Capital gain exemption allowed on independent building with more than one residential unit within it

The Income Tax Appellate Tribunal (ITAT) has ruled that an independent building, even if it contains more than one residential unit, can still be considered 'one residential house' for the purpose of capital gains tax exemption under Section 54(F) of the Income-tax Act. The ITAT overturned the tax authorities' decision to limit the exemption to just one unit, stating that each floor or portion of a floor does not constitute a separate property in this context. This decision allows taxpayers to claim full exemption on investments made in such properties.

In Sri Ramaiah Harish v. Income Tax Officer, Bangalore [ITA No.789/Bang/2019 dated September 24, 2021], Sri Ramaiah Harish ("the Appellant") has filed this appeal challenging the order dated March 01, 2019 passed by Commissioner of Income tax (Appeals), Bengaluru ("the CIT(A)") for the assessment year 2015-16. The Appellant is aggrieved by the decision of Ld. CIT(A) in confirming the rejection of claim for deduction under Section 54(F) of the Income-tax Act,1961("the IT Act").

Factually, the Appellant has sold a property jointly held by him along with his brother. Further, the Appellant stated that he has invested a sum of Rs.2.06 crores in the capital gains account scheme. Besides the above the Appellant claimed that he has spent a sum of Rs.50 lakhs towards construction of a house. Accordingly, the Appellant claimed exemption under Section 54(F) of the IT Act in respect of above said investments.

During the assessment proceedings, the Assessing Officer ("AO") noticed that the house property constructed by the Appellant consisted of the ground floor and 4 floors above it and concluded that the Appellant has constructed more than one residential house and hence he would be entitled to deduction under Section 54(F) of the IT Act for construction of one residential house only. Accordingly, the AO allowed a deduction under Section 54(F) of the IT Act for one residential unit only. The Ld. CIT(A) also confirmed the same.

The Hon’ble Income Tax Appellate Tribunal, Bangalore ("ITAT") noted that the question of whether each floor of a single stand-alone building should be considered as a separate house was examined in the case of Shri Bhatkal Ramarao Prakash v. ITO [ITA No.2692/Bang/2018 dated January 01 ,2019] wherein it was held that an independent building can have a number of residential units and it will not lose the character of "one residential house". The identical view has been expressed in another case of Shri Chandrashekar Veerabhadraiah vs. ITO [ITA No.2293/Bang/2019 dated December 07, 2020].

 Accordingly, held that ITAT is unable to agree with the view taken by the tax authorities that each floor of the individual house/each portion in a floor is separate house property.

Further, ITAT set aside the order passed by Ld CIT(A) on this issue and held that the house property received by the Appellant is "one residential house" only within the meaning of Section 54(F) of the IT Act. Accordingly, held that the reasoning given by the AO to the reject the claim for deduction under section 54(f) is not justified and allowed the appeal.