According to the tax laws, a taxpayer is entitled to claim tax benefits in respect of long-term capital gains (LTCG) earned on sale of a residential property or any other asset, if he or she purchases ‘one’ residential house in India. To provide greater clarity, an amendment was introduced from the financial year 2014-15, which substituted the term ‘residential house’ with the term ‘one residential house’. According to tax experts, post the amendment, a taxpayer can still invest in more than one house and claim the tax benefit provided it can be proved the multiple flats constitute one single residential house.Capital gains are taxable under the I-T Act. If on sale of a residential house (which has been held for at least two years), the taxpayer makes a profit, then such profit is treated as a long-term capital gain (LTCG). This gain is taxable at 20% with an adjustment for inflation, referred to as indexation benefit.
However, under section 54, if an investment is made in ‘one’ residential house in India, within the stipulated period, then the cost of the new house is deducted and only the balance component of the LTCG is taxable. Such deduction results in a lower I-T outgo.
In the case adjudicated by the ITAT on April 11, the taxpayer had sold her bungalow in Andheri and had purchased four flats in Malad. These were transferred to her by the builder under four separate agreements. However, she contended that the flats were purchased as a single residential house and, accordingly, in her tax return, she claimed the entire amount of investment as a tax benefit under section 54.
During scrutiny of her tax return, the I-T noted these flats were one-room kitchen apartments built for the lower income group and were clearly in the form of four separate residential flats. The society had split the four flats into two units – a single bill was furnished for flats no 1901 and 1902. Another bill was provided for flats no 1903 and 1904.
Based on these bills, the I-T officer agreed to treat the investments as having been made in two (rather than four) separate residential flats. He allowed tax investment of Rs1.04 crore made in one such unit (comprising two flats) as a deduction. The investment made in the other unit (comprising the other two flats) was not allowed to be deducted from the LTCGs. Accordingly, the I-T officer sought to tax Rs88 lakh as capital gains.
The Commissioner (Appeals) directed a spot verification of the flats to be conducted. The report showed the four flats had been merged into one composite flat, having a common entrance door and were used as a single residential apartment. But, the litigation did not end here, as the I-T department approached the ITAT.
Based on the precedence set by earlier orders of the Bombay high court and also the spot verification report, the ITAT held that the claim for exemption under section 54 in respect of the total investment made toward acquisition of the multiple flats, which were joined and used as a single residential unit, cannot be denied.
Tax experts point out that the taxpayer should be able to substantiate that the multiple flats are being used as a single unit (see table). If the multiple flats are in different locations, then he/she would not be able to claim the benefits under section 54.
