Exemption under Section 54 allowed for capital gains on two adjacent flats treated as one residential unit

Commissioner of Income-tax Versus Syed Ali Adil

ISSUES:

Whether the deduction under section 54 of the Income-tax Act, 1961 is allowable for the purchase of more than one residential house (specifically, two independent residential flats) from capital gains arising from the sale of a residential property.Whether two adjacent flats, purchased under separate sale deeds but having a common meeting point and capable of being combined, can be treated as 'a residential house' for the purpose of section 54 exemption.Whether the decision of the Special Bench of the Tribunal in ITO v. Ms. Sushila M. Jhaveri, which restricts deduction under section 54 to only one residential house, is binding or correct.

RULINGS / HOLDINGS:

The deduction under section 54 of the Act is not restricted to the purchase of only one residential house; the expression 'a residential house' should not be understood to indicate a singular number.Two adjacent residential flats, even if purchased under separate sale deeds but having a common meeting point and capable of being combined into a single unit, constitute 'a residential house' within the meaning of section 54, entitling the assessee to claim exemption for both flats.The decision in ITO v. Ms. Sushila M. Jhaveri [2007] 292 ITR (AT) 1 (Mumbai) (Special Bench), restricting exemption to one residential house, is disapproved and held not to represent the correct interpretation of section 54.

RATIONALE:

The Court applied the legal framework under section 54 of the Income-tax Act, 1961, which provides exemption from capital gains tax if the net consideration is reinvested in 'a residential house'.The Court relied on the Karnataka High Court decisions in CIT v. D. Ananda Basappa and CIT v. Smt. K. G. Rukminiamma, which interpreted the term 'a residential house' liberally to include multiple flats forming a single residential unit.The Court considered and followed the consistent view of various Benches of the Income-tax Appellate Tribunal (Mumbai, Chennai, Delhi) that exemption under section 54 requires the property to be of residential nature, and multiple independent units can be treated as one residential house if capable of combination.The Court explicitly disapproved the Special Bench decision in ITO v. Ms. Sushila M. Jhaveri, marking a doctrinal shift towards a more liberal construction of section 54.The Court found no substantial question of law arising and dismissed the appeal accordingly.