The Income Tax Appellate Tribunal (ITAT), Mumbai, has upheld capital gains exemptions totalling ₹28.45 crore under Sections 54 and 54F of the Income-tax Act, 1961, after accepting that two adjoining flats were amalgamated into a single residential house through a registered supplementary agreement.
The tribunal rejected the Income Tax Department’s objections concerning the original ownership of one flat in the names of the taxpayer’s wife and son, the admission of additional evidence, and the restriction on exemption for investment in two residential houses.
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The Mumbai “A” Bench, comprising Judicial Member Pawan Singh and Accountant Member Girish Agrawal, dismissed the Revenue’s appeal in Deputy Commissioner of Income Tax-6(1)(2), Mumbai v. Amit Mahendrakumar Mehta. The order, pronounced on August 17, 2026, concerns assessment year 2021–22.
The taxpayer had sold a residential flat on the ninth floor of Casa Grande at Malabar Hill, Mumbai, along with two ground-floor garages, for ₹43 crore on December 17, 2020.
The property had originally been purchased in June 2000 for ₹5.65 crore. After taking the cost of acquisition used in his capital gains computation, the taxpayer declared long-term capital gains of approximately ₹26.59 crore.
He also claimed an exemption of ₹1.86 crore under Section 54F in connection with long-term capital gains arising from the sale of equity shares.
The dispute centred on investments in two adjoining apartments, numbered 3101 and 3102, in a residential development at Lower Parel, Worli. Their respective purchase considerations were ₹17.84 crore and ₹22.56 crore, taking the combined consideration to ₹40.40 crore.
The Assessing Officer accepted the taxpayer’s eligibility for exemption in respect of Flat No. 3102, purchased for approximately ₹22.56 crore, but declined to recognise the investment in the adjoining flat for the disputed exemption claims.
The officer consequently brought approximately ₹4.03 crore of the capital gains from the Malabar Hill property to tax, treating that amount as the portion not covered by the eligible investment.
The officer also rejected the ₹1.86 crore exemption claimed under Section 54F because Flat No. 3101 had originally been purchased in the names of the taxpayer’s wife, Cherry Mehta, and son, Harsh Amit Mehta.
The assessment therefore proceeded on the footing that there were two separate residential properties and that the taxpayer could claim the relevant benefit only for the flat purchased in his name.
Before the Commissioner of Income Tax (Appeals), the taxpayer relied on a registered supplementary agreement dated March 25, 2022, under which the two adjoining apartments were amalgamated into a single residential flat.
The agreement recorded a 70% share for the taxpayer and a 30% share for his wife in the composite property. The taxpayer explained that his son’s name had been included in the original purchase documentation for convenience and that the son had made no investment.
The taxpayer’s representatives subsequently submitted before the tribunal that the combined residence had one entrance and one kitchen. Following amalgamation, the property retained Flat No. 3102, while Flat No. 3101 lost its separate identity.
The tribunal recorded that the supplementary agreement described the composite flat as having a carpet area of 6,769 square feet and a purchase consideration of ₹40.40 crore. It also noted that additional stamp duty had been paid on an increase in area arising from the amalgamation.
The appellate authority examined the payment trail rather than relying solely on the names appearing in the original agreements.
The entire investment in Flat No. 3102 had been made by the taxpayer. For Flat No. 3101, he transferred ₹5.44 crore to his wife’s bank account in two instalments of ₹2.72 crore each, following which payments were made to the builder from her account.
He also paid ₹1.15 crore directly from his own bank account towards Flat No. 3101. The order accordingly recorded his contribution towards that flat at ₹6.59 crore.
The Commissioner (Appeals) found that the taxpayer had invested ₹28.45 crore in the composite residence by the date of filing the return for the relevant assessment year. It accepted the claim of ₹26.59 crore under Section 54 and ₹1.86 crore under Section 54F.
In treating the adjoining apartments as one residential unit, the appellate authority relied on tribunal decisions in Nakul Agarwal v. ACIT and Anita Mahindrakumar Oberai v. ITO.
The department argued that the original purchase agreement and registration for Flat No. 3101 were in the names of the taxpayer’s wife and son. According to the Department, a subsequent supplementary agreement could not retrospectively shift ownership merely to secure a tax benefit.
It also contended that the properties remained two legally distinct residential units. The Department invoked the provision permitting investment in two residential houses under Section 54 where the capital gain does not exceed ₹2 crore, arguing that the taxpayer’s gains exceeded that threshold.
The Revenue further maintained that the precedents concerning amalgamated units were distinguishable because the original title and payments in this case were divided between the taxpayer and his family members.
Alternatively, the Department sought a fresh examination of the evidence by the Assessing Officer.
The tribunal upheld the appellate authority’s findings after independently examining the facts.
It accepted that the registered supplementary agreement converted the adjacent flats into a composite residence, with Flat No. 3102 remaining in existence and Flat No. 3101 losing its separate identity.
The bench also accepted the evidence showing that the taxpayer had funded the entire purchase of Flat No. 3102 and had contributed towards Flat No. 3101, including through transfers to his wife’s account.
The tribunal noted that the Assessing Officer had not carried out verification to displace the facts concerning amalgamation, the composite flat’s area, and payment of additional stamp duty.
On this factual basis, it found no infirmity in the Commissioner (Appeals)’s decision allowing the exemptions. The relief thus rested on the acceptance of one composite residential house, rather than an allowance for two independently existing houses despite capital gains exceeding ₹2 crore.
The department separately challenged the admission of documents at the appellate stage under Rule 46A of the Income-tax Rules, 1962. It argued that the taxpayer had received sufficient opportunities during assessment to furnish the required material.
The taxpayer responded that the supplementary agreement had already been placed before the Assessing Officer and that the appellate authority had, in any event, followed the required procedure by obtaining a remand report.
The tribunal found that the Commissioner (Appeals) had given the Assessing Officer an opportunity to examine the material and submit that report.
It also endorsed the appellate authority’s reliance on Section 250(4) and judicial precedents concerning evidence necessary to examine a taxpayer’s claim. These included the Bombay High Court’s decision in Smt. Prabhavati Shah and the Delhi High Court’s decision in CIT v. Virgin Securities and Credits Pvt. Ltd.
The tribunal therefore found no illegality in the consideration of the disputed evidence and dismissed the Revenue’s procedural ground.
Dismissing the appeal in full, the tribunal upheld the exemptions of ₹26.59 crore under Section 54 and ₹1.86 crore under Section 54F.
The decision highlights the relevance of registered amalgamation documents, the actual identity of the resulting residential unit, and evidence tracing the taxpayer’s investment when adjoining flats are claimed as a single house for capital gains exemption.
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