Income Tax: Bombay HC allows Exemption under Section 54 Allowed for Multiple Houses Purchased Before 2015

The assessee inherited a flat from his late mother and sold it in 1993 for Rs. 1.45 crore. The entire sale consideration was invested in a joint venture with a developer for the construction of seven row houses. The assessee claimed full exemption of capital gains under Section 54 of the Income Tax Act.

The Assessing Officer denied the exemption except for one row house. The decision of the AO was upheld by the ITAT, relying on a Special Bench decision in Sushila Jhaveri. The assessee challenged this before the High Court, arguing that the unamended Section 54(1) used the phrase “a residential house,” which should be read to include plural units, and that the 2014 amendment restricting relief to “one residential house” applied only prospectively.

Issue Raised: Whether the 2014 amendment’s definition of “a residential house” in the unamended Section 54(1) allowed the exemption of capital gains for the purchase of multiple homes.

Court’s Ruling: The High Court ruled in favour of the assessee, holding that the words “a residential house” in the unamended Section 54(1) included plural residential units, and therefore the assessee was entitled to exemption for the entire capital gain invested in seven row houses.

The Court held that the 2014 amendment restricting exemption to “one residential house in India” was prospective in nature and could not apply to the relevant assessment year. Relying on liberal interpretations given in Arun K. Thiagarajan, Tilokchand & Sons, and Geeta Duggal, it observed that beneficial provisions like Section 54 must be construed in favor of the taxpayer. It distinguished contrary rulings such as K.C. Kaushik and the ITAT Special Bench decision in Sushila Jhaveri, finding them inapplicable in the present context. So, the court allowed the full exemption filed by the assessee, and quashed the orders passed by ITAT.

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