In a significant ruling that could influence how capital gains tax exemptions are interpreted, the Delhi bench of the Income Tax Appellate Tribunal (ITAT) has held that multiple adjacent residential units can be treated as a single “residential house” for claiming exemption under Section 54 of the Income-tax Act.
The decision came in the case of Saroj Rani vs ITO (ITA No. 5472/DEL/2024) and deals with a long-running debate over whether investing in more than one apartment can still qualify for the capital gains exemption meant for investment in “one residential house”.
The background: Sale of property and reinvestment
The dispute arose after taxpayer Saroj Rani sold a residential property in Punjabi Bagh, Delhi for about Rs 2.70 crore and claimed exemption under Section 54 by reinvesting the proceeds into another residential property.
Instead of buying a single apartment, the taxpayer invested about Rs 2.55 crore in seven residential units located on the same floor of a housing complex. The units were numbered 1001 to 1007 and were adjacent to each other on the same floor.
Based on this investment, the taxpayer claimed a Section 54 deduction of Rs 2.22 crore on the capital gains.
Tax department rejects bulk of exemption
However, the tax department disagreed with the claim. The Assessing Officer (AO) took the view that Section 54 allows exemption only if capital gains are invested in “one residential house”. Since the taxpayer had bought seven units, the officer treated them as separate houses.
As a result, the AO allowed deduction only for the cost of one flat (Rs 36.54 lakh) and disallowed the remaining Rs 1.86 crore, adding it back to the taxpayer’s income.
The first appellate authority, CIT(A), also upheld the tax department’s interpretation.
ITAT overturns tax department’s view
When the matter reached the ITAT, the tribunal took a different view.
The bench noted that the seven units were located next to each other on the same floor with no outsider flats in between and could function as a single residential space. Based on this, the tribunal held that the investment could be treated as one residential house for the purpose of Section 54 exemption.
The tribunal also relied on earlier judicial precedents, including decisions of the Delhi High Court, which have interpreted the term “residential house” broadly when multiple units together function as a single residence.
Accordingly, the ITAT set aside the orders of the lower authorities and directed the tax department to allow the full exemption, deleting the addition of Rs 1.86 crore.
Expert view: Clarity on the “one residential house” debate
According to Sandeep Bhalla, Partner at Dhruva Advisors, the ruling offers important clarity on how the law should be interpreted after amendments made a decade ago.
“The judgment provides critical clarity on whether investing in multiple physical units can still qualify as a single ‘residential house’ for deductions under Section 54, even after legislative amendments aimed at tightening these provisions,” Bhalla said.
The key dispute: Seven units vs one house
Bhalla explained that the case essentially revolved around whether the purchase of several apartments could still qualify as a single house.
“The Bench held that ‘one residential house’ can encompass multiple adjacent units if they are situated on the same floor and function as a singular residential space,” Bhalla said.
Bhalla said the ruling emphasises an important factor: physical contiguity of the units. “A pivotal factor in this case was that the seven units were adjacent to each other on the same floor with no ‘outsider’ flats in between.”
This, Bhalla explained, distinguishes the case from earlier rulings such as Pawan Arya, where tax benefits were denied because the flats were located in different areas.
‘A house’ vs ‘one house’: Tribunal’s reasoning
Another key element in the ruling was how the tribunal interpreted the wording of the law.
Bhalla noted that the ITAT relied on the Delhi High Court’s reasoning in Lata Goel (2025).
“The Tribunal relied on the Delhi High Court’s recent logic in Lata Goel (2025), stating that the terms ‘a residential house’ and ‘one residential house’ are essentially synonymous in this context,” he said.
He explained that the law focuses on the residential use of the building rather than its technical architectural structure.
“Whether a house is structured laterally (adjacent units) or vertically (multiple floors), it remains a ‘house’ if it serves the purpose of a singular residence for the family.”
What the ruling means for taxpayers
The ruling could have important implications for taxpayers, especially those dealing with large capital gains from property sales.
According to Bhalla, the decision recognises that a single large residence may be created by combining multiple units, even if those units exist as separate apartments on paper. “The Tribunal views the ‘mischief’ not as the number of units, but as the multiplicity of residential destinations,” he explained.
“In allowing seven adjacent units to count as ‘one,’ the court acknowledges that ‘one house’ is defined by its functional unity rather than its municipal or deed-based boundaries.”
However, he cautioned that the benefit may not apply in all cases. “This ruling is a victory for high-net-worth individuals looking to consolidate large capital gains into sprawling, multi-unit single-floor apartments. However, the reliance on physical contiguity remains the bedrock of this defence,” Bhalla said.
He added that taxpayers buying units in different wings or floors of the same building may still face challenges from the tax department.