Section 54 exemption is asset-wise: rollover relief cannot be confined to one house for gains from distinct flat sales.

Section 54 rollover relief was discussed as asset-wise and source-wise, with capital gains under sections 45 and 48 computed separately for each transferred residential asset. The provision was read, for the assessment year in question, to permit exemption linked to each long-term capital gain from a residential house, while requiring investment in one residential house in India for each such gain. The proviso for investment in two residential houses was treated as limited to cases where the gain from a single transfer did not exceed the statutory threshold. Restricting exemption to one house for gains arising from distinct flats was held unsustainable, and exemption was allowed for the gains from the sale of 17 flats.

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Issues: Whether exemption under section 54 of the Income-tax Act, 1961 could be restricted to one residential house where the assessee had sold multiple residential flats and invested the resulting long-term capital gains in five new residential properties.

Analysis: The computation of capital gains under sections 45 and 48 is asset-wise and source-wise. Section 54, as applied for the assessment year in question, was read to allow rollover relief in relation to capital gains arising from each transfer of a long-term capital asset being a residential house, while still requiring the new investment to be in one residential house in India for each such capital gain. The proviso enabling investment in two residential houses was treated as applicable only where the capital gain from a single transfer did not exceed the statutory threshold. The restriction adopted by the lower authorities would amount to clubbing capital gains from distinct residential assets, which the provision did not mandate. The assessee had sold 17 flats and invested in five residential units, which was within the number of properties transferred.

Conclusion: The restriction of exemption under section 54 to only one residential house was held to be unsustainable, and the assessee's claim for exemption on the capital gains arising from the sale of the 17 flats was allowed.

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