Safiya Malik

The High Court of Bombay Division Bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne has held that the expression ‘a residential house’ under the unamended Section 54(1) of the Income Tax Act, 1961, includes more than one residential unit. In a judgment delivered on July 22, 2025, the Court quashed the orders passed by the Assessing Officer and the Income Tax Appellate Tribunal (ITAT) that had restricted the exemption to only one row house. It directed that the assessee is entitled to claim the full benefit of exemption under Section 54(1) against the capital gains arising out of the sale of a flat in Mumbai, as the entire amount was invested in seven row houses in Pune prior to the amendment of the said provision in 2014.

The Court noted that the restrictive term "one residential house" was introduced only by the Finance (No. 2) Act, 2014, with effect from April 1, 2015. As such, the assessee's claim was governed by the unamended law, which did not impose any numerical restriction on the number of residential units eligible for exemption. Accordingly, the Court answered the substantial question of law in favour of the assessee.

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The appellant in this case had inherited a residential flat located at Prabhat Building, 28 B Road, Marine Drive, Mumbai, from his mother, who passed away in 1990. On September 8, 1993, while the appellant was still a minor, his guardian entered into an agreement for the sale of the Mumbai flat for a total consideration of Rs. 1.45 crore. An amount of Rs. 45 lakh was paid at the time of the agreement, and the balance Rs. 1 crore was received on April 17, 1994, when possession was handed over to the purchasers.

Subsequently, on June 20, 1995, the appellant entered into a joint venture agreement with Samant Estate Private Limited for construction of residential units in a project named Yashodanandan at Viman Nagar, Pune. Entire sale proceeds from the Mumbai flat were invested in this project. Initially, five agreements were executed for allotment of five row houses on July 22, 1995. These were later cancelled, and a fresh agreement was executed on July 28, 1995, for seven row houses.

The appellant did not file returns for AY 1994-95 or 1995-96. Following a search under Section 132(1) of the Income Tax Act on June 19, 1996, notice under Section 158BC was issued. A block return was filed on April 22, 1997, declaring undisclosed income of Rs. 13,41,350, which was revised on July 21, 1997, to Rs. 51,20,990. The appellant disclosed nil income for AY 1994-95 and 1995-96, claiming full exemption under Section 54 on account of reinvestment of Rs. 1,08,30,625 into the new properties.

The Deputy Commissioner of Income Tax, Special Range-3, Pune, rejected the Section 54 claim and disallowed the entire exemption. The ITAT, Pune Bench, in its order dated March 7, 2003, allowed exemption under Section 54 only to the extent of investment in one row house (B-16) worth Rs. 21,78,000, denying the rest of the claim.

Aggrieved, the appellant preferred the present appeal under Section 260A of the Income Tax Act. The question of law admitted by the High Court on October 29, 2004, was whether the appellant was entitled to full deduction under Section 54 of the Act for investment of capital gains into multiple houses.

During arguments, counsel for the appellant contended that the use of the phrase "a residential house" in the unamended Section 54 was descriptive and not restrictive. It was argued that the phrase should not be interpreted to mean only one house and that Section 13 of the General Clauses Act, 1897 permits singular to include plural. Counsel submitted that the seven row houses were part of a single project and interconnected, with six of them having a common entrance.

The Revenue argued that the exemption should be limited to one house based on the phraseology used and cited the decision in K.C. Kaushik v. P.B. Rane and the judgement of a Special Bench in ITO v. Sushila M. Jhaveri. It was also contended that each of the seven units had separate kitchens and thus could not be considered a single residential unit.

The ITAT had accepted that the houses were contiguous but still treated them as separate units, relying on past decisions and interpreting the unamended provision narrowly.

The Division Bench recorded that the core issue for consideration was: "whether sale proceeds of one residential house, used for purchase of multiple residential houses, would qualify for exemption under Section 54(1) of the Act?"

The Court noted that the relevant assessment year was 1995-96 and hence, "provisions of Section 54(1) of the Act, prior to its amendment by Finance (No. 2) Act, 2014, are relevant." Quoting the unamended text, the Court stated that the phrase "a residential house" was present before the substitution of the term "one residential house in India" through the 2014 amendment.

The Bench reasoned that the amendment itself indicated the previous provision did not limit the number of 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’."

Rejecting reliance on K.C. Kaushik, the Court stated: "This Court was not called upon to consider correctness of decision of the Commissioner in holding that the Assessee was entitled to set off the cost of acquisition of the second residential house purchased against the capital gains arising out of the sale of the original residential property."

The Court observed that in contrast, the Karnataka High Court in Arun K. Thiagarajan v. CIT (Appeals) had interpreted unamended Section 54 to permit exemption for multiple houses. Referring to that case, it recorded: "The expression ‘a residential house’ therefore, includes building or lands appurtenant thereto. It cannot be construed as one residential house."

Further citing Tilokchand & Sons v. ITO, the Court quoted: "If the word ‘a’ as employed under Section 54 prior to its amendment... could not include plural units of residential houses, there was no need to amend the said provisions..."

The judgment stated "The position appears 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."

Addressing the Revenue’s reliance on the Special Bench judgement in Sushila M. Jhaveri, the Court stated: "which does not bind this Court, and therefore, it is not necessary to discuss the ratio of the said judgment."

It concluded this segment by holding: "We are in respectful agreement with the view expressed [in Karnataka and Madras High Court judgements] that the expression ‘a residential house’ in unamended Section 54(1) of the Act includes more than one residential house."

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The Court allowed the appeal and quashed the order of the ITAT dated March 7, 2003, to the extent it denied full exemption. It held:"In view of the foregoing analysis, the Appeal is allowed. The substantial question of law formulated by this Court is answered in favour of the Assessee and against the Revenue."

The Bench directed: "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 is hereby quashed and set aside."

Further, it held: "The Assessee is held entitled to the benefit of exemption under provisions of Section 54(1) of the Act against the entire capital gains of Rs.1,08,30,625/- arising out of sale of his flat in Mumbai, on account of utilization thereof towards purchase of seven row houses in Pune."

Advocates Representing the Parties:

For the Appellants: Mr. Nishant Thakkar with Ms. Jasmin Amalsadwala and Mr. Bhavesh Bhatia, Advocates, i/b Lumiere Law Partners

For the Respondents: Mr. Akhileshwar Sharma, Advocate

Case Title: Krishnagopal B. Nangpal v. Dy. Commissioner of Income Tax, Special Range – 3, Pune

Neutral Citation: 2025: BHC-OS:11546-DB

Case Number: Income Tax Appeal No. 569 of 2003

Bench: Chief Justice Alok Aradhe and Justice Sandeep V. Marne