Leaving open the question whether two adjoining flats can qualify as ‘one residential house’ under Section 54F of the Income Tax Act, the Bombay High Court has clarified that tax recovery cannot proceed on the basis of an apparently incorrect computation. The Court held that even if the exemption for the second flat was disallowed, the entire investment made in that flat could not automatically be added to the assessee’s income contrary to the statutory mechanism prescribed under Section 54F(1)(b) of the Income Tax Act.
The High Court noted that the assessee’s calculation of taxable capital gains at about Rs. 2.93 crore was not disputed by the Revenue, and the Revenue was unable to explain how capital gains of Rs. 13.24 crore had been reflected in the computation sheet. Holding that the demand had not been properly determined, the Court directed payment of only Rs. 6.50 lakh and stayed recovery of the balance demand pending disposal of the appellate proceedings before the Commissioner of Income Tax (Appeals).
Briefly, the petitioner, Nilesh Ramesh Modi, had transferred tenancy rights and sold certain shares during Assessment Year 2024-25, receiving aggregate consideration of about Rs. 11.07 crore. He thereafter agreed to purchase two adjoining residential flats in the Piramal Mahalaxmi project for a combined consideration of about Rs. 9.67 crore, claiming that both units were intended to be used as a single residential house.
In his income tax return, the petitioner claimed exemption under Section 54F of the Income-tax Act on the investment made in the two flats. During scrutiny assessment, the Income Tax Department accepted exemption for one flat but disallowed the claim relating to the second flat on the ground that both were separate residential units. Consequently, a substantial tax demand was raised against the petitioner.
The petitioner challenged the assessment before the Commissioner of Income Tax (Appeals) and also sought rectification of alleged computational errors. Simultaneously, he requested a stay on recovery of the tax demand. However, the Assessing Officer rejected the rectification application and granted stay only on the condition that 20% of the outstanding demand be deposited.
The Division Bench comprising Justice B. P. Colabawalla and Justice Farhan P. Dubash expressly clarified that it was not deciding the larger controversy regarding whether two contiguous flats intended to be used as a single residence would qualify as ‘one residential house’ under Section 54F. It also refrained from examining the Revenue’s contention that judicial precedents relied upon by the assessee related to a period prior to the amendment substituting the phrase ‘a residential house’ with ‘one residential house’.
The High Court confined itself to examining whether the tax demand had been correctly computed. It noted that under Section 54F, even if the investment in the second flat was to be ignored, the entire cost of that flat could not simply be added to the assessee’s income. The statutory formula required computation of the taxable capital gains in accordance with Section 54F(1)(b).
The Court found that the petitioner’s computation showing taxable capital gains at Rs. 2.93 crore was not disputed by the Revenue’s counsel. It further observed that the addition of Rs. 4.78 crore, being the cost of the second flat, appeared manifestly incorrect. The Court also noted that the Revenue had failed to explain how capital gains of Rs. 13.24 crore were reflected in the computation sheet when that figure did not find support in the assessment order itself.
