Buying two flats adjacent to each other, or one above the other, with a common entrance and treated as one residential unit, can be considered one for capital gains investment, the Income Tax Appellate Tribunal (ITAT) said.
However, this will be possible subject to physical verification by the Income Tax Department.
ITAT says separate deeds alone cannot deny exemption
“The JAO (Jurisdictional Assessment Officer) shall not deny the claim merely on the ground that there are two registered conveyance deeds, two flat numbers, separate parking spaces or absence of a separate municipal/RERA amalgamation approval, since those circumstances, by themselves, are not determinative of the issue under section 54F in view of the legal principles,” the Mumbai bench of ITAT said in a recent ruling.
However, the benefit will be available only based on the results of physical verification “to establish that the two flats, under discussion are physically interconnected and constitute and are used as one composite residential house,” the bench said.
Four conditions for treating two flats as one house
This physical verification will consider the following conditions: First, whether the two flats are physically interconnected and function as one composite residential dwelling. Second, whether the residential accommodation has a common passage/internal access, a common kitchen, and is used for a single residential purpose. Third, whether the actual physical configuration substantially corresponds with the photographs, architect’s material, society letter, previous-owner confirmation and other evidence already produced by the Assessee. Fourth, whether the two portions are maintained and used as one residential house rather than two separate and independent residential dwellings.
How capital gains tax exemption works
The Income Tax Act prescribes tax exemption from long-term capital gains (LTCG) earned through the sale of non-residential assets such as shares or gold, or from residential assets, if the investment in another residential property is made within the prescribed time limit.
For example, Section 54F of the Income-tax Act (Section 86 of the Income Tax Act 2025) offers LTCG tax exemption on the sale of non-residential long-term assets (like gold, land, or shares) if the net proceeds are reinvested into one residential house (purchased within 1 year before or 2 years after or constructed within 3 years of the transfer).
What qualifies as ‘one residential house’?
Post the 2014 amendment to the Income Tax Act, the exemption is strictly limited to one residential house in India. However, the big question is, what is the definition of one residential house? Can it be a single independent property, or a combination of two or more flats joined by a common entrance? The present judgment sought to answer the basic question of the criteria for deciding whether the property is one residential house.
In this process, it drew precedent from DCIT v. Priyanka Bhaskar Shah, wherein the claim under section 54F was directed to be allowed, subject to physical verification of the flats; the Court considered it appropriate, as an abundant precaution, to have this limited factual aspect physically verified.
Further, “We hold that separate conveyance deeds, separate flat numbers, separate parking spaces or absence of a separate municipal/RERA amalgamation approval, by themselves, cannot be treated as conclusive for denying exemption under section 54F where the units, in fact, constitute one composite residential house,” the bench said while noting that the tax department failed to demonstrate any legal or factual basis warranting withdrawal of the relief.
