Duplex flat treated as single property qualifies for section 54F LTCG exemption despite internal connection

ITAT Mumbai allowed the assessee's appeal regarding denial of LTCG exemption under section 54F. The AO incorrectly treated a duplex flat as two separate properties, believing the assessee purchased two different house properties on the same date within one year of the original asset transfer. The housing society certified that the flats were internally connected with an internal staircase, constituting a single duplex unit as originally purchased. ITAT relied on precedent and found the AO misconstrued the property nature. The CIT(A)'s findings were set aside, directing the AO to allow section 54F exemption. The appeal was allowed in favor of the assessee.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the claim of exemption under Section 54F of the Income Tax Act, 1961 can be allowed where the assessee has purchased two interconnected flats forming a single residential unit (duplex) as opposed to two separate flatsRs.

(b) Whether the Assessing Officer and the Commissioner of Income Tax (Appeals) erred in denying exemption under Section 54F on the ground that the assessee purchased two separate properties, despite evidence that the flats are internally connected and treated as one residential houseRs.

(c) The applicability and interpretation of judicial precedents regarding the treatment of two flats joined internally as a single residential house for the purpose of claiming exemption under Section 54F.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Eligibility of exemption under Section 54F for purchase of two interconnected flats forming one residential house

Relevant legal framework and precedents: Section 54F of the Income Tax Act, 1961 provides exemption from long-term capital gains arising from transfer of a capital asset if the net consideration is invested in purchasing or constructing a residential house within the prescribed period. The exemption is available for investment in "one residential house." The key legal question is whether two flats joined internally and treated as a duplex constitute "one residential house" for this purpose.

The Tribunal extensively relied on the decision of the Hon'ble Bombay High Court in CIT vs. Raman Kumar Suri, which dealt with a similar issue where two flats (Nos. 416A and 516A) were internally connected by an internal staircase, had a single entrance, kitchen, and common passage, and were treated as one residential house for exemption under Section 54. The High Court upheld the findings of fact by the Commissioner of Income Tax (Appeals) and the Tribunal that the two flats constituted a single residential house and the exemption was allowable for the aggregate consideration paid for both flats.

This decision was further supported by coordinate Bench rulings in Bhaskar Prataprai Shah vs. DCIT and Nakul Aggarwal vs. ACIT, which followed the principle that where two flats are joined internally and function as a single unit, they are to be treated as one residential house for Section 54F exemption.

Court's interpretation and reasoning: The Tribunal examined the facts and evidence on record, including the deed of transfer showing purchase by a single deed, certification from the Walkeshwar Om Vikas Co-op. Housing Society Ltd. confirming internal connectivity and presence of an internal staircase, and the prior purchase of the property as a duplex by the erstwhile owner. The Tribunal found that the Assessing Officer had misconstrued the property as two separate flats without adequately considering these facts.

The Tribunal held that the flats are not two separate residential houses but one single residential house, consistent with the legal principle established by the Bombay High Court. The exemption under Section 54F is therefore applicable to the entire consideration paid for the duplex.

Key evidence and findings:

• Deed of transfer evidencing purchase of the duplex by a single deed.
• Certification from the housing society dated 23/03/2024 confirming internal connectivity and internal staircase between flats 501-B and 601-B.
• Historical purchase of the property as a duplex by the previous owner.
• Absence of any evidence from the Department to prove that the flats were separate and distinct units.

Application of law to facts: The Tribunal applied the legal principle from the Bombay High Court that two flats joined internally and treated as one residential house qualify as a single residential unit under Section 54F. Given the evidence, the Tribunal found the exemption claim valid and the denial by the AO and CIT(A) incorrect.

Treatment of competing arguments: The Department argued that the exemption is allowable only for one residential house and the purchase of two flats, even if connected, should be treated as two separate houses. However, the Department failed to produce any evidence showing distinct identification or separation of the flats. The Tribunal rejected this argument based on the credible evidence of internal connectivity and prior judicial precedent.

Conclusions: The Tribunal concluded that the assessee's purchase of the duplex flat qualifies as investment in one residential house under Section 54F and the exemption claim should be allowed.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning is encapsulated in the following verbatim excerpt from the Bombay High Court decision which was followed:

"Section 54 of the Act exempts capital gain to the extent the consideration is paid for the purpose of a residential house. Consequently, where respondent-assessee has acquired one residential house consisting of two flats, it cannot be said the respondent assessee had purchased two residential houses."

Core principles established include:

• Two flats internally connected by an internal staircase, having a single entrance, kitchen, and common passage, constitute one residential house for the purpose of Section 54F exemption.
• The exemption under Section 54F is available for the aggregate consideration paid for such a duplex unit.
• Concurrent findings of fact by lower authorities supported by credible documentary evidence and judicial precedents cannot be overturned without cogent contrary evidence.

Final determinations on each issue:

• The claim of exemption under Section 54F of the Income Tax Act, 1961 is allowable for the purchase of the duplex flats treated as one residential house.
• The Assessing Officer and CIT(A) erred in denying the exemption on the ground that two flats were purchased as separate properties.
• The appeal is allowed, and the matter is remanded to the AO to grant the exemption accordingly.

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