A Mumbai Income Tax Appellate Tribunal (ITAT) has provided crucial clarity on Section 54 tax exemption for residential property investments involving multiple units. According to reports from TaxGuru, the Tribunal held that two adjacent flats legally and physically amalgamated into a single residential unit could be treated as one residential house for claiming capital gains exemptions. This ruling offers an important distinction from the rule governing investment in two separate residential houses.
The taxpayer sold a residential property at Malabar Hill, Mumbai, for ₹43 crore and claimed the entire amount as exempt under Section 54 for Assessment Year 2021-22. The investment involved Flat Nos. 3101 and 3102 at Lower Parel, Worli. As reported by TaxGuru, the assessing officer initially treated the two flats as separate properties, allowing exemption only for the ₹22.56 crore investment in Flat No. 3102 and taxing the remaining ₹4.03 crore of capital gains. The issue became particularly relevant as Section 54 permits investment in two residential houses only where the capital gain does not exceed ₹2 crore.
The taxpayer subsequently entered into a registered supplementary agreement dated 25 March 2022 with the developer to amalgamate the two adjacent flats. According to TaxGuru reports, after the amalgamation, Flat No. 3101 lost its separate identity, and the composite property continued as Flat No. 3102. The Mumbai ITAT agreed with the CIT(A) that the two flats had effectively become one residential unit, making the restriction concerning investment in two separate houses inapplicable.
Section 54 allows individuals or HUFs to claim exemption on long-term capital gains from residential house sales by investing in another residential house in India. As reported by TaxGuru, the original property must be held for more than 24 months to qualify as long-term, and the new house must be purchased within one year before or two years after the sale. From AY 2021-22, a one-time option was introduced to invest in two residential houses where the LTCG does not exceed ₹2 crore. However, from AY 2024-25, the Finance Act 2023 capped the investment considered for Section 54 exemption at ₹10 crore.
The Mumbai ITAT upheld the ₹26.59 crore Section 54 exemption and dismissed the Revenue's appeal, with the order pronounced on 17 August 2026. According to TaxGuru, the ruling does not remove the ₹2 crore investment limit for two separate houses but clarifies that where two adjacent flats are legally and physically amalgamated into one residential unit, they can be treated as one house rather than two separate houses. This provides important guidance for taxpayers considering similar property investment scenarios involving adjacent residential units.
