Sale of Late Mother's Flat for Multiple Residential Houses eligible for Income Tax S.54 Exemption: Bombay HC [Read Order]

This benefit applies when the proceeds are invested in multiple residential houses too, provided the transaction falls under the pre-2014 version of the Income Tax Act.

The Division Bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne delivered the judgment recently.

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The appeal arose from a long-running dispute. The assessee sold a Marine Drive flat in 1993–94 for ₹1.45 crore and, in 1995, ploughed the full gains about ₹1.08 crore into seven row houses at the “Yashodanandan” project in Viman Nagar, Pune, via a joint-venture arrangement with Samant Estate Pvt. Ltd.

The Assessing Officer had denied the Section 54 exemption and the Income Tax Appellate Tribunal (ITAT) partly allowed relief only for one unit (Row House B-16).

Framing the core question as whether Section 54, in its unamended form, permitted set-off of gains against the cost of more than one residential unit, the High Court answered in the affirmative. It was observed that before Finance (No. 2) Act, 2014, the statute used the phrase “a residential house,” which courts have read as descriptive rather than limiting the number of houses.

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The 2014 amendment replacing “a residential house” with “one residential house in India” was a prospective change operative from Assessment Year 2015-16, not a restatement of earlier law.

In agreement with the KarnatakaHigh Court in Arun K. Thiagarajan and the Madras High Court in Tilokchand & Sons, the Bench reaffirmed that, pre-2014, “a” could include plural meaning investment across multiple houses still qualified for Section 54 relief. The Court also noted consistent Delhi High Court reasoning in CIT v. Gita Duggal.

The Revenue had urged reliance on the ITAT Special Bench ruling in Sushila M. Jhaveri (permitting exemption for only one house) and on earlier Bombay decisions where two flats were effectively combined into one residence.

The High Court distinguished those authorities, in observation that the Special Bench ruling was not binding and that subsequent High Court decisions, coupled with the 2014 legislative change, clarified the correct position for prior years.

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Allowing the appeal, the Court quashed the orders of the Assessing Officer and the ITAT to the extent they denied full relief, and held the assessee entitled to exemption against the entire capital gains arising from the Mumbai flat’s sale, given the reinvestment into seven Pune row houses.

For assessment years prior to AY 2015-16, taxpayers who sold a residential property and reinvested the gains in multiple residential units stand on firmer ground to claim Section 54 relief. Post-2014, however, the law restricts the benefit to investment in “one” residential house in India.

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