High Court allows capital gain exemption u/s 54(1) on purchase of seven houses

High Court allows capital gain exemption u/s 54(1) on purchase of seven row houses before the amendment brought w.e.f. 01.04.2015.

In a recent judgment, Hon’ble Bombay High Court has held that the words ‘a residential house’ in unamended Section 54(1) of the Income Tax Act would not mean a single residential house and the contemplated even multiple residential houses before the amendment w.e.f. 01.04.2015.

ABCAUS Case Law Citation:
4672 (2025) (07) abcaus.in HC

Important Case Laws relied upon by Parties:
Mavilayi Service Co-operative Bank Ltd. and Ors. Vs. CIT & Anr.
K. C. Kaushik Vs. P. B. Rane
Arun K. Thiagarajan vs. CIT(A)
CIT Vs. Khoobchand M. Makhija
CIT Vs. D. Ananda Basappa
CIT Vs. Geeta Duggal

In the instant case, the only issue was whether under Section 54(1) of the Income Tax Act, 1961 (the Act) the assessee can claim exemption against purchase of multiple residential houses (more than one) against the capital gains earned from sale of a single residential house.

The appellant had sold on residential flat and entered into joint venture agreement with a builder for construction of residential house in their project and invested the entire sale proceeds of the said flat for allotment of 7 row houses in the project.

For the relevant Assessment Year the assessee showed Nil income stating that he had invested the entire capital gain arising out of sale of his flat for acquisition/construction of the 7 row houses in a joint venture with the Builder company and that therefore he was entitled for exemption under Section 54 of the Act against the entire capital gain on sale of his flat.

However, the Assessing Officer (AO) disallowed the deduction under Section 54 of the Act. The ITAT partly allowed the appeal preferred by the assessee directing the Assessing Officer to consider investment made in acquiring/construction of only one row house as qualifying for exemption under Section 54 of the Act while computing the long term capital gain.

Being aggrieved the Assessee took the matter to the Hon’ble High Court.

It was contended that he was entitled to exemption against the entire capital gain as the unamended Section 54(1) of the Act used the expression ‘a residential flat’ as against use of the expression ‘one residential house in India’ in the amended Section 54(1) of the Act.

It was said that the words ‘a residential house’ are merely descriptive of nature of the asset and not restrictive of the number of assets sold/purchased. That since the Section 54 (1) covers sale of “lands and building” (i.e. in plural), there is no reason why purchase or construction of residential house should not be interpreted to be in the plural and be restricted to only ‘one’ residential house as canvassed by the Revenue.

It was further contended that the phrase ‘a residential house’ is only meant to qualify the nature of asset purchased/sold, viz. what is sold or purchased cannot be a commercial asset/premises. That amendment made by Finance (No. 2) Act, 2014 makes it explicitly clear that the restriction of exemption of capital gain against ‘one residential house’ is made applicable prospectively, i.e. with effect from 01st April 2015.

The Hon’ble High Court observed that the expression ‘a residential house’ was replaced by the expression ‘one residential house’ by way of 2014 amendment. The Court opined that the amendment brought in by Finance (No.2) Act 2014 makes the position clear that after the amendment, the capital gains can be adjusted against purchase of only ‘one’ residential house. The word ‘a’ is consciously replaced by the legislature by the word ‘one’ by way of amendment making the intention clear that after the amendment, it is impermissible to adjust the capital gains arising out of one house towards purchase of more than one houses. If the restriction of adjustment of capital gains against only one house was already there in the unamended Section 54(1), there was no necessity of amendment by specifically using the word ‘one’.

The Hon’ble High Court noted that the issue involved in the present case was squarely covered by the judgment of the Karnataka High Court wherein assessee had claimed exemption with respect of two properties. The High Court held that the expression ‘a residential house’ therefore, includes building or lands appurtenant thereto. It cannot be construed as one residential house.

Further, the Hon’ble High Court observed that the Madras High Court has held that the word ‘a’ used in Section 54, prior to the amendment and substitution by the word ‘one’ with effect from 1st April 2015, itself means that there was provision in the unamended Section 54 to include plural units of residential houses, which is a reason why the amendment was necessary. The Madras High Court had also held that even if the multiple houses are purchased bearing different addresses, the same did not make any difference, so long as the same assessee has purchased the same out of sale consideration of the sold house.

The Hon’ble High Court further observed that the Madras High Court also took note of the fact that the Special Leave Petition preferred by the Revenue against the judgment of the Karnataka HC was dismissed by the Supreme Court. The Delhi High Court in has also adopted the same view. Thus, the issue involved was squarely covered by several judgments as discussed above. 

Accordingly, the Hon’ble High Court held that the position appeared to be fairly well settled that use of the words ‘a residential house’ in unamended Section 54 (1) of the Act would not mean a single residential house and the contemplated even multiple residential houses. The emphasis in the unamended Section 54 (1) of the Act is on residential nature of the property and the objective was never to restrict the number of residential houses purchased against capital gains. The words ‘a residential house’ were merely descriptive nature of the assets sold/purchased and not restrictive of the number of assets sold or purchased. The position got modified only by the Legislature only w.e.f. 01 April 2015.

As a result, the order passed by the Assessing Officer  and the ITAT, to  the  extent  of  deprivation of benefit of exemption under Section 54(1) of the Act was quashed and set aside and it was held that assessee was held entitled to the benefit of exemption under provisions of Section 54(1) of the Act against the entire capital gains on account of utilization thereof towards purchase of seven row houses. 

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