The Mumbai Income Tax Appellate Tribunal (ITAT) has sent a case back to the Income Tax (I-T) authorities for further investigation regarding a tax deduction claimed by P. Shah. Shah invested INR 9.5 crore from a share sale into two adjacent apartments in Navi Mumbai, claiming a tax exemption under Section 54-F, which allows for tax-free long-term capital gains if invested in a single residential unit. The I-T department rejected his claim, arguing the two apartments are separate properties, but Shah argued they should be considered one unit. The ITAT directed physical verification to confirm if the apartments were merged into one.
The Mumbai Income Tax Appellate Tribunal (ITAT) has sent a case regarding a tax deduction on two adjacent apartments back to the Income Tax (I-T) authorities for further investigation. In the 2020-21 fiscal year, a taxpayer named P. Shah claimed a tax deduction of INR 9.5 crore under Section 54-F of the Income Tax Act. This deduction was based on his investment in two adjacent apartments located in Navi Mumbai.
Section 54-F of the Income Tax Act allows taxpayers to avoid paying taxes on long-term capital gains if the money from the sale of the original asset, like shares, is invested in buying a single residential home. The rule clearly states that tax exemption is available only if the taxpayer purchases "one" residential unit. Shah, however, invested the entire INR 9.5 crore from his share sale into the two adjacent apartments. He claimed that they should be considered as one dwelling unit for the purpose of the tax exemption.
This situation raised a common issue in tax law, where the question arises whether buying two adjacent apartments can count as buying one home. In this case, the I-T department did not agree with Shah's claim. They argued that the law only allows the purchase of a single apartment for tax benefits, as per a change that took place in the 2014-15 fiscal year. The key point in this dispute was that the two apartments, although adjacent, were separated by an "open to sky" zone and were registered individually. This led the tax officer to conclude that they could not be considered a single property.
The explanatory memorandum for the 2014 budget supports this stance, stating that the Section 54-F exemption applies only when the investment is in one residential property located in India. This rule has been in effect since the 2014-15 fiscal year. However, Shah submitted documents to show that his intention was to merge the two apartments into one unit. He provided an affidavit from the builder and a revised building design to support his claim. The appellate commissioner accepted this and ruled in Shah's favour, but the I-T department did not agree and appealed the decision to the ITAT.
The ITAT noted that the tax officers had not conducted a physical verification of the properties to check if the apartments had been merged into a single unit. Therefore, the tribunal asked the tax officer to visit the site in person to confirm whether the two apartments had been united into one. If the apartments were found to be merged, Shah would qualify for the tax deduction.
This case highlights ongoing legal questions about tax exemptions for home investments and how Section 54-F is interpreted. The final decision will depend on the tax authorities' findings after they conduct their physical verification.
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