Sold a commercial property? Can you claim tax exemption by investing the proceeds in two flats? ITAT clarifies
A Mumbai taxpayer who sold six commercial properties and invested the proceeds in two flats on different floors of the same building has won a major capital gains tax relief. The Mumbai Income Tax Appellate Tribunal (ITAT) has allowed a deduction of ₹2.51 crore under Section 54F of the Income-tax Act, ruling that the two flats could be treated as one residential house despite having separate registrations and entrances.
The decision is important for property owners who sell commercial property, land or other long-term capital assets and reinvest the proceeds in a residential home. It clarifies that buying two separately registered flats does not automatically mean that a taxpayer loses the Section 54F exemption. What matters is whether the two units, considering the facts of the case, can be treated as one residential house.
The ruling in Sunil Indravadan Shah vs ITO, Ward 19(3)(1) (ITA No. 7276/MUM/2025), pronounced on 24 August 2026, addresses an important question for taxpayers buying multiple residential units to claim capital gains tax exemption.
The taxpayer sold six commercial units at Solitaire Chambers on Kalbadevi Road, Mumbai, between 13 June 2019 and 5 July 2019. The sale generated a net consideration of ₹5.32 crore and long-term capital gains of approximately ₹4.97 crore.
To claim exemption under Section 54F, he invested the proceeds in two residential flats in 22 Dholera, a building in Parel, Mumbai. Both properties were purchased from the same developer, Safal Realtors & Developers Pvt. Ltd., through separate agreements registered on 29 September 2020.
Each flat measured 1,334.19 sq. ft. and cost ₹2.65 crore. One was Flat A-601 and the other was Flat A-1801, both in Wing A of the same building but on different floors.
The taxpayer claimed an exemption of ₹4.97 crore under Section 54F against the capital gains from the commercial property sale.
However, the assessing officer accepted the exemption for only one flat and disallowed ₹2.51 crore relating to the second. The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, upheld the tax department's decision.
The tax department argued that Section 54F provides an exemption for investment in one residential house. Since the taxpayer had purchased two separately identifiable flats, it considered the second flat a separate residential property.
The authorities pointed to the separate sale agreements, registrations, stamp duty payments and entrances as reasons to deny the deduction.
The taxpayer challenged the decision before the Mumbai ITAT, arguing that both flats were purchased simultaneously from the same developer in the same wing of one building. His intention was to use them together as one residential accommodation for his family.
He also explained that finding adjoining flats in Mumbai was difficult and that purchasing units on different floors was a practical alternative. Family circumstances, including his wife's restricted mobility, were also cited to explain the need to keep the family in the same building.
The tribunal examined whether the two flats could qualify as one residential house despite being situated on different floors and having separate registrations.
It relied on the Delhi High Court's ruling in CIT vs Gita Duggal (2013), which held that a residential house need not necessarily comprise a single physical unit. A building with multiple independent residential units can qualify as one residential house for claiming a capital gains tax exemption.
The tribunal also referred to the Delhi High Court's decision in Pr. CIT vs Lata Goel, which supported a broader interpretation of the expression 'a residential house'.
In the present case, the tribunal considered several common factors. Both flats were purchased on the same date, from the same developer, in the same building and wing. They also had identical carpet areas and purchase prices.
The tribunal held that the fact that the flats were on different floors did not, by itself, make them two separate residential houses for Section 54F.
It also observed that separate registration documents, stamp duty payments and entrances could not independently determine whether the properties constituted one residential house.
The ITAT consequently set aside the appellate authority's order and directed the assessing officer to allow the deduction under Section 54F in accordance with law.
Section 54F allows individuals and Hindu Undivided Families (HUFs) to claim exemption on long-term capital gains from the sale of assets other than residential houses, provided they invest the net sale consideration in a qualifying residential house in India.
The new residential property must generally be purchased within one year before or two years after the sale of the original asset, or constructed within three years.
If the entire net sale consideration is invested, the entire eligible capital gain can be exempt, subject to the statutory conditions. If only part of the consideration is invested, the exemption is calculated proportionately.
The provision also restricts eligibility where the taxpayer owns more than one residential house, other than the new asset, on the date of transfer of the original asset. A ₹10 crore cap on the cost of the new asset also applies to the exemption calculation.
For property sellers, the Mumbai ITAT ruling provides an important clarification. Two flats on different floors may qualify as one residential house, but this is not an automatic exemption for every multiple-flat purchase. Tax authorities will examine the facts, the arrangement and whether the properties genuinely constitute one residential accommodation.
Kirti jha
Kirti Jha is a Senior Content Producer at Mint, where she writes on mutual funds, taxation, personal finance and macroeconomic developments. Her reporting focuses on helping readers understand complex financial developments through data-driven, research-backed stories that explain how policy changes, market trends and regulatory decisions affect investors and households. <br><br> Before joining Mint, Kirti worked at ET Money, where she specialised in mutual fund research and investment analysis. She tracked portfolio disclosures, fund manager strategies, sectoral allocation shifts and investment trends, distilling large datasets into investor-focused insights. Her work combined quantitative analysis with consumer-centric storytelling, enabling readers to better understand fund positioning, portfolio changes and long-term investment opportunities.<br><br> Kirti holds a Bachelor's degree in Economics from Indraprastha College for Women, University of Delhi, and a Master's in Finance from the Jindal School of Banking & Finance at O.P. Jindal Global University. Her academic training emphasised analytical thinking, quantitative research and financial decision-making, providing a strong foundation in understanding capital markets, financial systems and economic policy. With a combined experience in investment research and financial journalism, she is committed to producing accurate, accessible and insightful journalism that empowers readers to make well-informed financial decisions.
Get Latest real-time updates
Catch all the Instant Personal Loan, Business Loan, Business News, Money news, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
HomeMoneyPersonal FinanceSold a commercial property? Can you claim tax exemption by investing the proceeds in two flats? ITAT clarifies
✕
Wait for it…
Oops! Looks like you have exceeded the limit to bookmark the image. Remove some to bookmark this image.