Homebuyers who invest capital gains in two adjoining flats may be eligible for a tax exemption if the properties are physically connected and function as a single residential home. This position was highlighted in a ruling by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT).
According to Research Lawsathi, the tribunal held that a claim under Section 54F of the Income-tax Act cannot be rejected solely because the flats have separate registration deeds, different flat numbers or individual parking spaces. The absence of formal approval from municipal authorities or the Real Estate Regulatory Authority (RERA) to merge the units is also not, by itself, sufficient reason to deny the exemption.
However, the ruling does not mean that every purchase involving two flats automatically qualifies for tax relief. The jurisdictional assessing officer must physically verify the properties to determine whether they are interconnected and genuinely used as one residential house.
When Can Two Flats Be Treated as One Residential House?
The ITAT has directed the assessing officer to examine the actual layout and use of the properties before deciding whether they qualify as a single residential dwelling.
The assessment will focus on whether the flats are physically connected and function as one home. Relevant factors may include internal access or a common passage, a shared kitchen and the use of both units for a single residential purpose.
The officer must also consider supporting evidence, such as photographs, architectural plans, housing society letters and confirmation from the previous owner. This information can help establish whether the physical arrangement matches the taxpayer’s claim.
Another important factor is how the properties are actually occupied. If the two units are maintained and used together as one home, that may support the exemption claim. If they operate as separate residential units, the assessment could be different.
The ruling therefore places emphasis on the physical configuration and actual residential use of the properties rather than relying only on their legal descriptions.
Can Separate Registration Deeds Lead to Rejection?
According to the tribunal’s ruling, separate property documents do not automatically disqualify a taxpayer from claiming the exemption.
The Mumbai bench observed that different conveyance deeds, individual flat numbers, separate parking spaces and the absence of formal amalgamation approval cannot independently determine whether two flats constitute one residential house for Section 54F purposes.
The tribunal referred to the earlier case of DCIT v. Priyanka Bhaskar Shah, in which the exemption claim was allowed subject to physical verification of the flats.
In the present matter, the assessing officer has been directed to establish whether the properties are genuinely interconnected and used together as a single residence before deciding the claim.
How Does Section 54F Capital Gains Tax Exemption Work?
Section 54F of the Income-tax Act provides relief from long-term capital gains tax to eligible taxpayers who sell a long-term capital asset other than a residential house and invest the net sale proceeds in a qualifying residential property in India, subject to the applicable conditions.
Under the provision, the new residential house generally must be purchased within one year before or two years after the transfer of the original asset. Alternatively, it must be constructed within three years of the transfer.
The exemption is linked to investment in one residential house in India. This makes the interpretation of a single residential dwelling important when a taxpayer purchases two flats and combines them into one home.
The ITAT ruling addresses how this requirement may be assessed when separately registered units are physically integrated. It does not remove the need to meet the other conditions prescribed under Section 54F.
Evidence Taxpayers Should Keep Ready
Taxpayers seeking the exemption for two adjoining or vertically aligned flats should be prepared to demonstrate that the units operate as one functional residence.
Photographs, architectural drawings, housing society correspondence and confirmation from the previous owner may help support the claim. Evidence of internal access, shared facilities and actual residential use may also be relevant to the assessing officer’s verification.
The key takeaway is that separate registration documents or flat numbers do not, by themselves, settle the matter. The physical connection between the units and their use as a single residential home are central to the assessment, along with the other applicable legal requirements.
Disclaimer: This article is intended for general informational purposes only and is based on the details provided about the ITAT ruling. Tax treatment depends on the facts of each case and the applicable provisions of the Income-tax Act. This article should not be treated as tax or legal advice. Taxpayers should consult a qualified tax professional before claiming an exemption under Section 54F.