The Income Tax Appellate Tribunal has ruled that two adjacent or vertically connected flats can be treated as a single residential unit for tax exemption under Section 54F. This decision helps taxpayers who combine flats for personal use, provided they can prove the units function as one home. Tax authorities will focus on physical connectivity rather than just property deeds.
Taxpayers who buy two smaller, adjacent flats to merge into a single, larger home often face challenges when claiming capital gains tax exemptions. In the past, tax authorities frequently rejected claims under Section 54F of the Income Tax Act because these flats had separate sale deeds or distinct municipal registration numbers. However, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has now clarified that having multiple deeds should not automatically disqualify a taxpayer, provided the flats function as one single residential house.
The ruling focuses on the functional reality of the property rather than its administrative records. The tribunal noted that the tax department should not deny the exemption based on technicalities, such as a lack of formal amalgamation in government records. The primary test for eligibility is whether the units are physically linked and operate as a unified family residence. If the units are used as a single dwelling, they should be treated as one house for the purpose of the law.
To benefit from this ruling, the property must display clear signs of a single, integrated household. Tax authorities will look for indicators such as a common entrance, a shared kitchen, or an internal passage that connects the two areas. If the owner uses the flats as separate living units, or if they lack internal connectivity, the exemption will likely not apply. The ITAT decision emphasizes that physical verification remains the final and most important test for eligibility.
This ruling provides clarity for individuals using capital gains to purchase a larger home, but it also increases the need for proper documentation. Taxpayers claiming this exemption should be prepared to provide evidence that their flats are truly integrated. This could include an architect’s certificate, a letter from the housing society confirming that the flats are being used as a single unit, and photographs of the internal layout. Maintaining these documents is essential because tax officers may physically inspect the property before approving the tax claim. Investors and taxpayers should remain cautious, as the exemption depends on proving that the flats are not being maintained as two distinct assets.