MUMBAI: Mumbai bench of the Income-Tax Appellate Tribunal (ITAT) has remanded a tax deduction case involving two adjoining flats back to I-T authorities for further verification.
During 2020-21, the taxpayer, P Shah, had claimed a tax deduction of Rs 9.5 crore under Section 54-F of the Income-Tax (I-T) Act, following her investment in two adjoining flats in Navi Mumbai.
Under this section, if a taxpayer sells long-term assets (original assets), such as equity shares and invests the entire net sales consideration in ‘one’ residential house within the specified period, the entire long-term capital gain arising on sale of the original assets is exempt from tax. In case only a part of the net sale consideration is invested in a residential house, tax exemption is allowed proportionately. Shah invested the entire proceeds of Rs 9.5 crore arising from the sale of the equity shares (long-term capital assets) in the two adjoining flats. For the purpose of tax exemption under Section 54-F, she claimed it was a single residential unit.
The issue of whether an investment in two adjoining flats can be treated as a single unit has been prone to litigation. In this case, during the tax assessment, the I-T official contested this point, stating that owing to an amendment, with effect from financial year 2014-15, a taxpayer can invest only in one residential flat. In Shah’s case, the flats were registered separately and could not be considered as a single unit, as they were separated by an ‘open to sky’ space.
The explanatory memorandum to Budget 2014 stated that the exemption under Section 54-F is available if the investment is made in one residential house situated in India. The amendment will apply in relation to assessment year 2015-16 (financial year 2014-15) and subsequent years.
The commissioner (appeals) held in favour of the taxpayer, based on an affidavit of the builder and a revised building plan. Shah had entered into an agreement with the builders for purchasing adjoining flats and converting them into one unit. The I-T department termed these documents as “self-serving” and filed an appeal with ITAT. ITAT noted that no physical verification had been conducted by the tax authorities. Thus, the case was remanded back to the I-T officer to physically verify whether the flats were combined into a single residential unit. The tax tribunal held if the flats were indeed combined, Shah would be eligible for the deduction.This case highlights legal debates about tax exemptions on residential investments and the interpretation of amendments to Section 54-F. The ITAT order keeps the matter open pending further verification by tax authorities.
