Two adjoining flats may qualify as one residential house for capital gains tax exemption if they are physically connected and used as a single home, the Mumbai Income Tax Appellate Tribunal has ruled.
A recent ruling by the Mumbai bench of the Income Tax Appellate Tribunal has added clarity for taxpayers who buy two adjoining flats and use them as a single home. The tribunal said such a purchase can qualify as one residential house for the purpose of capital gains tax exemption, provided the units are physically connected and function as one composite dwelling. According to the Income Tax Department’s own wording of Section 54F, the relief is available when net proceeds from the sale of a long-term capital asset are reinvested in one residential house within the prescribed time limits.
The bench said tax officers should not reject a claim simply because the buyer holds two registered sale deeds, two flat numbers or separate parking spaces. Nor, it said, should the absence of a formal municipal or real estate regulatory amalgamation approval automatically defeat the exemption. What matters, the tribunal held, is the real-world use of the property. If the flats are internally linked, share a common entrance or passage, and are occupied as one household, they may still be treated as a single residential unit. Guidance on Section 54F published by tax advisers such as ClearTax and Tax2Win similarly notes that the exemption turns on the reinvestment being made into a qualifying residential property within the statutory window, rather than on paperwork alone.
Even so, the tribunal made clear that the relief is not automatic. It said the tax department must physically verify the flats to confirm that they are in fact interconnected and used as one residence. The bench listed several relevant checks: whether the layout works as a single home, whether there is internal access and a common kitchen, whether photographs and supporting documents match the actual configuration, and whether the space is maintained as one dwelling rather than two independent homes. That approach reflects earlier case law cited by the bench, including a precedent where relief was allowed subject to a limited factual inspection.
The decision is significant because Section 54F was tightened by a 2014 amendment that limits the exemption to investment in one residential house in India, leaving taxpayers and advisers to argue over what “one” means in practice. Official Income Tax Department material and third-party tax guides describe the provision as a way to shelter long-term capital gains from the sale of non-residential assets, such as shares, gold or land, when the proceeds are rolled into a home within the permitted period. The Mumbai ruling suggests that the law may still accommodate larger, combined homes, so long as they are genuinely used as one residence and not as a device to claim relief on two separate properties.
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