A Residential House Is Not Just One Structure: Bombay High Court Allows Full Tax Exemption for Investment in Seven Homes Under Unamended Section 54

“If the Legislature always meant ‘one house’, why amend the law in 2014? The word ‘a’ in Section 54 never restricted the exemption to a single unit,”  In a landmark judgment that is poised to influence capital gains litigation across the country, the Bombay High Court ruled in favour of a taxpayer who had invested his entire capital gains into seven residential row houses, holding that such investment qualified for full exemption under Section 54 of the Income Tax Act, 1961, as it stood prior to the 2014 amendment.

Delivering the decision in Income Tax Appeal No. 569 of 2003, a Division Bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne answered the core question of law in favour of Krishnagopal B. Nangpal, who had invested ₹1.08 crore — the full sale proceeds of a flat in Mumbai — in a real estate project in Pune consisting of seven row houses.

The Court categorically held: “The words ‘a residential house’ under the unamended Section 54(1) do not restrict the exemption to a single unit. The provision, being beneficial in nature, must be liberally construed to include multiple houses.”

“The 2014 Amendment Introduced the Word ‘One’ for a Reason — The Pre-Amendment Law Permitted Multiple Units”

The Revenue had denied the exemption on the ground that the phrase “a residential house” must be interpreted to mean only one house. But the High Court firmly rejected that view.

“If the restriction of adjustment of capital gains against only one house was already there in the unamended Section 54(1), there was no necessity of amending it to explicitly use the word ‘one’ in 2014,” the Court observed.

It noted that the Finance (No. 2) Act, 2014 substituted “a residential house” with “one residential house in India,” which applies prospectively from April 1, 2015, and not retrospectively.

Tribunal’s Denial of Exemption for Six of the Seven Homes Was Unjustified, Held the Court

The Tribunal had earlier granted exemption only for one of the seven row houses, disallowing the remainder. But the High Court found that the Tribunal ignored binding precedents and misapplied the law.

It noted that the ITAT had acknowledged the fact that six of the seven houses were interconnected and shared a common entrance, yet proceeded to treat them as distinct units. The Court found this approach unsustainable, especially in light of consistent judicial interpretation across multiple High Courts.

Referring to the judicial consensus, the Bench stated: “The Karnataka and Madras High Courts have consistently held that ‘a residential house’ includes multiple units. We respectfully agree with this view.”

“Section 54 Is a Beneficial Provision — And Must Be Interpreted in Favour of the Taxpayer”

The Court emphasized the liberal and purposive interpretation of tax exemptions intended to promote housing reinvestment.

“The purpose of Section 54 is to encourage reinvestment in housing. Being a beneficial provision, even if two interpretations are possible, the one favourable to the assessee must be adopted,” the Court held, relying on the Supreme Court’s observations in Mavilayi Service Cooperative Bank Ltd. v. CIT.

The Bench also clarified that the special bench ruling of the ITAT in Sushila Jhaveri, which had restricted the exemption to one house, was not binding on the High Court and did not stand in the face of subsequent High Court decisions.

Court Dissects and Dismisses Revenue’s Case Based on Outdated and Distinguishable Precedents

The Revenue had attempted to rely on this Court’s earlier ruling in K.C. Kaushik v. P.B. Rane, but the Bench distinguished it, pointing out that:

“The issue in Kaushik was not about the number of houses, but whether letting out the second house within three years would disqualify the exemption. The number of units was never in question in that case.”

It also dismissed reliance on Pawan Arya, Devdas Naik, and Raman Kumar Suri, explaining that those decisions turned on specific factual scenarios and could not override the broader interpretation given by High Courts in more recent and squarely applicable rulings.

Seven Homes, One Investment, Full Exemption: Bombay High Court Brings Clarity

In concluding the matter, the Court held: “The substantial question of law is answered in favour of the Assessee and against the Revenue. The order passed by the Assessing Officer and the ITAT, to the extent of depriving benefit of exemption under Section 54(1), is hereby quashed. The Assessee is held entitled to full exemption on the capital gains of ₹1,08,30,625.”

This ruling not only gives relief to the appellant in the current case, but also provides a binding precedent in the Bombay High Court jurisdiction, reinforcing that “a residential house” may well be more than one — at least until April 1, 2015.

Date of Decision: 22 July 2025