Selling multiple flats to buy one? You can get tax benefits: ITAT

Mumbai: In a landmark decision, the Income Tax Appellate Tribunal (ITAT) has held that a taxpayer can avail of tax benefits where long-term capital gains (LTCG) arising on sale of more than one flat are invested or will be invested in one residential house in India, within the stipulated time.

This recent decision will benefit taxpayers in Mumbai and in the absence of any contrary jurisdictional order will strengthen the case of other taxpayers.

It is not uncommon for a taxpayer to sell more than one house in order to buy a larger accommodation or shift to a tonier locality.


Dispute revolved around Section 54 of Income Tax Act
There have been instances where tax benefit claims made by taxpayers have been denied as sale proceeds of more than one flat were invested in a new residential property.

If the taxpayer makes a profit on sale of a residential house that has been held for at least two years, then such profit is treated as a LTCG. This gain is taxable at 20% with an adjustment for inflation referred to as indexation benefit. Section 54 of the Income Tax Act, which was the subject matter of the dispute, provides that if the investment is made in one house in India, in the stipulated period , then to the extent of this investment, the taxable component of the LTCG is reduced, which results in a lower tax outgo.

The ITAT agreed with the contention of the taxpayer that Section 54 of the I-T Act has an inbuilt restriction that the capital gain arising from sale of a residential house cannot be invested in more than ‘one’ residential house, in India. However, there is no restriction that the capital gains arising from the sale of more than one residential houses can be so invested.

ITAT held: “The provision of Section 54 is applied to the transfer of any number of residential houses provided the capital gains arising therefrom are invested in a proper manner within the prescribed time period.”

Incidentally, the Interim Budget has provided for an additional relaxation. It proposes to allow investments to be made in two house properties in India, but this option can be exercised only once in a lifetime. ITAT is the final fact-finding authority. The I-T department can appeal only if it involves a question of law. At this stage, it is not known whether the I-T department will file an appeal in the HC.