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One Residential House Can Comprise Several Independent Units: ITAT Bangalore Allows Full Section 54 Exemption
Summary: The Bangalore Bench of the Income Tax Appellate Tribunal has held that a residential house should not necessarily be equated with a single residential unit. Where several units together constitute one residential house and are retained by the assessee as such, exemption under Section 54 cannot be restricted merely because the units have been allotted separate numbers.
The Tribunal also held that where a case was selected for limited scrutiny to examine the deduction or exemption claimed from capital gains, the Assessing Officer could not enlarge the scope of scrutiny and enhance the disclosed sale consideration without obtaining the prescribed approval for conversion of the proceedings into complete scrutiny.
Facts of the case
The assessee, an individual, entered into a development agreement with a builder under which she transferred land and became entitled to receive certain constructed premises. In consideration, the assessee was to receive three flats, including the premises on the fourteenth floor along with basement car parking.
The assessee treated the entire premises bearing Flat No. 1401, measuring approximately 9,500 sq. ft., as one residential house retained by her. At the agreed construction rate of ₹1,700 per sq. ft., she claimed exemption of ₹1,61,50,000 under Section 54.
The Assessing Officer found from the Deed of Declaration that the fourteenth floor was divided into four separately identifiable apartments bearing Nos. 1401, 1402, 1403 and 1404. He accordingly took the view that the assessee had acquired four distinct residential units and that the exemption could be allowed only in respect of one unit.
The Assessing Officer also substituted the sale consideration adopted by the assessee and recomputed the capital gain. As a result, an addition of approximately ₹3.05 crore was made. The first appellate authority confirmed the action of the Assessing Officer and restricted the exemption under Section 54 to ₹90,44,750, representing the value attributed to the largest unit.
Issue of limited scrutiny
The assessee’s case had been selected for limited scrutiny under CASS specifically for examination of “deductions/exemptions from capital gain.” However, while completing the assessment, the Assessing Officer described the purpose as examination of the “capital gains tax liability” and proceeded to enhance the sale consideration itself.
The Tribunal noticed the material difference between examining the correctness of an exemption and undertaking a general recomputation of the entire capital gain. The upward revision of the sale consideration was outside the specified scope of limited scrutiny.
Accordingly, unless the Assessing Officer had obtained the requisite approval from the competent authority for conversion of limited scrutiny into complete scrutiny, he could not travel beyond the issue for which the case was originally selected.
The Tribunal, therefore, held that the upward valuation of the sale consideration was beyond the jurisdiction of the Assessing Officer. The orders of the Assessing Officer and the CIT(A), to the extent they expanded the scope of limited scrutiny, were held to be unsustainable in law.
Residential house is not the same as residential unit
On the Section 54 issue, the assessee contended that the entire fourteenth floor was retained as one residential house, although it consisted of four separately marked residential units. According to her, Section 54 refers to “one residential house” and not “one residential unit.”
The Tribunal accepted this distinction. A residential house may contain several rooms, portions, floors or independently usable units, depending upon the requirements of the owner. Merely because different portions have been assigned separate numbers or can be used independently does not necessarily mean that they cease to constitute one residential house.
Reliance was placed on the decision of the Bangalore Tribunal in Bhatkal Ramarao Prakash v. ITO [2019] 102 taxmann.com 145, where a property consisting of two portions bearing different door numbers was treated as a single residential property. The Tribunal in that case had followed the principles laid down in CIT v. Gita Duggal [2013] 357 ITR 153 (Delhi), CIT v. D. Ananda Basappa [2009] 309 ITR 329 (Karnataka) and CIT v. K.G. Rukminiamma [2011] 331 ITR 211 (Karnataka).
These decisions recognise that the physical structuring of a residential house—whether lateral or vertical—cannot by itself determine eligibility for exemption. A person may construct or acquire a house containing independently usable portions for children, relatives, tenants or future requirements. The income-tax authorities cannot prescribe the particular manner in which a residential house must be designed or utilised when the statute contains no such condition.
Following these precedents, the Tribunal held that the assessee was entitled to exemption in respect of the entire amount of ₹1,61,50,000 claimed under Section 54. The restriction imposed by the lower authorities was accordingly deleted, and the assessee’s appeal was allowed.
Author’s comments
This decision is significant on two independent principles.
First, the scope of a limited scrutiny assessment is not elastic. An Assessing Officer cannot convert a narrowly selected enquiry into a complete examination of the return merely by altering the description of the issue in the assessment order. The procedure prescribed for conversion into complete scrutiny, including approval of the competent authority, must be followed.
Secondly, the judgment reiterates that “one residential house” need not always mean one municipal number, one door number or one independently saleable unit. The real test is whether the units, considering their location, physical arrangement, commonality and intended use, together constitute a single residential house.
At the same time, the ruling should not be understood as laying down that every acquisition of multiple flats automatically qualifies as one residential house. The strength of the assessee’s claim would depend upon factors such as whether the units are situated in the same building or on the same floor, whether they are contiguous or capable of integrated use, whether they were acquired under a common arrangement, and whether they were actually intended to be retained as one residence.
Thus, separate unit numbers are relevant evidence, but they are not conclusive. The substance and residential character of the property must prevail over its mere numbering or internal division.
Cases Discussed
- Bhatkal Ramarao Prakash Vs. ITO [2019] 102 taxmann.com 145.
- CIT v. Gita Duggal [2013] 357 ITR 153 (Delhi).
- CIT v. D. Ananda Basappa [2009] 309 ITR 329 (Karnataka).
- CIT v. K.G. Rukminiamma [2011] 331 ITR 211 (Karnataka).
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT BANGALORE
This is an appeal filed by the assessee against the order passed dated 10-12-2024 for the assessment year 2017-18.
2. The interconnected issued raised by the assessee is that the ld. CIT-A erred in confirming the addition made by the AO towards the sale consideration and by reducing the amount of exemption claim by the assessee under section 54 of the Act.
3. The brief facts of the case are that the assessee is an individual who filed her ROI for AY 2017-18 on 02.11.2017. Assessee case was selected for limited scrutiny for verification of deductions/exemptions from capital gain u/s 143(2) vide notice dt. 13.08.2018.
4. The assessee filed its ROI claiming deduction u/s 54 of the Act. During the assessment proceedings, the AO issued notices from time to time in order to verify the Fair market value of consideration adopted for calculating the capital gain and consequently exemption u/s 54 of the Act claimed by assessee. The AO has adopted the fair market of the consideration at Rs. 5,04,40,562.00 against the consideration adopted by the assessee at Rs. 2,70,0000.00.
5. Similarly, the AO recalculated the deduction/ exemption under section 54 of the Act at Rs. 90,44,750.00 against the claim made by the assessee for Rs. 1,61,50000.00 in the return of income.
6. Finally, the AO passed an order u/s 143(3) of the Act dt. 18.11.2019 recomputing the Sales consideration and deduction u/s 54 of the Act by making an addition on account of capital gains amounting to Rs. 3,05,45,812/- to the total income of the assessee.
7. The assessee preferred an appeal to the Ld. CIT(A) who upheld and confirmed the order of AO by passing order u/s 250 of the Act dt. 10.12.2014.
8. Being aggrieved by the order of the ld. CIT-A, the assessee is in appeal before us.
9. The ld. AR before us filed paper book running from pages 1 to 79 and case law compilation comprising of 116 pages and submitted that the case of the assessee was selected for the limited scrutiny i.e. examination of deduction /exemption under section 54 of the Act whereas the AO has exceeded his jurisdiction by disturbing the sale consideration declared by the assessee for calculating the capital gain. According to the ld. AR, the sale consideration shown by the assessee cannot be disputed in the present case on account of limited scrutiny.
9.1 The learned AR furtherer submitted that the assessee has retained the entire floor bearing No. 1401 as his one house comprising of 4 residential units, the value of which was considered for calculating the exemption under section 54 of the Act. According to the Ld. AR, the provision of law requires to hold one house which may certainly comprise of many residential units and therefore the same cannot be restricted to one residential unit.
10. On the other hand, the ld. DR before us submitted that the issue for the purpose of the scrutiny was relating to the exemption under section 54 of the Act which is not possible without verifying the sale consideration declared by the assessee. According to the learned DR, the AO has not exceeded his jurisdiction by taking into consideration the sale value declared by the assessee in the income tax return.
10.1 The learned DR regarding the exemption claimed by the assessee under section 54 of the Act has submitted that the exemption is limited to one residential unit. The Ld. DR vehemently supported the order of the authorities below.
11. We have heard the rival submissions of both the parties and perused the materials on record. The first limited and the core issue to be dealt by us is whether the limited scrutiny could be enlarged to full scrutiny without the prior approval of the Joint Commissioner of Income Tax. It is an undisputed fact that the case of assessee was selected for limited scrutiny under the CASS by issuing notice u/s 143(2) of the Act. The case was identified for limited scrutiny (CASS) for the examination of “deductions/exemptions from capital gain”. However, on perusal of the assessment order passed u/s 143(3) by the AO, it is observed that the AO expanded the scope of scrutiny by conveniently modifying the words “deductions/exemptions from capital gain” to “examine the capital gains tax liability”.
11.1 Further, the Ld. CIT(A), while passing the order u/s 250, upheld the actions of AO without adjudicating upon the specific grounds raised by the assessee relating to the impermissible expansion of limited scrutiny.
11.2 In our considered view, regarding the upward valuation of the sales consideration, we are of the opinion that it was out of the scope of the notice issued to assessee without prior approval of the competent authority for conversion of limited scrutiny into complete scrutiny, Therefore, the order passed by the Ld. AO & Ld. CIT(A) cannot be sustained, it is bad in law and is liable to be quashed to this extent i.e. expanding the scope of the limited scrutiny.
11.3 Regarding the second issue for our consideration relates to exemption u/s 54 of the Act, we note that the provisions of section 54 of the Act provides exemption from capital gains to an Assessee/HUF from transfer of residential house and purchases or constructs one residential house in India (As per the amended definition) within prescribed time period. The assessee has claimed exemption u/s 54 for amounting to Rs. 1,61,50,000 whereas the Ld. CIT(A) restricted the exemption amount to Rs. 90,44,750/- only. From the preceding discussion, the key issue arises for our consideration is regarding restriction of exemption u/s 54 of the Act by the Ld. CIT(A). The assessee transferred a piece of land to a builder pursuant to a development agreement between them wherein it was agreed that in consideration of transfer of land, the assessee will get 3 flats viz. Flat No. 1301 measuring 2750 Sq ft, Flat No. 1302 measuring 2250 sq.ft. and Flat No. 1401 along with basement car parking measuring 9500 square feet. The Assessee claimed an amount of Rs. 1,61,50,000 as exemption u/s 54 calculated as follows:
Rs. 1,700 per sq ft X 9500 sq. ft. for one flat bearing No. 1401 that would be retained by the assessee.
11.4 The AO contended the assessee has misleadingly quoted that she has invested in flat No.1401 as per computation filed and claimed the cost of such apartment measuring 9500 sq.ft. amounting to Rs. 1,61,50,000/- @ 1700 per sft and claimed deduction u/s 54 of the Act. After verification, it was found that that there were four distinct flats allotted in the same floor. As per the Deed of Declaration (DOD), the apartments were distinctly marked as 1401, 1402, 1403 and 1404 in 14th floor. Consequently, AO restricted the deduction to one unit only i.e. Rs.40,37,500/-being cost of one flat in fourteenth floor on an average cost. However, by considering the value adapted for the purposes of working out consideration, the value of one flat measuring 2750 sft (Flat No.1401 – being the biggest unit among four units) works out to Rs. 90,44,750/- @ Rs. 3289 per sq.ft. as adapted for the purposes of sales consideration.
11.5 However, the Assessee stated that this is one residential house only and should not be treated as more than one unit. Section 54 of the Act uses the word one residential house and not one residential unit. A house can have several units constructed as per the needs and requirement of a person. House should not be equated with a unit.
11.6 Assessee relied on various judgments of Hon’ble Courts and tribunal where it has been held one house can have multiple units which are eligible for deduction u/s 54 of the Act. The jurisdictional ITAT in the case of Bhatkal Ramarao Prakash Vs. ITO reported in 102 taxmann.com 145 wherein it was held as under:
20. As far as the case of the AO that assessee has purchased two properties under Sale Deed dated 28.06.2014 is concerned, we have perused the schedule of the property that was purchased. Actually this was a single piece of property viz., Site No.1 owned by Smt. Janaki Iyengar, Smt. Janaki Iyengar constructed a residential house in ground floor in the year 1937 and the first floor in the year 1962-63 with the ground floor of the property re-numbered as No.37 and the first floor as Door No.37/1 of 1st Main Road, N.R.Colony. Janaki Iyengar executed a will on 28.5.1975 wherein she bequeathed to her sister Dr.M.Vaidhei with Door No.37 which is Schedule-A of the Sale Deed under which the Assessee purchased this property and the first floor bearing door No.37/1, described in Schedule B in the sale deed under which Assessee purchased the new asset to her nephew P.Ramanuja Chari. Janaki Iyengar died on 6.6.1975 and the legatees under the will sold their respective shares in one property to the Assessee. The entire property constitutes single house but was bifurcated with two door numbers for the ground and first floor with common entrance in the ground floor only to earmark the share of each beneficiaries. The property otherwise constitutes a single property, though they have two different door nos. In such circumstances, the assessee has purchased only one property and not two properties. In this regard, the decisions cited by the ld. Counsel for the assessee before us supports the plea of the assessee viz., the decision of the Delhi High Court in the case of CIT v. Gita Duggal [2013] 30 taxmann.com 230/214 Taxman 51/357 ITR 153. In the aforesaid decision, the facts were that the assessee entered into a development agreement pursuant to which the developer demolished the property and constructed a new building comprising of three floors. In consideration of granting the development rights, the assessee received Rs. 4 crores and two floors of the new building. The AO held that in computing capital gains, the cost of construction of Rs. 3.43 crores incurred by the developer on the development of the property had to be added to the sum of Rs. 4 crores received by the assessee. The assessee claimed that as the said capital gains was invested in the said two floors, she was eligible for exemption u/s. 54. The AO rejected the claim on the basis that the units on the said floors were independent & self-contained and not “a residential house” and granted exemption for only one unit. The CIT (A) and Tribunal upheld the assessee’s claim by relying on CIT v. D. Ananda Basappa [2009] 180 Taxman 4/309 ITR 329 (Kar.) and CIT v. Smt. K.G. Rukminiamma [2010] 8 taxmann.com 121/[2011] 196 Taxman 87/331 ITR 211 (Kar.). On appeal by the department, the High Court dismissed the appeal of the revenue. The Hon’ble Court observed that as held in D. Ananda Basappa (SLP dismissed) & K G Rukminiamma, the Revenue’s contention that the phrase “a” residential house would mean “one” residential house is not correct. The expression “a” residential house should be understood in a sense that building should be of residential in nature and “a” should not be understood to indicate a singular number. Also, section 54/54F uses the expression “a residential house” and not “a residential unit”. Section 54/54F requires the assessee to acquire a “residential house” and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans, requirements and compulsions. A person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. The physical structuring of the new residential house, whether it is lateral or vertical, cannot come in the way of considering the building as a residential house. The fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the deduction u/s. 54/54F. It is neither expressly nor by necessary implication prohibited.
21. We are therefore of the view that the Assessee was entitled to claim deduction u/s. 54F of the Act in respect of investment in the property bearing Door No.37 & 37/1, 1st Main Road, N.R.Colony, Bangalore.
11.7 Likewise, the Hon’ble Karnataka HC in case of CIT Vs. D. Ananda Basappa reported in 309 ITR 329 wherein it was held that assessee should not be denied benefit of Sec 54 of the Act where assessee has purchased two apartments situated side by side.
11.8 In view of the aforesaid facts and respectfully following the judicial precedents relied upon, we are of the considered opinion that the assessee is entitled to the exemption claimed under section 54 of the Act. Accordingly, the restriction imposed by the Ld. CIT(A) is not sustainable. Therefore, the appeal of the assessee on this issue is allowed.
12. In the result, the appeal of the assessee is allowed.
Order pronounced in court on 18th day of December, 2025.
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