing to appreciate that for transfer, there must be two parties to the transaction. Also, the Ld. CIT(A) failed to appreciate that a person cannot make profit out of himself, since conversion of Company into LLP is a mere readjustment of the position of the stakeholders.

12.

The learned CIT(A) / AO have erred to appreciate that where the conversion of company into LLP itself is not taxable, then the claim of exemption under section 54F was mere academic and therefore denying of such exemption was only a theoretical exercise.

Ground 4: Levy of interest under Section 234A and 234B of the Act

13.

The learned CIT(A)/AO has erred in law and on facts, in levying additional interest under Section 234A and Section 234B of the Act, having regard to the assessed income.

Ground 5: Initiation of penalty proceedings under the Act

14.

The learned CIT(A)/AO has erred in law in initiating penalty proceedings under section 270A of the Act.

The Appellant submits that each of the above grounds is independent and without prejudice to one another.

The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with law." 3. The Assessee had filed his Return of Income (ROI) for the subject AY (i.e. AY 2017-18) on 14th March 2018 declaring Total Income of INR 30,90,430 as per the provisions of the Act. The case was selected for scrutiny under CASS and the Assessing Officer (in short “the AO”), issued a notice initiating scrutiny assessment under Section 143(2) of the Income Tax Act, 1961 (in short “the Act”) dated 10.08.2018. In response to this

ITA No.365/SRT/2025 (A.Y. 2017-18) RITESH ARORA notice, the assessee filed a submission dated 24.08.2018 providing the requested details. The AO subsequently issued the notice dated 04.02.2019 to furnish information/details regarding claim of exemption under Section 54F of the Act and foreign assets of the assessee. The assessee responded to the notice by way of online response on the income tax portal. The assessee furnished all the details requested and informed the AO that: a) The assessee was a shareholder in Binary Life Technology Private Limited, which was converted into Binary Life Technology LLP, a Limited Liability Partnership on 28.10.2016. b) The assessee on a conservative basis, offered the capital and current account balance in the LLP as income from Capital gains even though the conversion of the Company into an LLP is not a taxable transfer. c) The assessee utilised the proceeds of his capital account balance with the LLP and purchased a new residential house property and claimed exemption under the provisions of Section 54F of the Act. The AO subsequently issued notice dated 12.10.2019 to show cause as to why the claim of deduction under Section 54F of the Act should not be disallowed as the assessee had invested in two residential house instead of one residential house. The assessee requested for the opportunity of personal hearing to present his case which was granted by the AO. The assessee had met the AO through personal hearing held on 13.11.2019 and submitted the following: “i. The assessee always intended to combine the flats into one unit and had expressed his intention to purchase only one residential house from the builder at the time of investment itself. Due to limitation from the builder’s end, the assessee had to register the units through two separate registration deeds. The assessee submitted a letter from the builder in this regard through his additional submission on 28.11.2019.

ii. The Assessee directed the builder to break the joint wall between the two units and had also carried out plenty of Civil rework, Electrical rework and Main door rework such that the entire house can be

ITA No.365/SRT/2025 (A.Y. 2017-18) RITESH ARORA occupied and used as one residential house property. Further, the Assessee had moved into the flat post completion of all the modifications once the residential house was ready for occupancy. The assessee submitted the invoice summary for the work undertaken and the final floor plan of the house in this regard.

iii. The assessee further submitted that the two residential units that were acquired by the assessee constitute one residential house on the basis that: (a) There is only one common entrance door for the entire residential house on the 15th floor of the Building; (b) the entire house is a single residential house with multiple bedrooms/other rooms and one living room; (c) the house has only one kitchen and one common passage; (d) rest of the rooms are used as bedroom for family members as well as for guest; and (e) the apartment is one combined house property for the assessee with a common service lift, service lobby and stair case. Accordingly, there is no additional residential house purchases by the assessee apart from the one combined house occupied by the assessee”.

Subsequently, the AO issued another notice dated 30.11.2019 to show cause as to why the claim of deduction under Section 54F of the Act should not be disallowed as the assessee had purchased second residential house within one year from purchase of the new residential house, thereby violating the proviso to Section 54F of the Act. The assessee responded to the notice through detailed submissions on 06.12.2019 and 20.12.2019. The AO passed the assessment order under Section 143(3) of the Act vide dated 31.12.2019 disallowing the claim of exemption of INR 23,45,92,040 under Section 54F of the Act. In the said assessment order, the AO held that during the subject AY, the assessee had violated the following conditions stipulated by Section 54F of the Act for claiming the exemption for capital gains income:

ITA No.365/SRT/2025 (A.Y. 2017-18) RITESH ARORA i. the assessee had purchased two residential house s instead of one residential house as required under Section 54F of the Act; and ii. the assessee had purchased second residential flat within one year from the date of purchase of the new residential house.

Accordingly, the total income was assessed at INR 23,76,82,470.

4.

Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.

5.

The Ld. Authoritised Representative (in short “the Ld. AR”) for the assessee relied upon the decision of the Tribunal in case of Nakul Aggarwal vs. ACIT (ITA No.2551 & 2833/Mum/2024 order dated 14.10.2024) wherein the similar issue and that also in respect of the said project has been dealt with in favour of the assessee. Thus, the Ld. AR submitted that in assessee’s case as well the assessee got revised approval plan from MADA, wherein the bidding permit was granted to convert the two flats, one being 1501 and 1502. Thus, the same should not be treated as two flats, but as one house only.

6.

The Ld. Departmental Representative (in short “Ld. DR”) submitted that the reliance on the decision of the Tribunal in case of Nakul Aggarwal is not justifiable. The Ld. DR submitted his written submissions as follows:

“1. The Appellant is placing reliance on the decision of the Mumbai Bench in Nakul Aggarwal v. ACIT (ITA Nos. 2551 & 2833/Mum/2024, dated 14.10.2024) on the ground that it involves the same project (Rustomjee Elements), the same builder, the same transaction of conversion of Binary Life Technology Pvt. Ltd. into an LLP and a similar claim under section 54F. However, such reliance is misplaced in view of the subsequent decision of the Delhi Bench in ACIT v. Rahul Garg (ITA No. 7435/Del/2025, dated 10.07.2026 Copy Encl.), which has examined and distinguished the very line of authorities relied upon by the Appellant.

ITA No.365/SRT/2025 (A.Y. 2017-18) RITESH ARORA

2.

In Rahul Garg, the learned CIT(A) had allowed deduction under section 54F by relying upon decisions including Nakul Aggarwal, Gita Duggal, Lata Goel and Mohammadanif Sultanali Pradhan. The Delhi Bench reversed the order and held that the said decisions were distinguishable as they dealt with different factual situations. 3. The above distinction squarely applies to the present appeal. The authorities relied upon by the Appellant, including Nakul Aggarwal and Gita Duggal, concern cases where multiple units were intended and used as one residential house. They do not lay down that two independent residential houses can subsequently be converted into one residential house by obtaining a later amalgamation approval. That precise issue has now been answered in the negative by the Delhi Bench in Rahul Garg. 4. The facts of the present case are, in fact, stronger in favour of the Revenue than those in Nakul Agarwal: a. the flats were purchased through two separate registered sale deeds; b. they had separate sanctioned plans, separate kitchens and separate electricity connections; c. no request was made to the builder at the time of purchase to treat them as a single residential unit; d. the application before MHADA for amalgamation was filed only on 08.10.2020, nearly one year after the assessment order dated 31.12.2019; and e. the transfer giving rise to capital gains took place on 28.10.2016. Even assuming that amalgamation constitutes "construction", the three-year period prescribed under section 54F expired on 28.10.2019, much before the amalgamation process was initiated. 5. These undisputed facts clearly establish that the two flats retained their independent legal identity throughout the relevant period and that the subsequent amalgamation was merely an event occurring after the Such subsequent approval proceedings. retrospectively alter the character of the investment for the purpose of section 54F. assessment cannot 6. The decision in Nakul Aggarwal turned on its own peculiar facts, where the Tribunal accepted that the assessee had always intended to

ITA No.365/SRT/2025 (A.Y. 2017-18) RITESH ARORA acquire a single residential house and the revised plans approved by MHADA substantiated such contemporaneous intention. The present case is materially different. There is no evidence of any contemporaneous intention to acquire one residential house; on the contrary, the record consistently shows purchase and existence of two independent residential units, with amalgamation being sought only after the assessment. 7. Accordingly, the Appellant's reliance on Nakul Aggarwal is misconceived. The present case is fully governed by the ratio laid down in Rahul Garg, which directly addresses the issue involved in this appeal. The deduction claimed under section 54F was, therefore, rightly denied by the Assessing Officer, and the order under challenge deserves to be upheld.”

The Ld. DR also relied upon the decision of the Delhi Tribunal in case of ACIT vs Rahul Garg (ITA No.7435/Del/2025 order dated 10-07-2026).

7.

We have heard both the parties and perused all the relevant materials available on record. It is pertinent to note that the addition of Tribunal in case of Nakul Aggarwal (supra) is based on identical facts, wherein MHADA approval for the said two flats was taken on record for internal changes for attaching the two flats into one flat. In fact, the argument before us was also categorically mentioned that the agreement for purchase of flat No.1501 was on 22-06-2017 and the date of payment consideration plus floor plan was also to that extent. In fact, the agreement for purchase of flat No.1502 was also on the very same day. The possession was taken from the builder on 02-01-2018 and revised floor layout shared by the builder was on 07-02-2018. On 25-11-2019, the assessee received certificate from builder which stated in clause 2 that at the time of booking the flats in August 2016, Mr. Arora i.e. assessee had expressed his desire to combine the flats into one unit and therefore purchased one flat. However, since the plans relating to his wing at that time were at an advanced stage of approval and the final construction was underway, it was not possible for the builder to amend the plans to amalgamate his flats and therefore two agreements were executed between the parties. Thus, the assessee was

ITA No.365/SRT/2025 (A.Y. 2017-18) RITESH ARORA having the intention to purchase one flat only, for which subsequently the revised approval plan was taken from MHADA on 24-11-2000. This categorically takes into account that assessee in the beginning itself has purchased one flat only, but on paper it appears to be separate agreement. In case of Nakul Aggarwal, this aspect was also considered and has taken a conscious view by the Tribunal, thereby allowing the benefit of Section 54F to the assessee therein. As relates to the case laws submitted by the Ld. DR, the decision of the Delhi Tribunal has not taken into account whether the respective plan approval of local authority was given separately and the approval categorically mentions that the two properties in Block F subsequently merged into one property. Thus, the facts of Rahul Garg’s case (supra) are totally different from the present assessee's case. In fact, the project mentioned in case of Nakul Aggarwal (supra) is the very same project wherein the assessee has taken the said flat. Thus, the decision of the Mumbai Tribunal squarely covers the assessee's case and there is no need to deviate from the said view. Therefore, the deduction claimed by the assessee u/s. 54F should have been allowed by the Assessing Officer.

8.

In result, the appeal of the assessee is allowed. Order pronounced in the open court on 13.10.2026

Sd/- Sd/- (B.M. BIYANI) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER Surat; Dated: 13.10.2026 * Kishore, Sr. P.S. Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT- concerned 4. DR, ITAT, Surat

ITA No.365/SRT/2025 (A.Y. 2017-18) RITESH ARORA 5. Guard File By order,

Assistant Registrar/Sr.PS/PS ITAT, Surat Bench

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