The Mumbai Income Tax Appellate Tribunal has confirmed that physically and legally merged adjoining flats can qualify as one residence for Section 54 relief, providing new guidance for property tax exemptions amid evolving legal standards.
India’s income tax tribunal has added fresh clarity to a long-running dispute over Section 54 relief, holding that two adjoining flats can qualify as a single home when they are both physically and legally merged into one residence. In the case reported by Business Today, the taxpayer sold a property for ₹43 crore and realised long-term capital gains of ₹26.59 crore before reinvesting in two neighbouring apartments. The Mumbai bench of the Income Tax Appellate Tribunal upheld full exemption after finding that the units had been combined into one composite dwelling.
The dispute began when the tax office treated the flats as separate properties. Under rules introduced from assessment year 2021-22, a taxpayer may claim Section 54 relief on two residential properties only if the total capital gains do not exceed ₹2 crore. Because the gains in this case were far above that limit, the Assessing Officer restricted the exemption to the amount linked to Flat No. 3102 and taxed the balance spent on Flat No. 3101.
That position did not survive appeal. According to the report, the owner later formalised the arrangement through a registered supplementary agreement dated March 25, 2022, with Flat No. 3101 surrendered into Flat No. 3102. The Commissioner of Income Tax (Appeals) accepted the merger after reviewing the agreement and bank records, and the Mumbai tribunal agreed that the two units had lost their separate identity.
The ruling fits a broader trend in which tax courts have looked beyond strict form to actual use and structure. LiveMint reported a similar Mumbai decision in which two adjoining flats legally and physically amalgamated into one unit were treated as a single house for Section 54 purposes. Hindustan Times has also reported on a case involving seven adjoining flats, while LiveMint described a Bengaluru ruling that granted relief over 23 flats in a redevelopment deal, though that decision turned on older law. For taxpayers, the message is clear: the way a purchase is structured, documented and used can matter as much as the number of titles on paper.
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