Holding that two adjoining flats purchased in different names had subsequently been amalgamated into a single composite residential unit, the Mumbai bench of income tax appellate tribunal (ITAT) upheld tax exemptions totalling ₹28.45 crore claimed by an individual on long-term capital gains (LTCG).
In an order last month, the ITAT bench of judicial member Pawan Singh and accountant member Girish Agrawal, said, "On our independent appreciation of facts, we find that entire investment in flat No3102 was made by assessee. Part of unamalgamated flat No3101 was paid by his wife, through her bank account. Out of total payment of ₹17.84 crore, ₹5.44 crore (₹2.72 crore on 2 April 2021 and ₹2.72 crore on 8 April 2921) was transferred by assessee in his wife's account and from her account payment were made to builder. The assessee made investment of ₹6.59 crore in flat No3101 and remaining of ₹11.60 crore by his wife."
"We also find that after supplementary agreement the assessee acquire composite flat bearing No.3102. As per clause No.2(c) & (e) of supplementary the carpet area of flat No.3102 is now 6769sqft (square feet) and purchased consideration is of ₹40.40 crore. Further, due to amalgamation area of the flat is increased by 9.66sqmt (square meter), on which the assessee paid additional stamp duty and that flat No.3101 has lost its existence. No verification of facts was carried out by the assessing officer (AO) to discard such facts. Thus, in view of the above factual position, we do not find any infirmity in the order of commissioner of income tax-appeals (CIT(A)), which we affirm," the bench said.
The case arose from the sale of Amit Mahendrakumar Mehta (the assessee)'s residential property at Malabar Hill in Mumbai, for ₹43 crore on 17 December 2020. After taking into account the indexed cost of acquisition, he computed long-term capital gains (LTCG) of ₹26.59 crore. He invested in a residential property at Lower Parel in Mumbai and claimed exemption under Section 54 of the Income Tax (I-T) Act.
Mr Mehta also reported LTCG from the sale of equity shares and claimed exemption under Section 54F against his investment in another flat in the same project.
The AO, however, restricted the Section 54 exemption to flat No.3102, for which Mr Mehta had made the investment, and brought the balance LTCG of ₹4.03 crore to tax. The AO also rejected the Section 54F claim of ₹1.86 crore on the ground that flat No.3101 had initially been purchased in the names of Mr Mehta’s wife, Cherry Mehta, and son, Harsh Amit Mehta.
The dispute before the appellate authorities centred on the status of the two flats.
According to Mr Mehta, flat No.3102 was purchased for ₹22.56 crore, while flat No.3101 was acquired for ₹17.84 crore in the names of his wife and son. The two adjoining flats were subsequently amalgamated under a registered supplementary agreement with the developer. The agreement provided for a 70% share for Mr Mehta and 30% for his wife in the composite residential unit.
The tribunal noted that Mr Mehta had funded the entire investment in flat No.3102. In the case of flat No.3101, he had contributed ₹6.59 crore, while the balance ₹11.60 crore was paid by his wife. Of the amount paid towards flat No.3101, ₹5.44 crore was transferred by Mr Mehta to his wife’s bank account from which payments were made to the developer, while another ₹1.15 crore was paid directly by Mr Mehta.
By the time the return was filed for the relevant assessment year, Mr Mehta had invested a total of ₹28.45 crore in the composite property. The registered supplementary agreement recorded his share at 70% and his wife’s at 30% in the amalgamated flat.
The tax department also challenged the CIT(A)’s decision to admit the registered supplementary agreement and bank statements, arguing that the documents amounted to additional evidence and that the conditions prescribed under Rule 46A of the I-T Rules had not been satisfied.
ITAT rejected this objection. The tribunal noted that the CIT(A) had called for a remand report from the AO before relying on the additional material. The AO was, therefore given an opportunity to examine the evidence and submit his objections. The tribunal found no infirmity in the CIT(A)’s procedure and held that there was no violation of Rule 46A.
On the substantive issue, the tribunal focused on what happened to the two flats after the amalgamation.
Mr Mehta’s counsel submitted that the registered supplementary agreement resulted in a single residential unit bearing flat No.3102. Flat No.3101, according to the submission, lost its independent identity after the amalgamation. The composite flat had a single entry and a single kitchen.
The supplementary agreement also recorded that the carpet area of the composite flat No.3102 was 6,769sqft and that the purchase consideration was ₹40.40 crore. The amalgamation increased the area, for which Mr Mehta paid additional stamp duty.
While accepting the factual position, ITAT observed that, after the supplementary agreement, the assessee acquired the composite flat bearing No.3102 and that flat No.3101 had lost its existence. The tribunal also noted that the AO had not carried out any verification to dislodge these facts.
ITAT, therefore, upheld the CIT(A)’s conclusion that the two adjoining flats were ultimately treated as one composite residential property.
The tribunal consequently upheld Mr Mehta’s claim for exemption of ₹26.59 crore under Section 54 against the LTCG arising from the sale of the Malabar Hill residential property. It also upheld the exemption of ₹1.86 crore under Section 54F in respect of the LTCG arising from the sale of equity shares.
The tax department had argued that the two flats were legally distinct properties and that the restriction under Section 54 applicable from assessment year (AY)21-22 prevented Mr Mehta from claiming the benefit in respect of two separate residential units because his capital gain exceeded ₹2 crore.
The tribunal, however, did not accept this characterisation of the property as two separate residential units. Its finding rested on the subsequent registered amalgamation and the evidence showing that the two flats had become a single composite residential unit.
With the tribunal finding no infirmity in the CIT(A)’s order, all the tax department’s grounds were dismissed. “In result, the appeal of revenue is dismissed,” the bench held in its order.
The decision is significant for taxpayers claiming capital gains exemptions when adjoining residential units are subsequently combined into a single dwelling, particularly where the original purchase documents list different names but later registered documentation establishes the property's composite nature and the taxpayer’s financial contribution.
(ITA No599/MUM/2026 (AY: 2021-22) Date: 17 August 2026)
