2025 (9) TMI 89 - AT - Income Tax

Seven adjacent units held as one residential house under Section 54, exemption allowed for all units

ITAT-DEL held that seven adjacent units in the same complex constitute 'one residential house' for purposes of s 54, overturning the CIT(A) and directing ... Disallowance of deduction u/s 54 - assessee has made the investment in the multiple residential units ignoring the material and evidences showing that all the units were adjacent to each other and the above action is against the ratio of judgment in the case of Gita Duggal [2013 (3) TMI 101 - DELHI HIGH COURT] HELD THAT:- Neither the AO or the CIT(A) has raised dispute as to the eligibility of the assessee for the deduction u/s 54 of the Act except for the reason that the investment is made in seven residential units and both the AO and CIT(A) allowed the deduction to the extent of investment in single residential unit by allocating total cost of seven units to each unit and thereafter allowed the cost of a single unit as deduction disallowing the balance claim. We find that the Ld AO considered the investment in seven residential units of the same complex; each unit being adjacent to other units, with no outsider flat coming in between as investment in multiple houses and applied the amendment effective from 01.04.2015 to invoke the concept of 'one residential house' instead of 'a residential house'. AO and the CIT(A) held that the judgement in the case of CIT vs Gita Duggal [2013 (3) TMI 101 - DELHI HIGH COURT] was not applicable, post above amendment. We find that the Hon'ble Delhi Court in the Lata Goel [2025 (5) TMI 1247 - DELHI HIGH COURT] referring its own decision in the case of Gita Duggal case [2013 (3) TMI 101 - DELHI HIGH COURT] had held that multiple residential units may be construed as a single residential house for the purposes of exemption u/s 54F of the Act and that the term ‘a residential house’ can be construed as ‘one residential house’. Where the term 'a residential house' has been construed to mean 'one residential house' and that different floors of the house do not mean multiple houses, we hold that “one residential house” in section 54/54F would encompass within its fold seven residential units on the same floor. Accordingly, we set aside the findings of the CIT(A) and direct the AO to delete the addition and allow exemption u/s 54 on the seven residential units as claimed by the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether investment in multiple adjacent residential units (seven flats on the same floor of the same apartment complex) can qualify as acquisition of 'a residential house' or 'one residential house' for the purpose of claiming exemption under Section 54 of the Income-tax Act (read with Section 54F proviso as relevant). 2. Whether the Assessing Officer and first appellate authority were justified in restricting the benefit of Section 54 to the cost of a single unit by treating physically separate but adjacent units as investments in 'more than one residential unit' notwithstanding that the units are contiguous and capable of being used as a single residence. 3. Whether post-amendment (effective 01.04.2015) statutory language or relevant jurisprudence requires a different approach from earlier High Court and Tribunal decisions construing 'a residential house' as capable of including multiple units used or capable of being used as a single house. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether multiple adjacent units constitute 'a residential house' / 'one residential house' for exemption under Section 54 (and Section 54F proviso) Legal framework: Sections 54 and 54F require acquisition of 'a residential house' (and the proviso to Section 54F refers to 'one residential house') as a condition for exemption from long-term capital gains. The statutory text does not define the physical configuration required for the new asset to qualify as 'a residential house'. Precedent Treatment: Coordinate decisions of the Delhi High Court and other High Courts have construed the expression 'a residential house' broadly to include a building that, though constructed with several independent units, constitutes a single residential house if it is for residential use and is capable of being used as a single unit (decisions relied upon by the Tribunal include prior rulings upholding this construction). The Punjab & Haryana High Court decision treating flats in different localities as distinct for this purpose has been distinguished on its facts. Interpretation and reasoning: The Tribunal adopts the principle that the statutory expression 'a residential house' is not synonymous with 'a residential unit' and may encompass a building configured in multiple independent units where the aggregate can be construed as one residential house. Physical segmentation into multiple units, by itself, does not negate the character of the acquisition as a single residential house if the units are contiguous/adjacent and capable of being used together as one dwelling. Practical reasons for constructing independent units (family needs, letting, future disposition) do not change the statutory requirement which focuses on residential character and use rather than a rigid unit/flat count. The Tribunal also reasons that the proviso's language 'one residential house' should be read consistently with prior construction of 'a residential house'. Ratio vs. Obiter: Ratio - where the new asset consists of multiple adjacent units on the same floor of the same complex and those units are contiguous and capable of being used as one residence, they can be treated as 'a residential house' or 'one residential house' for exemption purposes under Section 54/54F. Obiter - general observations about common practices of construction and family arrangements illustrating why physical structuring should not defeat the exemption. Conclusions: The Tribunal concludes that the acquisition of seven adjacent units on the same floor in the same residential complex qualifies as acquisition of 'one residential house' for the purposes of Section 54 (and by parity Section 54F proviso), and hence the full investment in those units is eligible for exemption from long-term capital gains to the extent claimed. Issue 2 - Validity of AO/CIT(A) restriction of deduction to cost of a single unit by allocating total cost across units Legal framework: Assessing Officers may examine eligibility and quantum of deduction under Sections 54/54F, but their factual and legal conclusions must conform to the statutory test of acquisition of a residential house and relevant judicial interpretations. Precedent Treatment: Jurisprudence permits aggregation of physically contiguous units as a single residential house where the facts justify such characterization. Conversely, decisions denying exemption when purchases are in different localities or wholly independent cannot be mechanically applied to cases of adjacent units forming a coherent residential whole. Interpretation and reasoning: The AO and CIT(A) treated the seven units as multiple houses and applied an approach of allocating total cost to per-unit cost, allowing deduction only to one unit. The Tribunal finds this approach inconsistent with the correct legal test: the focus should be on whether the units together satisfy 'a residential house' requirement. Given the undisputed adjacency, same floor location, single complex and capability of being used as a single residence, the allocation method and consequent restriction were legally unsound. Ratio vs. Obiter: Ratio - a mechanical per-unit allocation to deny exemption where the aggregate acquisition qualifies as a single residential house is impermissible. Obiter - comments on the limits of administrative recharacterization where statutory language and judicial interpretation point to a broader construction. Conclusions: The Tribunal sets aside the AO/CIT(A) restriction, directs deletion of the addition disallowing the claimed amount, and remits/commands allowance of exemption in respect of the full investment in the seven units as claimed by the assessee. Issue 3 - Effect of the amendment effective 01.04.2015 and whether earlier decisions (e.g., construing 'a residential house') remain applicable Legal framework: An amendment effective from 01.04.2015 altered the wording in the proviso to Section 54F to refer to 'one residential house'. The interpretive question is whether this amendment narrows the scope to preclude aggregation of multiple units that would otherwise qualify under prior jurisprudence. Precedent Treatment: The Tribunal examined jurisdictional and coordinate High Court rulings which continued to construe 'a residential house' and 'one residential house' similarly - i.e., as capable of including multiple contiguous units when facts support single-house characterization. Decisions that denied exemption involved materially different facts (e.g., purchases in different localities) and are thus distinguishable. Interpretation and reasoning: The Tribunal reasons that the amendment's use of 'one residential house' should be read in light of the settled principle that the statutory requirement is residential character and capacity for single-unit use, not a prohibition on multi-unit configurations. The Tribunal finds no basis to treat the amendment as overruling or displacing the earlier construction where the new asset, although consisting of several units, functions as a single residential house. Ratio vs. Obiter: Ratio - the amendment to refer to 'one residential house' does not require a contrary outcome where factual matrix shows continuity/contiguity and capacity for use as one residence; prior construction remains applicable. Obiter - distinctions drawn with cases where units are in different localities or otherwise plainly independent. Conclusions: The Tribunal holds that the post-2015 amendment does not alter the outcome in cases of contiguous/adjacent units capable of single-house use; therefore the authorities below erred in invoking the amendment to deny exemption. Cross-references Decisional reasoning relies on prior rulings construing 'a residential house' to include buildings composed of multiple independent units when those units are capable of being used as one residence; decisions refusing exemption where units are in different localities are distinguished on factual grounds. Final disposition flowing from analysis The Tribunal allows the appeal, directs deletion of the addition corresponding to the disallowed exemption amount, and directs the Assessing Officer to allow exemption under Section 54 in respect of the seven adjacent residential units as claimed.