Recently, ITAT Mumbai bench giving a big relief to the taxpayers held that for the purposes of S. 54 of Income Tax Act, 1961 (Act), an assessee can sell multiple flats for buying a new one in India subject to conditions mentioned in S. 54 of the Act.
S. 54 of the Act provides that for claiming benefit the period prescribed for investment in a new house is one year before or two years from the date of sale of old house, OR if within three years after the date of sale of the house, constructs a new residential house.
The interim budget proposed to allow investment to be made in two house properties in India. However, this option can be exercised only once in a lifetime.
The relief was announced in the case of ACIT v. Mr. Bipin N. Sagar, ITA No.1507/M/2017 dated 05.02.2019.
Facts of the case are as follows:
In this case, the assessee Bipin N. Sagar sold three flats & claimed exemption u/s 54 of the Act. The AO issued the Show cause notice to the assessee against which, the assessee submitted that all flats were located on the same floor when purchased & later on were combined into one flat. Due to legal formalities, they were purchased & sold under separate agreements.
Whether the AO was justified in disallowing exemption u/s 54 of the Act on the ground that assessee has purchased and sold three flats by three separate agreements & thereafter converted them into one.
• It was observed that generally, it may not be possible to find a bigger residential unit and that requires combining two or more adjoining flats into one unit. However, that does not mean that each flat is in itself a separate residential unit. What is to be seen is whether the adjoining flats were actually united and used as a common single unit or not. Execution of separate agreements cannot decide this issue. The flats were constructed in such a way that adjustment units of flats can be combined into one. (Refer CIT v. DevdasNaik (2014) 49 taxmann.com 30)
• That there is no restriction placed u/s 54 that exemption is allowable only in respect of sale of one residential house. There is an inbuilt restriction that capital gain arising from sale of residential house cannot be invested in more than one residential house. However, there is no restriction that capital gain arising from sale of more than one residential flat cannot be invested in one residential house. (Refer DCIT v. Ranjit Vithaldas  23 taxmann.com 226, Rajesh Keshav Pillai v, ITO (2011) 44 SOT 617 (Mum.)
• Hence, in the instant case it was observed that the flats were constructed in such a way that they could be combined into one unit for the purpose of residence. The acquisition of flats has been done independently but eventually they are single unit for the purpose of residence. Execution of separate agreements cannot decide this issue.
• The provision of Section 54 is applied to transfer of any number of residential house by the assesse, provided the capital gain arising there from is invested in a proper manner within the prescribed time limit.