Independent Building with More than One Residential Units eligible for Capital Gain Exemption, rules ITAT [Read Order]

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that an independent building with more than one residential unit within it shall be eligible for capital gain exemption under section 54F of the Income Tax Act, 1961.

The assessee in the instant case sold a property jointly held by him along with his brother for consideration of Rs.10 Crores, of which the assessee’s share was 50%. The assessee computed capital gain at Rs.3.21 crores and claimed exemption u/s 54F of the Act in respect of the above-said investments.

During the assessment proceedings, the Assessing Officer noticed that the house property constructed by the assessee consisted of the ground floor and 4 floors above it. The ground floor had a parking facility, one house (2 bedrooms house) on the first floor, and four 1 bedroom units on the 2nd, 3r d& 4th floors. He concluded that the assessee has constructed more than one residential house and hence he would be entitled to deduction under section 54F of the Act for construction of one residential house only. Accordingly, the AO allowed a deduction under section 54F of the Act for one residential unit only by adopting proportionate cost of construction of one residential house at Rs.27.10 lakhs and proportionate cost of land at Rs.5.94 lakhs.

The Tribunal bench comprising ITAT Vice President N V Vasudevan and Accountant Member B R Bhaskaran noted that the question of whether each floor of a single stand-alone building should be considered as a separate house was examined by the co-ordinate Bench in the case of Shri Bhatkal Ramarao Prakash vs. ITO. “The view taken in the case cited above is 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 by another coordinate Bench in the case of Shri Chandrashekar Veerabhadraiah vs. ITO (ITA No.2293/Bang/2019 dated 07-12-2020 relating to AY 2015-16). Accordingly, we are 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. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and hold that the house property received by the assessee is “one residential house” only within the meaning of sec.54F of the Act. Accordingly, we are of the view that the reasoning given by the AO to reject the claim for deduction u/s 54F is not justified,” the bench said.

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