She sold her house for Rs 2.7 crore to buy seven new flats and paid no income tax, wins case in ITAT Delhi; Know how

Section 54 of the Income Tax Act, 1961 allows a taxpayer who has sold a residential house property to avoid paying income tax if they purchase another residential property within a certain timeframe. Using the benefit of this section, in the financial year 2015-16, Saroj sold her house in Punjabi Bagh, a locality in West Delhi, for Rs 2.7 crore, and used Rs 2.55 crore to purchase seven residential house units in Greater Noida. After that she showed her income as Rs 5 lakh in her Income Tax Return (ITR) and Rs 2.2 crore as tax exemption amount under Section 54.

Essentially Saroj took advantage of this tax rule (Section 54) and claimed a long term capital gains (LTCG) tax exemption of Rs 2.2 crore crore and thus she had to pay no income tax. However, she soon got into trouble with the income tax department.

The income tax officer said that the language used in the Section 54 law back then was that a person can get tax exemption for selling house property if he/she buys "a residential property" using the capital gains. The income tax officer said the phrase "a residential property" can't mean that she can claim tax exemption for the seven house units purchased by her by using the capital gains from the Punjabi Bagh property sale.

The income tax officer granted her a LTCG tax exemption of Rs 36 lakh but added Rs 1.8 crore to her income, which made her responsible for paying tax on this additional income.

In 2023, Saroj filed an appeal with the commissioner of appeals CIT (A) and requested that this order of the tax officer be cancelled. But the CIT (A) rejected her request, following which Saroj’s chartered accountant filed an appeal before Income Tax Appellate Tribunal (ITAT) Delhi.

On August 19, 2025 Saroj won the case in ITAT Delhi and the entire addition of Rs 1.8 crore income was deleted. Thus she didn’t have to pay any income tax on this property sale transaction.

Check out the details below to see how she pulled it off.

Brief background of the case

As per the order of ITAT Delhi dated August 19, 2025, here’s the brief facts:

• The facts of the case are that the assessee (Saroj) is an individual and has declared income from salary, rental income and also income from long term capital gain on sale of immovable properties. The assessee (Saroj) e-filed her return of income (ITR) on July 20, 2016 under Section 139(1) of Income-tax Act, 1961 for the year under consideration declaring total income of Rs 5,27,260.
• Saroj had to file an appeal in ITAT Delhi as the tax department denied her tax deduction under Section 54 against long term capital gain (LTCG) from sale of residential house at Punjabi Bagh, Delhi for sale consideration of Rs 2.7 crore (2,70,60,000).
• The tax deduction claimed for Rs 2.22 crore (2,22,91,420) was restricted to the extent of Rs 36 lakh (36,54,821) and the balance deduction of Rs 1.8 crore (1,86,36,599) was denied as it pertained to investment in the more than one residential house unit.
• The deduction under Section 54 was claimed for investment of Rs 2.55 crore (2,55,83,750) in seven residential units on a single floor in the Units Nos 1001 to 1007 in a residential Complex at Greater Noida.

Also read: You have to file ITR if you carried out any of these eight transactions

ITAT Delhi says this about Section 54 and seven residential house units

ITAT Delhi in its order dated August 19, 2025 said:

• “We find that the Hon'ble Delhi Court in the Lata Goel in ITA 127/225 vide its order dated April 30, 2025, referring its own decision in the case of Gita Duggal case [supra], had held that multiple residential units may be construed as a single residential house for the purposes of exemption under Section 54F and that the term ‘a residential house’ can be construed as ‘one residential house’.
• "Considering the facts of the case in totality, in light of the decision of the Hon'ble Delhi Court where the term 'a residential house' has been construed to mean 'one residential house' and that different floors of the house do not mean multiple houses, we hold that “one residential house” in section 54/54F of the Act would encompass within its fold seven residential units on the same floor."

Judgement: Accordingly, we set aside the findings of the ld. CIT(A) and direct the Assessing Officer to delete the addition of Rs. 1,86,36,599- and allow exemption under Section 54 on the seven residential units as claimed by the assessee. Grounds raised by the assessee are allowed. In the result, the appeal of the assessee in ITA No. 5472/DEL/2024 is allowed. The order is pronounced in the open court on 19.08.2025.”

Also read: Father sells house worth Rs 67 lakh and shows only Rs 1,690 income in ITR, wins case in ITAT Ahmedabad; Know how

What did Section 54 say at the time of this judgement?
Chartered Accountant (Dr.) Suresh Surana explains that at the time of the judgment, Section 54 of the Income Tax Act, 1961 provided that if an individual or a Hindu Undivided Family (HUF) sold a long-term capital asset in the form of the residential house, the capital gains from such transfer would be exempt from tax, subject to reinvestment conditions.

Surana says: "The assessee must purchase a residential house within 1 year before or 2 years after the date of transfer of the original property or construct a new residential house within 3 years from the date of transfer. The amount of capital gains must be invested in the new residential house to claim the exemption. If the entire capital gains are not invested, the exemption is proportional to the amount invested."

What did Delhi High Court say about Section 54?

ITAT Delhi cited a Delhi High Court related judgement where the high court said that it is also relevant to refer to the decision of the coordinate bench of the court in Commissioner of Income-tax v. Gita Duggal: 2013 SCC OnLineDel 752 where this court has held as under: -

The Delhi High Court said that there could also be another angle. Section 54/54F uses the expression "a residential house". The expression used is not "a residential unit". This is a new concept introduced by the Assessing Officer into the section.

Also read: How to pay zero or lower income tax on your residential property sale using Sections 54 and 54F

Delhi High Court said that Section 54/54F requires the assessee to acquire a "residential house" and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the section should be taken to have been satisfied.

Also read: How to file ITR if you have sold house or land in FY 2024-25

Delhi High Court said: "There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for residential use and not for commercial use. If there is nothing in the Section which requires that the residential house should be built in a particular manner, it seems to us that the Income-tax authorities cannot insist upon that requirement. A person may construct a house according to his plans and requirements."

Also read: No income tax for son who sold late mother’s flat for Rs 1.45 crore to buy seven houses; how a minor language error helped him

Delhi High Court also said that most of the houses are constructed according to the needs and requirements and even compulsions. For instance, a person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented.

Delhi High Court said that it is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive.

The Delhi High Court also said that a person may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house.

Delhi High Court said: "We are therefore unable to see how or why the physical structuring of the new residential house, whether it is lateral or vertical, should come in the way of considering the building as a residential house. We do not think that the fact that the residential house consists of several independent units can be permitted to act as an impediment to the allowance of the deduction under section 54/54F. It is neither expressly nor by necessary implication prohibited."

Also read: Husband files for divorce from wife citing her mental illness started much before marriage; High Court denies divorce on this ground

What is the significance of this judgement?

ET Wealth Online has asked many experts about the significance of this judgement, here's what they said:

Chartered Accountant (Dr.) Suresh Surana, says: This judgment clarified the interpretation of the term “one residential house” under Section 54.

It held that the expression does not rigidly imply a single, standalone unit. Instead, multiple adjacent residential units forming part of a single residential complex such as flats on the same floor without intervening units may collectively qualify as one residential house for the purpose of exemption. This liberal interpretation recognizes practical realities, such as taxpayers purchasing multiple units for integrated family use. While the Assessing Officer and the Commissioner of Income Tax (Appeals) had restricted the benefit to a single unit, relying on the amendment which substituted “a residential house” with “one residential house,” the Income Tax Appellate Tribunal rejected this narrow view.

The Tribunal held that the amendment does not bar multiple units from being treated as a single house, provided they constitute a cohesive residential setup. Further, the decision restricts tax authorities from mechanically denying exemptions based solely on the number of units. Instead, they must assess whether the units, in substance, form one residential house, in line with judicial precedents rather than a strictly literal reading of the statute. It is also pertinent to note that while the case specifically dealt with Section 54, the reasoning applies to Section 54F as well, as both sections use similar language.

Lawyer Nilesh Modi says: “Prior to 2014, Section 54 did not define what exactly ‘one residential house’ means, nor does it say that such a house must be built in a particular way. This gap in the law has led to avoidable litigation. The Tribunal has now made it clear that, if several residential units are next to each other, with no outsider’s flat in between, they can be treated together as ‘one residential house’. Section 54 should, therefore, be applied with common sense and fairness, without getting trapped in a web of overzealous technicalities. This ruling gives major relief to homeowners and investors, and is a very welcome development”

Also read: Father receives Rs 4 lakh as cash gift in son’s marriage and wins income tax case of unexplained income; ITAT Ahmedabad ruling explained

Mihir Tanna, associate director, S.K Patodia LLP, says:

• When income tax provisions require taxpayers to invest in "a residential house" to save tax on gain earned from long term capital assets, different scenarios arise and several High Courts have considered it in favor of taxpayers.
• Purchase two non-adjacent flats, but they are in the same tower of a residential society - eligible for exemption [Mrs. Kamla Ajmera v. Pr. CIT [2024] 169 taxmann.com 119 (Delhi) [FY 2012-13] AND [2025] 174 taxmann.com 535 (Delhi) HIGH COURT OF DELHI Principal Commissioner of Income-tax - Central v. Lata Goel [FY 2010-11]
• Took two separate registered sale deeds in respect of the two flats situated side by side purchased on the same day and effected necessary modifications to the two flats to make it one residential apartment - eligible for exemption [CIT v. D. Ananda Basappa [2009] 180 Taxman 4/309 ITR 329 (Karnataka)][FY 1996-97].

Also read: No income tax for lady who sold land for Rs 4.5 crore; Know how a 1955 circular and established case laws saved the day for her