Buying two flats and joining them? ITAT ruling clarifies when you can claim capital gains tax exemption

Homebuyers who reinvest capital gains in two adjoining flats may be eligible for a tax exemption if the properties are physically connected and function as a single residential home, according to a recent ruling by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT).

According to Research Lawsathi, the tribunal held that the tax department cannot reject an exemption claim under Section 54F of the Income-tax Act merely because the two flats have separate registration deeds, individual flat numbers or separate parking spaces. The absence of formal municipal or RERA approval to amalgamate the units is also not, by itself, sufficient grounds to deny the benefit.

However, taxpayers cannot assume that buying two flats automatically qualifies them for the exemption. The ruling makes the relief subject to physical verification by the jurisdictional assessing officer to establish whether the properties are interconnected and are actually used as one residential house.

The tribunal has directed the tax officer to examine the physical layout and use of the properties before deciding whether they constitute a single residential dwelling.

Physical connection: Whether the two flats are linked and function as one composite home.

Common access and facilities: Whether they have internal access or a common passage, share a kitchen and are used for a single residential purpose.

Supporting evidence: Whether the actual layout is consistent with photographs, architectural documents, a housing society letter, confirmation from the previous owner and other evidence submitted by the taxpayer.

Actual use: Whether the two portions are maintained and occupied as one home rather than as separate, independent residential units.

For property buyers, the distinction is important: the tribunal's ruling places emphasis on the actual configuration and use of the flats, rather than relying exclusively on their registration details.

Not on their own, the tribunal said.

The Mumbai bench observed that separate conveyance deeds, different flat numbers, separate parking spaces and the absence of formal amalgamation approval cannot independently determine whether two flats qualify as one residential house for Section 54F purposes.

The ruling referred to the earlier case of DCIT v. Priyanka Bhaskar Shah, in which the exemption claim was allowed subject to physical verification of the flats.

In the present matter, the tribunal said the assessing officer should not deny the benefit merely because the units have separate legal or administrative identifiers. Instead, the officer must establish through physical verification whether the properties are genuinely interconnected and used together as one residence.

Section 54F provides relief from long-term capital gains tax when an eligible taxpayer sells a long-term capital asset other than a residential house and invests the net sale proceeds in a qualifying residential property in India, subject to the applicable conditions.

Under the time limits described in the provision, the new house must be purchased within one year before or two years after the transfer of the original asset, or constructed within three years of the transfer.

The exemption is linked to investment in one residential house in India. This is why the meaning of "one residential house" matters when a taxpayer purchases two flats and combines them into a single dwelling.

The ruling addresses how that requirement may be assessed when two separately registered units are physically integrated. It does not mean that every purchase of two flats will automatically qualify for the exemption; the facts of each case and the outcome of physical verification remain important.

Anyone seeking to claim the exemption for two adjoining or vertically aligned flats should be prepared to demonstrate that the units form one functional home.

Evidence such as photographs, architectural plans, housing society correspondence and confirmation from the previous owner may be relevant, based on the material considered in the case. The physical layout, internal access, shared kitchen and actual residential use will also matter.

Ultimately, the ruling indicates that separate registration documents or flat numbers do not, by themselves, settle the question. The decisive issue is whether the two units are physically interconnected and used as one composite residential house, subject to verification by the income tax authorities.

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