Section 54F exemption allowed as assessee purchased a single duplex unit, not two separate properties

By | June 2, 2025
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Section 54F exemption allowed as assessee purchased a single duplex unit, not two separate properties, which was evident from the deed and municipal records.

Issue:

Whether an assessee is eligible for exemption under Section 54F of the Income-tax Act, 1961, when they purchase a residential home described as a duplex (interconnected by a staircase and constituting a single unit), but the Assessing Officer denies the exemption by misconstruing it as an investment in two separate immovable properties.

Facts:

  • For Assessment Year 2022-23, the assessee purchased a residential home by way of a single deed of transfer. The property was a duplex.
  • The assessee claimed exemption under Section 54F of the Income-tax Act, which allows exemption on long-term capital gains from the sale of assets other than residential houses, if the net consideration is invested in the purchase or construction of one new residential house.
  • The Assessing Officer (AO) was of the firm belief that the assessee invested capital gains in two separate immovable properties on the same date, and thus denied the exemption.
  • The assessee contended that they did not purchase two flats but that it was a duplex interconnected with a staircase and was, in fact, one single unit.
  • The assessee provided the following evidence to support their claim:
    1. The deed of transfer.
    2. A receipt from the municipal corporation.
    3. Certification from the Housing Society.
  • It was also found that the erstwhile owner had purchased the impugned property as a duplex.
  • All these facts were available before the Assessing Officer, who, despite the evidence, misconstrued the property as two different flats.

Decision:

The court held in favor of the assessee. It ruled that the Assessing Officer was to be directed to allow the exemption under Section 54F.

Key Takeaways:

  • “One Residential House” for Section 54F: The critical condition for Section 54F is that the investment must be in “one residential house” in India. This often leads to disputes when assessees invest in connected units or multiple units in the same building.
  • Duplex as a Single Unit: A duplex, by its very nature, is a single residential unit spread across two levels, connected internally (typically by a staircase). It is not treated as two separate flats.
  • Substance Over Form and Factual Evidence: The court emphasized examining the factual reality of the property. The single deed of transfer, municipal receipts, housing society certification, and the history of the property (being purchased as a duplex by the erstwhile owner) all strongly indicated it was a single residential unit.
  • AO’s Misconception: The AO’s error stemmed from misinterpreting the physical layout or nature of the property as two distinct units despite clear documentary evidence. The court found that the AO had “mis-construed property as two different flats.”
  • No Splitting of Units: If a property is functionally and legally a single residential unit, it cannot be arbitrarily split into multiple units by the tax authorities for the purpose of denying the exemption.
  • Beneficial Interpretation: Provisions offering tax exemptions, while to be strictly construed regarding eligibility, should also be interpreted reasonably to reflect the legislative intent. The intent of Section 54F is to encourage investment in residential housing.
  • Relief to Assessee: The allowance of the Section 54F exemption provides significant tax relief to the assessee by reducing their capital gains tax liability.
IN THE ITAT MUMBAI BENCH ‘D’
Mrs. Ratan Mahendra Jain
v.
Income-tax Officer
Narendra Kumar Billaiya, Accountant Member
and SAKTIJIT DEY, Vice President
IT Appeal No. 1669 (Mum.) of 2025
[Assessment year 2022-23]
MAY  14, 2025
Himanshu Gandhi, A/R for the Appellant. Smt. Sanyogita Nagpal, CIT D/R for the Respondent.
ORDER
Narendra Kumar Billaiya, Accountant Member.- This appeal by the assessee is preferred against the order dated 05/02/2025 by NFAC, Delhi [hereinafter “the ld. CIT(A)”] pertaining to AY 2022-23.
2. The grievance of the assessee reads as under:-
“1. The order dated 05/02/2025 bearing No. ITBA/NFAC/S/250/2024-25/107295 1959[11 passed by the Honourable CIT[Appeal], NFAC, Delhi, is excessive, unreasonable, arbitrary, against the provisions of Income Tax Act, 1961 and therefore liable to be quashed.
2. On facts and circumstances of the case and in law, the Honourable C.I.T.(A) has erred in confirming the disallowance of claim of Rs.16,33,83,660/-in respect of exemption under section 54F of Income Tax Act, 1961 ignoring the fact that, the Appellant had purchased two interconnected flats and necessary document /evidence in respect of the same was filed before the Assessing Officer.
3. The appellant craves to alter, add, delete, substitute, or modify and other grounds of appeal.”
3. Briefly stated, the facts of the case are that the assessee is an individual and filed her return of income on 26/07/2022 declaring total income of Rs. 1,48,55,010/-. The return was selected for scrutiny assessment under CASS and accordingly statutorily notices were issued and served upon the assessee.
4. During the year under consideration, the assessee has purchased a residential home being duplex bearing 501 & 601 by way of a single deed of transfer and claimed the same as exempt u/s 54F of the Act from the long-term capital gain earned by her.
5. The AO was of the firm belief that the assessee should not have purchased another house property other than the new asset within one year from the date of transfer of original asset and since the assessee invested the capital gains on two separate immovable properties on the same date, the claim of exemption u/s 54F of the Act was denied.
6. The assessee carried the matter before the ld. CIT(A) but without any success.
7. Before us, the ld. Counsel for the assessee vehemently contended that the lower authorities have not understood the facts of the case in their true perspective inasmuch as, the assessee did not purchase two flats but it was a duplex interconnected with staircase and was one single unit as evidenced from the deed of transfer and from the municipal corporation receipt and from the certification of Housing society.
7.1. Per contra, the ld. D/R could not bring any evidence on record to show that the impugned property were two separate flats with differed identification marks.
8. We have carefully considered the facts of the case and find force in the contention of the ld. Counsel for the assessee. Walkeshwar Om Vikas Co-op. Housing Society Ltd., by its letter dated 23/03/2024 has certified that Flat No. 501-B & 601-B are internally connected and have an internal staircase inside the premises. The flat is a duplex flat.
8.1. We find that the erstwhile owner vide agreement dated 17/10/1989 had purchased the impugned property as a duplex. All these facts were before the AO who mis-construed the impugned property as two different flats.
9. The Hon’ble High Court of Bombay in the case of CIT v. Raman Kumar Suri  was interalia seized with the following questions of law:-
“(e) Whether the Tribunal was justified in confirming the decision of Commissioner of Income Tax (Appeals) in allowing the exemption u/s. 54 for investment in two new flats viz. 416A and 516A by treating the same as one single unit ignoring the fact that the assessee purchased two different flats in the same society and converted them into one duplex flat?
(f) Whether the Tribunal was justified in treating the two flats viz. 416A and 516A purchased by the assessee as one singular unit for the purpose of deduction under Section 54 and not as two separate and distinct units?”
9.1. And held as under:-
“6. (a) The respondent in his return of income for the assessment year 2006-07 had claimed a deduction of Rs. 3 crores under Section 54 of the Act being the investment made for purchase of flat Nos. 416A and 516A at Mittal Park, Juhu, Mumbai. The Assessing officer in his assessment order dated 22/12/2008 restricted the exemption under Section 54 to only Rs. 1.34 crores on the ground that the exemption is allowable only in respect of investment in one residential house only. Further the fact that two flats had been joined and made into one flat would not be considered to be purchase of one flat but would be purchase of two separate flats. Consequently, the Assessing officer restricted the exemption to only Rs. 1.45 crores as according to him Section 54 of the Act exempts investment in a residential house i.e. one residential house only.
(b)In appeal, the Commissioner of Income Tax (Appeals) by his order dated 4/5/2009 held that the respondent herein is entitled to the benefit of exemption under Section 54 of the Act to the extent of Rs.3 crores as claimed in the return of income. This was on the basis that the respondent herein had produced a Certificate of Co-operative Society that two flats were inter connected by internal stair case. The site plan was also submitted inter alia showing only one entrance gate and one kitchen. The duplex flat Nos. 416A and 516A was purchased on as is and where is basis and the assessee had not joined the said two flat internally after acquiring the flats. The flats were inter connected by the previous owner only and therefore, the fact that there were two different flats was immaterial as Section 54 grants exemption to a residential house and unit. The Commissioner of Income Tax (Appeals) had reached a finding of fact was that two flats were joined into one single flat before the respondent became its owner and was one residential house.
(c)On an appeal filed by the revenue, the Tribunal by its order dated 30/4/2010 upheld the findings of Commissioner of Income Tax (Appeals) dated 4/5/2009. The Tribunal also followed the Special Bench decision of the Tribunal in the matter of ITO v. Ms. Sushila M. Jhaveri [2007] 107 ITD 327 (Mum.) to hold that where two flats bearing Nos. 416A and 516A had only one entrance, one kitchen and common passage it has to be considered as one residential house and the respondent was entitled to exemption for the aggregate consideration of Rs. 3 crores under Section 54 of the Act.
(d)We find no fault with the order of the Tribunal which has upheld the finding of fact of the Commissioner of Income Tax (Appeals) to the effect though the respondent-assessee had purchased flat Nos. 416A and 516A it was only purchase of one residential house. Further, the Tribunal held that two flats were joined together before the respondent assessee became the owner of the two flats. The Certificate from the society also established the fact that two flat Nos. 416A and 516A were joined together and were considered as one residential house. These concurrent findings of fact by the Commissioner of Income Tax (Appeals) and the Tribunal have not been shown to be perverse or arbitrary. Further, Section 54 of the Act exempts capital gain to the extent the consideration is paid for the purpose of a residential house. Consequently, where respondent-assessee has acquired one residential house consisting of two flats, it cannot be said the respondent assessee had purchased two residential houses. In view of the above, we find that question (e) and (f) also do not raise any substantial question of law. Therefore, the appeal is dismissed with regard to question (e) and (f) above.”
10. This decision of the Hon’ble Bombay High Court was followed by the Co-ordinate Bench in the case of Bhaskar Prataprai Shah v. Dy. CIT
11. Considering the facts in totality, in light of the aforementioned judicial decisions, we set aside the findings of the ld. CIT(A) and direct the AO to allow the exemption u/s 54F of the Act.
12. In the result, appeal of the assessee is allowed.