Owning Multiple Houses Breaks Section 54F Claim: ITAT Clarifies ‘One Residential House’ Rule [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that the benefit of capital gains exemption under Section 54F of the Income Tax Act, 1961 is not available where the assessee owns more than one independent residential house on the date of transfer of the original asset.

Late Shri Ram Kishore Seth, represented through his legal heir Smt. Rama Seth, had filed an appeal against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, for the Assessment Year 2017-18. The case arose from scrutiny proceedings initiated to examine capital gains arising from the sale of property and cash deposits made during the demonetisation period.

The Assessing Officer disallowed the exemption claimed under Section 54F of the Income Tax Act, 1961 amounting to ₹1.22 crore, holding that the assessee owned more than one residential house on the date of transfer. An addition was also made in respect of cash deposits during demonetisation. The appellate authority upheld both additions, leading to the appeal before the Tribunal.

On behalf of the appellant, a panel of representatives contended that the assessee originally owned a residential house at Pitampura, Delhi, which was redeveloped under a joint development agreement resulting in construction of multiple floors. It was argued that the entire building constituted a single residential house and, therefore, the exemption under Section 54F of the Income Tax Act, 1961 could not be denied merely because the structure comprised multiple floors.

The Revenue opposed the appeal, contending that the assessee was deriving rental income from several independent residential units, each having separate kitchens, indicating ownership of multiple residential houses. It was argued that the statutory condition under Section 54F of the Income Tax Act, 1961 clearly restricts the exemption to cases where the assessee owns not more than one residential house other than the new asset.

The Bench, comprising Anubhav Sharma, Judicial Member, and S. Rifaur Rahman, Accountant Member, noted that the assessee was earning rental income from multiple independent residential units, each capable of separate residential use and equipped with independent kitchens. It held that for the purposes of Section 54F of the Income Tax Act, 1961, an independent residential unit with basic amenities such as a kitchen constitutes a separate residential house.

The Tribunal observed that the assessee already owned more than one independent residential house at the time of transfer. Accordingly, the denial of exemption under Section 54F was upheld. However, the ITAT granted relief on the issue of cash deposits during demonetisation, holding that the assessee had satisfactorily explained the source of such deposits.

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