Property with Shops and Single Room Not Eligible for S.54 Exemption: ITAT [Read Order]
The tribunal denied exemption on the second property but gave partial relief by directing capital gains to be calculated on only 50% of the sale amount, as the property was jointly owned with the wife.
![Property with Shops and Single Room Not Eligible for S.54 Exemption: ITAT [Read Order]](https://images.taxscan.in/h-upload/2025/06/23/2053226-exemption-itat-taxscan.webp "Property with Shops and Single Room Not Eligible for S.54 Exemption: ITAT [Read Order]")
The Agra Bench of Income Tax Appellate Tribunal ( ITAT ) held that a property comprising four shops on the ground floor and a single room on the first floor could not be treated as a residential house for the purpose of claiming exemption under section 54 of theIncome Tax Act, 1961.
Alauddin, appellant-asseseefiled his ITR-4S on 26.03.2018, declaring income of Rs.3,98,560/-. Later, the Assessing Officer (AO) received information that he had sold an immovable property for Rs.45,00,000/- but had not disclosed any capital gains in his return.
Reassessment proceedings were initiated under section 147, and notices under sections 148 and 142(1) were issued. The assessee eventually responded, stating that he had sold jointly owned residential properties and claimed exemption under section 54 as he had purchased two new properties,one in his name for Rs.8,50,000/- and another jointly with his wife for Rs.28,00,000/-.
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The AO partly disallowed the claim, treating the second property as commercial since it included shops and was bought separately. Capital gain was computed at Rs.37,35,606/-, and exemption of Rs.9,31,060/- was allowed only for the first property. The remaining Rs.28,04,546/- was added to the income.
The Commissioner of Income Tax (Appeals)[CIT(A)] upheld the assessment, holding that the assessee was eligible for exemption under section 54 for only one residential house during that year, and the second property did not qualify as residential.
The two member bench comprising Sunil Kumar Singh (Judicial Member) and Manish Agarwal (Accountant Member) noted that the case related to the Assessment Year 2015-16 and that the reassessment was governed by the old law, as the notice under section 148 was issued on 31 March 2021, before the new regime came into effect on 1 April 2021.
The AO had received information that the assessee had sold property worth Rs 45,00,000 but had not reported any capital gains. Based on this, he recorded reasons to believe that income had escaped assessment and issued the notice after getting the necessary approval.
The appellate tribunal found no fault in the reopening process. It held that the notice was issued within the permitted time limit and served correctly through the assessee’s registered email. The assessee also took part in the proceedings, which were conducted under the faceless assessment scheme.
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On the main issue, the tribunal looked into whether the property bought by the assessee, having four shops on the ground floor and one room on the first floor, qualified as a residential house under section 54.
It held that the property was mainly commercial in nature and did not qualify for exemption, as the presence of one room did not change its dominant use. The assessee also failed to provide evidence like electricity or municipal records to support the residential claim.
However, the bench agreed that the property sold was jointly owned with the assessee’s wife. Since this was clear from the sale deed, it held that only 50 percent of the sale consideration should be taxed in the appellant’s hands. The tribunal directed the AO to recompute the capital gains accordingly and allowed partial relief on this point.
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