According to Indian tax laws, an assessee is entitled to claim exemption on long-term capital gains tax, on sale of a property or any other asset, if s/he purchases a residential house. However, there are a few grey areas in this exemption.
Number of houses, in which the investments can be made
A question that arises, is whether the assessee can invest in more than one residential house and claim capital gains exemption under Section 54 or 54F. In Gita Duggal case (in 257 CTR 208), the Delhi High Court held that the expression ‘a residential house’ should be understood in a sense that building should be a residential one and that the word ‘a’ should not be understood to indicate a singular number. The court interpreted the word ‘a residential house’ to mean any residential house, in contradistinction to any ‘commercial house property’. Consequently, tax payers were able to claim long-term capital gains tax exemption by investing in more than one house property. However, an amendment was made to the income tax laws, which replaced ‘a residential house’ with ‘one residential house’, with effect from April 1, 2015.
Position, if the investment is made in more than one flats to be used as single residential unit
However, even after the amendment, a question arises – is it possible for one to claim long-term capital gains tax exemption, if more than one residential units are purchased, which are used as a single residential unit by the family? The answer is provided by two decisions.
The first one is that of CIT vs D Ananda Basappa 309 ITR 329 (Kar.), where multiple flats were purchased in the same complex and were used as one unit. In this case, the tax exemption was allowed. A special leave petition filed by the income tax department against this decision was also rejected by the Supreme Court.
Hence, it can be reasonably inferred that even after the amendment of Section 54 and 54F, providing for exemption from long-term capital gains tax, only if the investment is made in one residential house property, one can still invest in more than one house and claim the tax exemption, provided the taxpayer can prove that all such flats are used as a single residential unit by the family. In the abovementioned case, two residential units were purchased, which were separated by a strong wall and were purchased from two different vendors under two separate sale deeds. The exemption was still granted to the tax payer, because both the flats were capable of being used as a single residential unit.
The second decision, which was delivered after the amendments were made, was announced by a Special Bench of the Mumbai Tribunal, in the case of ITO vs Suseela M Jhaveri 26 (ITAT Bom). It was held that if the assessee has purchased more than one residential house and the houses are in different locations, then, the assessee could claim exemption only in respect of one house. However, the taxpayer would be entitled to exemption in more than one unit, if the two adjacent or continuous units are converted into one residential house, and the two units are intended to be used as a single house for the family’s residence.
(The author is a tax and investment expert, with 35 years’ experience)