The Income Tax Appellate Tribunal (ITAT), Chandigarh, has held that a commercial property cannot be counted as a residential house while determining eligibility for capital gains exemption under Section 54F of the Income-tax Act, 1961. 

The bench of Laliet Kumar (Judicial Member) and Vijay Varma (Accountant Member) has observed that the urban location of agricultural land, by itself, is insufficient to deny deduction under Section 54B when its agricultural character is established through verification.

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The tribunal deleted the ₹2,63,71,500 disallowance under Section 54F, subject to satisfaction of the remaining statutory conditions. It also allowed relief under Section 54B to the extent of eligible agricultural land investments established by documentary evidence, including purchases of ₹80 lakh and ₹45 lakh.

The taxpayer, an individual earning income from house property, business or profession, capital gains and other sources, sold ancestral agricultural land for ₹8 crore through a sale deed dated September 18, 2017.

After deducting the indexed cost of acquisition, he computed capital gains of ₹7,72,80,000. Against these gains, he claimed exemption of ₹2,63,71,500 under Section 54F for investment in a residential property and deduction under Section 54B for investment in agricultural land.

The return was selected for limited scrutiny concerning the capital gains deductions. During assessment, the Assessing Officer sought documents supporting both claims.

Although the taxpayer furnished certain documents, the officer considered the evidence insufficient and disallowed ₹2,63,71,500 under Section 54F and ₹3,72,56,500 under Section 54B. The aggregate addition was ₹6,36,28,000, resulting in assessed income of ₹6,69,79,260.

Before the Commissioner of Income-tax (Appeals), the taxpayer maintained that the relevant documents had been furnished and that the assessment had been completed without properly considering them.

The documents submitted during the appellate proceedings included the sale deed of the original agricultural land, purchase deeds of replacement agricultural properties, records concerning the residential property and a bank statement relating to the Capital Gains Accounts Scheme.

The Commissioner (Appeals) allowed the Section 54B claim to the extent of ₹2.20 crore after finding that the agricultural land investment had been made within the prescribed period.

The appellate authority also accepted a deposit of ₹1,36,52,000 in the Capital Gains Accounts Scheme as eligible for exemption for the year under consideration, subject to verification of subsequent utilisation in accordance with the provisions referred to in its order.

However, the ₹2,63,71,500 claim under Section 54F remained disallowed. The Commissioner (Appeals) proceeded on the basis that the taxpayer owned more than one residential house on the date of transfer, including a property at SCO-7, Dhakoli, Zirakpur.

Before the tribunal, the taxpayer argued that SCO-7 was a shop-cum-office and therefore commercial in nature. It could not be counted as a residential house when applying the restriction under Section 54F.

He also submitted that two agricultural land purchase deeds—dated July 2, 2018, for ₹80 lakh and August 1, 2018, for ₹45 lakh—had not received due consideration despite being furnished in support of the Section 54B claim.

Through an earlier order dated August 13, 2026, the tribunal directed the Assessing Officer to examine the documents and submit a comprehensive report after providing an opportunity to the taxpayer.

Following this verification, the Assessing Officer confirmed that SCO-7 was commercial property. The officer also confirmed that the other two properties were agricultural properties purchased by the taxpayer, although they were situated in an urban area.

The tribunal found that the denial of Section 54F relief was materially based on treating SCO-7 as a residential property. Once the Assessing Officer confirmed its commercial nature, the factual basis for denying the exemption ceased to exist.

The bench held that a property established to be commercial could not be taken into account as a residential house for determining whether the taxpayer owned more than one residential house on the date of transfer of the original asset.

Accordingly, it deleted the ₹2,63,71,500 disallowance and allowed the Section 54F claim, subject to satisfaction of any remaining statutory conditions.

On the agricultural land investments, the Revenue pointed out that two properties were situated in an urban area. However, the verification report confirmed their agricultural character.

The tribunal held that urban location alone could not justify denial of Section 54B relief in the absence of material showing that the properties were not agricultural in character.

Since the purchase documents had been examined and both the agricultural nature of the properties and their acquisition by the taxpayer had been confirmed, the tribunal found that the factual basis of the claim stood established.

It allowed deduction to the extent of eligible investment supported by the purchase deeds and other material on record, expressly including the ₹80 lakh and ₹45 lakh purchases. The disallowance sustained by the Commissioner (Appeals) was deleted to that extent.

The tribunal treated the grounds concerning interest under Sections 234A, 234B and 234C as consequential. Interest would therefore be modified according to the final income computation giving effect to its order.

The challenge to initiation of penalty proceedings under Section 270A was considered premature and did not require independent adjudication at that stage. The penalty issue was left open in accordance with law.

Allowing the appeal, the tribunal underscored the need to establish the actual character of a property before denying capital gains relief. Its Section 54B ruling remained confined to eligible investments proved by documentary evidence, while the Section 54F relief remained subject to the other statutory requirements.

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