News: Seven Adjoining Flats Qualify for Section 54 Relief-21-03-2026
A taxpayer who sold a residential property for around Rs 2.7 crore and put the capital gains into seven adjacent flats on the same floor has won exemption under Section 54 of the Income Tax Act, 1961. The tax department had denied the claim, arguing that the benefit is limited to investment in "one residential house". The tribunal ruled for the taxpayer because the flats were contiguous and effectively used as a single residential unit.
Section 54 exempts long-term capital gains from the sale of a residential house if the proceeds are reinvested in buying or constructing another residential property in India within prescribed timelines.
Experts say the reading of the provision has moved from a strict count of units towards actual use and intent. Tushar Kumar, Advocate, Supreme Court of India, said the exemption has been upheld where several contiguous flats are acquired and demonstrably integrated into one composite dwelling, which recognises how modern urban housing is configured. If a taxpayer can show a genuine intention to live in multiple units as one residence, the full gains may qualify. Without such proof, he said, the Revenue may justifiably separate the units, allow exemption on one flat and tax the remaining gains, which can substantially erode returns.
Shobha Jagtiani, Partner, D.M. Harish & Co, said several high courts have interpreted this beneficial provision liberally. Even after the amendment that applies from Asst. Year 2015-2016, she said, most ITAT benches followed the earlier High Court reasoning and held that the amendment denies exemption for multiple independent houses but does not bar combining adjoining flats into one residential house.
According to Jagtiani, ITAT benches have stressed three tests, which apply even when no single document covers the whole purchase. The first is structural unity: the flats should be adjacent or on the same floor so they can be regarded as one structure. The second is functional use: the flats must in fact be used together as one residence. The third is actual modification, such as a common entrance or internal connections, showing the intent to have one home with a single kitchen, drawing room and living space.
Documentation is central. A prudent taxpayer would keep contemporaneous records of both the intention and its execution, including architectural plans, utility consolidation records, declarations of self-occupation and consistent disclosures in income-tax filings. Kumar said that in high-value transactions the issue is seldom legal principle but proof, so the investment should be structured and documented to be defensible at every appellate forum.
