You give your house for redevelopment to a builder and get money from the builder and some floors. You claim long-term capital gains exemption, but the tax department sends you a notice for what it sees as multiple residential units. What do you do?In one such case, a man in Delhi, received Rs 75 lakh from the builder and faced a tax notice. Let’s understand why and how he managed to win relief with the Income Tax Appellate Tribunal (ITAT) Delhi.
What the case is about
A man inherited 400 square yards of leasehold land from his late mother in 1997. He subsequently initiated the process of converting the land into freehold. In 1998, Delhi Development Authority (DDA) transferred the property’s records into his name through mutation.Also Read | He gave up his land for road widening and got TDRs which he sold for Rs 6.02 crore to a builder; landowner gets tax notice, ITAT rules proceeds taxable as capital gains but allows land cost deductionThe conversion was completed by 1999, making him the owner of the freehold property. His mother had constructed a single-storey house on the plot in 1978, but the son decided to redevelop it. Towards the end of 1999, he entered into an agreement with a developer to demolish the existing house and construct a new building.Under the arrangement, the man retained the rights to the basement, ground floor, second floor and the open terrace that was above the second floor. As per the agreement, the builder was entitled to the entire first floor of the building. The first floor was subsequently divided and sold as three separate units to three people.Nearly two decades later, in 2018, the man along with the other three people who had ownership of the first floor decided to undertake another redevelopment of the property. They entered into a fresh agreement with another builder, under which the existing building was to be demolished and replaced with a new structure.The agreement specified how ownership rights would be distributed after reconstruction. The was to receive the basement, the entire ground floor, the entire third floor and the open terrace. The builder was allocated the whole second floor, while the first floor remained with the three people, according to an ET report.Also Read | She worked as a teacher till 62 years of age instead of retiring at 60, but was denied gratuity because of extended service; Allahabad HC orders payment with 6% interestAs part of the 2018 redevelopment agreement, the man received Rs 75 lakh from the builder. Each of the three first-floor owners received Rs 25 lakh. The man, however, did not pay income tax on the transaction, claiming an exemption under Section 54 for long-term capital gains on the entire portion of the building allotted to him, comprising the ground floor, basement and third floor.The Income Tax Officer (AO) rejected the man’s claim and concluded that he was liable to pay tax.The man challenged the decision and secured a favourable ruling from the Income Tax Appellate Tribunal (ITAT), Delhi, on July 13, 2026.
Why did the son win the case and pay no tax?
Chartered Accountant Suresh Surana told ET that the Delhi ITAT had to examine whether the basement, ground floor and third floor allotted to the man under the new redevelopment agreement could be treated as separate residential houses for claiming long-term capital gains (LTCG) tax exemption under Section 54.The tribunal also considered whether the Income Tax Assessing Officer was justified in rejecting the property’s fair market value determined through reports prepared by registered valuers.Also Read | Man enters JDA for land, gets 6 flats from builder and transfers 5 to wife, but gets tax notice; ITAT Delhi deletes Rs 4.14 crore additions after finding no stock-in-trade conversion or saleUnder the 2018 redevelopment agreement, the man received Rs 75 lakh and declared the capital gains arising from the transaction. He subsequently claimed an exemption under Sections 54/54F in respect of the basement, ground floor and third floor allotted to him.The man calculated the property’s value using the fair market value of the inherited land as on April 1, 2001, supported by reports from registered valuers to come up with the value of the capital gains.The Assessing Officer was not in agreement with this approach and on his part classified the basement, ground floor and third floor as three separate residential units. The officer’s reasoning was that the portions were physically distinct and could be used independently.The officer also relied on the amendment to Section 54 introduced in the Union Budget 2025, which restricted the exemption to one residential house. Applying this amendment, the Assessing Officer permitted the man to claim the capital gains tax exemption for only the ground floor.The dispute also extended to the valuation of the inherited property. The Assessing Officer rejected the fair market value adopted by the owner and replaced it with a lower value derived from government sources. However, the officer did so without referring the matter to the Departmental Valuation Officer (DVO) for examination of the valuation difference.The Commissioner of Income Tax (Appeals), or CIT(A), upheld the Assessing Officer’s findings. The appellate authority also did not take into account the builder’s certificate submitted as evidence of the actual construction cost.Also Read | He bought a diesel SUV for Rs 13.69 lakh; but repeated DPF issues followed; consumer commission finds deficiency in service and awards Rs 10.99 lakh refund, 9% interest and compensationThe Delhi ITAT held that the presence of several floors or portions that are capable of independent use within one building does not automatically mean that a taxpayer has acquired multiple residential houses.It observed that dividing a residential building vertically or according to its intended use is simply a way of organising the property to meet current or even future requirements.The tribunal also relied primarily on the Delhi High Court’s ruling in Pr. CIT v. Lata Goel. The decision clarified that acquiring more than one floor within the same residential property does not, by itself, mean you have acquired multiple residential houses.According to Surana, separate entrances, kitchens and bathrooms on different floors, or the ability to use each portion independently, were not sufficient grounds on their own to deny the man income tax exemption under Section 54/54F.The restriction introduced after the 2015 amendment, which refers to investment in “one residential house”, applies to the acquisition of multiple separate houses. It does not require the eligible residential property to consist of only one floor or a single self-contained unit.On this basis, Jain was entitled to claim the Section 54 exemption from long-term capital gains (LTCG) tax for the basement, ground floor and third floor of the same residential building.The tribunal also held that the Assessing Officer could not discard the valuation reports prepared by registered valuers and replace their estimates with an arbitrary figure without pointing out specific deficiencies in the reports or referring the matter to the Departmental Valuation Officer.Another important piece of evidence was the builder’s certificate dated February 7, 2023. According to Surana, the document recorded a construction cost of Rs 2.54 crore for the portions handed over to the man. This figure had a direct bearing on the computation of capital gains.The ITAT observed that the CIT(A) had wrongly disregarded the certificate despite its relevance to the case.These findings ultimately led to the man’s victory before the Delhi ITAT. After examining the construction cost, the registered valuers’ reports and his claim for LTCG tax exemption under Section 54, the tribunal directed the Assessing Officer to recalculate the capital gains in accordance with the man’s computations, as set out in the order. The revised calculation resulted in no taxable long-term capital gain.
