The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has held that an assessee who earns long-term capital gains from the sale of multiple residential houses can claim exemption under Section 54 for investment in multiple residential houses, provided the number of new residential properties does not exceed the number of residential properties sold. 

The bench of Keshav Dubey (Judicial Member) and Waseem Ahmed (Accountant Member) allowed the appeal filed by the assessee for Assessment Year 2020-21 and set aside the orders of the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals), which had restricted the exemption to only one residential house. 

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The assessee had entered into Joint Development Agreements (JDAs) for two parcels of land in Bengaluru, under which he received residential flats in completed apartment projects. During the relevant assessment year, he sold 17 residential flats, generating aggregate long-term capital gains of ₹11.80 crore. 

The entire capital gains were invested in Construction of one residential property, Purchase of four residential properties, aggregating to ₹11.80 crore, and exemption under Section 54 was claimed accordingly. 

The Assessing Officer accepted exemption only in respect of the first residential property purchased for ₹5.91 crore and disallowed the balance exemption of ₹5.88 crore on the ground that, after the amendment made by the Finance (No.2) Act, 2014, Section 54 permits exemption only for investment in one residential house in India. The CIT(A) affirmed this view. 

Before the Tribunal, the assessee contended that every sale of a residential house constitutes an independent source of capital gains. Section 54 grants exemption in respect of each capital asset transferred. Since 17 residential houses were sold, exemption should be available for investment in up to 17 residential houses. The amendment replacing the words “a residential house” with “one residential house in India” merely restricts the exemption available against the capital gain arising from each individual residential house, and does not aggregate capital gains from multiple transfers into a single exemption. The Revenue itself had accepted similar claims in the assessee’s assessments for AYs 2018-19 and 2019-20. 

The Tribunal undertook an extensive analysis of Sections 45, 48 and 54 of the Income Tax Act.

It observed that capital gains are computed asset-wise, meaning every transfer of a capital asset constitutes a separate source of income. Consequently, exemption provisions under Section 54 must also be applied separately to each residential house transferred rather than clubbing all capital gains into a single computation. 

The Tribunal clarified that the 2014 amendment introducing the expression “one residential house in India” was intended only to prevent an assessee from claiming exemption arising from the sale of one residential house by investing in multiple houses.

However, the amendment does not state that where multiple residential houses are sold, the assessee is entitled to exemption for investment in only one residential property. Had Parliament intended such a restriction, it would have expressly incorporated language similar to that found in Sections 54EC, 54EE or Section 23 of the Act, where explicit numerical limits are prescribed. 

The Tribunal also noted that for Assessment Years 2018-19 and 2019-20, the Revenue had accepted the assessee’s claim of exemption under Section 54 for investments in multiple residential properties after scrutiny assessments.

Accordingly, the Bench observed that a contrary approach for the present assessment year would violate the principle of consistency. 

Allowing the appeal, the Tribunal held that Section 54 exemption must be applied separately in respect of each residential house transferred. An assessee selling multiple residential houses can claim exemption by investing in an equal or lesser number of residential houses. Since the assessee sold 17 flats but invested only in five residential properties, the statutory conditions stood fully satisfied. The restriction imposed by the Assessing Officer limiting the exemption to only one residential house was contrary to law. 

The ITAT directed the Revenue to allow the assessee’s full claim for exemption under Section 54 and deleted the addition of ₹5.88 crore made towards long-term capital gains.

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