ITAT Mumbai Upholds Capital Gains Exemption After Two Adjacent Flats Amalgamated Into One

The Income Tax Appellate Tribunal (ITAT) at Mumbai held that amalgamation of two adjacent flats into a single residential unit can qualify for capital gains exemption where the earlier flat loses its independent existence.

A Bench of Judicial Member Pawan Singh and Accountant Member Girish Agrawal dismissed the appeal filed by the Deputy Commissioner of Income Tax-6(1)(2), Mumbai against the order of the Commissioner of Income Tax (Appeals) and upheld the exemptions claimed by Amit Mahendrakumar Mehta under Sections 54 and 54F of the Income Tax Act, 1961. It observed:

“...after supplementary agreement the assessee acquire composite flat bearing no. 3102... and that flat No. 3101 has lost its existence.”

Mehta had sold his Malabar Hill property, Flat No. 92 in Casa Grande, to ABD Dwelling Private Ltd. for Rs. 43 crore and computed long-term capital gains of Rs. 26.59 crore. He invested Rs. 22.56 crore in Flat No. 3102 at Lower Parel, Worli and claimed exemption under Section 54 against the capital gains. He also claimed exemption of Rs. 1.86 crore under Section 54F against long-term capital gains arising from the sale of equity shares.

Flat No. 3101 had initially been purchased in the names of Mehta's wife, and son. A registered supplementary agreement dated 25 March 2022 executed with developer K. Raheja Private Ltd. amalgamated Flats 3101 and 3102 into a composite residential unit. Under the agreement, Mehta held a 70% share and his wife held 30%. The composite Flat No. 3102 had a carpet area of 6,769 square feet and a purchase consideration of Rs. 40.40 crore.

The Tribunal noted that Mehta had invested Rs. 6.59 crore in Flat No. 3101, while his wife had contributed Rs. 11.60 crore. It found that the Assessing Officer had not carried out verification to dislodge the factual position concerning the amalgamation.

It also upheld the CIT(A)'s admission of the supplementary agreement and other material after the Assessing Officer was given an opportunity to furnish a remand report. Further, the Bench held that there was no infirmity in admitting the evidence.

Accordingly, the ITAT dismissed the Revenue's appeal and affirmed the exemptions claimed by Mehta under Sections 54 and 54F of the Income Tax Act.