The Hyderabad bench clarifies that claiming relief under section 54F is not barred by the number of residential units or minor planning deviations, marking a significant shift in tax exemption interpretations.
The Hyderabad bench of the Income Tax Appellate Tribunal has ruled that a taxpayer claiming relief under section 54F for the 2009-10 assessment year could not be refused the exemption simply because the new property comprised several residential units, the construction did not match the municipal plan in every respect, or complete bank statements were not produced. In an order pronounced on 25 March 2026, the bench said the Revenue had tried to read conditions into the statute that were not there.
The case arose from the affairs of Mekala Sharath Reddy (HUF), which had filed its return on 27 July 2009. The family sold an immovable property for Rs.1.5 crore, claimed an indexed cost of Rs.1.73 lakh and worked out long-term capital gains of Rs.1.48 crore. After claiming section 54F relief, it offered net capital gains of Rs.50.26 lakh to tax. The dispute centred on a deduction of Rs.99.73 lakh that the tax department later disallowed, pushing the assessed income up to Rs.1.50 crore.
This was not the first time the matter had reached the tribunal. An earlier assessment order dated 27 December 2011 had taxed the entire receipt, and the Hyderabad tribunal had already sent the issue back to the assessing officer in January 2020 for a fresh look at the section 54F claim. In the set-aside proceedings, the officer again rejected the exemption, and the National Faceless Appeal Centre upheld that view in an order dated 28 August 2025. The appeal that succeeded in March this year was heard by Ravish Sood, judicial member, and Madhusudan Sawdia, accountant member, with Akash Deshpande appearing for the assessee and AVES Madhukar for the Revenue.
At the heart of the ruling was the old wording of section 54F. For the year in question, the law spoke of investment in “a residential house”. The tribunal said that mattered because Parliament later changed the phrase, through the 2014 amendment effective from 1 April 2015, to “one residential house in India”. Relying on earlier court reasoning cited before it, including the Bombay High Court’s view that the shift from “a” to “one” was deliberate and prospective, the bench concluded that the pre-amendment provision did not confine the benefit to a single unit. In this case, the assessee had put up a multi-floor building with 13 residential units, but the tribunal said the claim could not be denied “merely because the assessee has constructed multiple residential units”.
The tribunal was equally dismissive of the department’s reliance on planning deviations. It accepted the taxpayer’s argument that section 54F requires construction of a residential house within the prescribed period, but does not make tax relief contingent on strict adherence to an approved municipal plan. Drawing on earlier Chennai and Mumbai tribunal rulings, the bench said the question whether a building conforms to local approvals belongs to the municipal sphere unless the Income-tax Act itself makes that compliance a tax condition. That distinction was important to the outcome: a breach of planning rules may expose a taxpayer to other consequences, but it does not automatically erase a section 54F claim.
On the evidence point, the tribunal said the Revenue had put too much weight on missing bank records and too little on the material actually available. The assessee had produced a valuation report showing that construction took place between November 2008 and July 2009, which was within the statutory period. Because the lower authorities had not challenged the report’s correctness, the bench held that relief could not be refused just because the banking trail was incomplete. If the department suspected unexplained investment, it said, that issue had to be pursued under the provisions dealing with unexplained funds rather than by collapsing the section 54F claim altogether.
The ruling fits into a longer line of litigation over what counts as “a residential house” under the unamended exemption. TaxGuru’s summary of the Karnataka High Court’s decision in Navin Jolly notes that two 500 sq ft apartments in the same building could be treated as one residential unit, and that the court also referred to Delhi High Court authority in Geeta Duggal reaching a similar conclusion where a house was split into several independent portions. Those earlier cases do not decide the Hyderabad dispute by themselves, but they show why courts have often treated section 54F as a beneficial provision rather than a trap built around the number of doors, kitchens or floors.
Tax practitioners have been quick to draw a practical lesson from the judgment. Writing on LinkedIn, Rajesh Bohra said many clients fixate on the number of units while overlooking what the statute actually requires, and described the ruling as a move from hesitation to “confident compliance”. That is broadly the message of the tribunal’s order as well: substantive compliance still has to be proved, but tax officers cannot substitute their preferred paperwork checklist for the text of Parliament.
The case also sits within a busy stream of section 54F disputes in Hyderabad. Indian Kanoon’s 2026 index for Hyderabad tribunal decisions under that provision lists 35 results, including later matters involving claims tied to two flats and disputes over whether construction was completed within time. That wider pattern helps explain why the Mekala Sharath Reddy ruling may travel beyond one family’s tax bill. For older assessment years, especially those before 1 April 2015, it gives taxpayers fresh authority to argue that the exemption turns on the law as it then stood, not on later wording and not on extra hurdles invented in assessment.
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