Sale of Ancestral Property and Reinvestment in More than One Residential Units: Delhi HC says Multiple Investments Eligible for Exemption u/s 54 [Read Order]

The bench of the Delhi High Court ruled that exemption under Section 54 of the Income Tax Act, 1961, is not confined to investment in a single residential property. The Court upheld that reinvestment of capital gains in more than one residential unit qualifies for deduction, provided the funds are sourced from the sale consideration or advance received against the capital asset.

The appellant, Valmik Thapar, had declared capital gains from the sale of a 50% share in his ancestral property at Kautilya Marg, New Delhi. He claimed deductions for (i) ₹3.77 crore invested in a residential flat in Mumbai, (ii) ₹1.70 crore spent on reconstruction of the retained portion of the Delhi property, and (iii) ₹1 crore invested in REC and NHAI capital gains bonds.

The Assessing Officer disallowed these deductions, stating that the Mumbai flat was purchased before the date of transfer and that the Section 54EC claim exceeded ₹50 lakh. The Commissioner of Income Tax (Appeals) partly upheld the order but deleted the disallowance under Section 54EC. Both parties appealed before the Income Tax Appellate Tribunal (ITAT).

Represented by Salil Aggarwal, Madhur Aggarwal, Uma Shankar, and Mahir Aggarwal, the appellant contended that both investments into the Mumbai property and capital gains bonds were funded from advance consideration received from the buyer before the final transfer, thus satisfying the conditions of Section 54 and Section 54EC.

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It was argued that Section 54 does not limit the exemption to a single residential house and that Section 54EC allows investments across financial years.

Represented by Debesh Panda and Zehra Khan, Vikramaditya Singh, Kanishk, Nivedita, Anavntta, and Yashika, argued that the deduction under Section 54 could only be claimed for one property and that the ₹50 lakh cap under Section 54EC was an absolute limit, regardless of financial year. It was contended that the investments were made beyond the prescribed six-month period and thus were not eligible for exemption.

The Income Tax Appellate Tribunal held that the phrase “a residential house” in Section 54 of the Income Tax Act, 1961, cannot be narrowly construed to mean one residential unit. The Tribunal recognised that the appellant was entitled to claim deduction for both the Mumbai property and reconstruction in Delhi.

On Section 54EC, the Tribunal held that the appellant’s investment of ₹1 crore in REC and NHAI bonds made from advance consideration was eligible for full exemption, as the statutory ₹50 lakh limit applied per financial year.

The Delhi High Court comprising of Justice Vibhu Bakhru and Justice Tejas Karia noted that the Revenue had not challenged the Tribunal’s findings on deductions under Sections 54 and 54EC. Consequently, these findings attained finality. The Court recorded that both the reasons for reopening relating to these very deductions were rejected on merits, thereby affirming the appellant’s entitlement to the claimed exemptions.

The Court thus ruled that reinvestment of capital gains in multiple properties or eligible bonds is entitled to deduction, provided statutory conditions are met.

Accordingly, the Court allowed the appeal.

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