Mumbai: In a significant relief to individual taxpayers, the Bombay High Court has ruled that long-term capital gains tax exemption under Section 54(1) of the Income Tax Act can be claimed for investment in multiple residential houses, if the transactions were carried out before the law was amended in 2014.
“A residential house” not numerically restrictive: Court
A bench of Chief Justice Alok Aradhe and Justice Sandeep Marne clarified that the earlier version of Section 54(1), which used the phrase “a residential house,” did not limit the exemption to just one property.
Case linked to Marine Drive flat and Pune row houses
The case involved Krishnagopal B. Nangpal, who had inherited a flat at Marine Drive, Mumbai, from his late mother. In 1993, the flat was sold for Rs1.45 crore while Nangpal was still a minor. The entire amount from the sale was later invested in the purchase of seven row houses in Pune through agreements signed in 1995 with a developer, Samant Estate Pvt Ltd.
However, during assessment, the Income Tax Department denied full exemption, arguing that Nangpal was entitled to the benefit only for one house. The Income Tax Appellate Tribunal (ITAT) had partly upheld this view.
The High Court, however, overturned the ITAT’s decision. It noted that the law was amended by the Finance (No. 2) Act, 2014 — effective from April 1, 2015 — to specifically restrict the exemption to “one residential house.” Until then, the term “a residential house” did not imply a numerical limit.
Court: Words describe nature, not quantity of property
“The emphasis in the unamended Section 54(1) is on the residential nature of the property, not the number of houses,” the bench observed. “The words ‘a residential house’ are descriptive, not restrictive. The restriction was introduced only from April 1, 2015.”
The Court cited earlier judgments of the Karnataka High Court and Madras High Court to support this view and held that the exemption should be granted for all seven row houses purchased by Nangpal.
HC overturns ITAT order, grants full exemption
The Court quashed the assessment order and the ITAT ruling, thereby allowing Nangpal to claim the full exemption on capital gains under the old provision of Section 54(1).
No More Tax On 'Gifts': Bombay HC Rules Against Taxing Capital Gains On Gifted AssetsJudgment may aid similar pre-2015 taxpayers
The ruling sets a precedent for taxpayers with similar cases from the pre-2015 period. It also reaffirms that amendments to tax laws cannot be applied retrospectively unless specifically stated.
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