The Income Tax Appellate Tribunal (ITAT) Mumbai has clarified a key question in capital gains taxation: Can a residential flat used for commercial purposes (such as a dental clinic) claim exemption under Section 54F, which is meant for non-residential assets?
In its order dated 20 May 2026, the ITAT ‘E’ Bench partially allowed the appeal of Kailash Gul Rajani for Assessment Year 2020-21. The assessee had sold two Mumbai flats and invested the gains in a new residential flat at Dosti Flamingo, Sewri.
For the Shanti Niketan flat (Marine Drive), the assessee claimed ₹1.34 crore exemption under Section 54F. He argued that the flat had been used for decades as a dental clinic and submitted strong evidence — society secretary’s confirmation, commercial municipal tax bills, electricity charges at commercial rates, and photographs.
However, both the Assessing Officer and CIT(A) rejected the claim, ruling that the flat remained a residential house in law. Factors such as the purchase deed, stamp duty paid at residential rates, and society records determined its legal character. Mere commercial use without formal change-of-user permission does not convert it into a commercial asset.
ITAT’s Verdict:
The Tribunal upheld the denial of Section 54F exemption. Relying on precedents like Srimati Radha Devi vs. ITO and ITO vs. Smt. Sushila M. Jhaveri, it held that the legal status of the property prevails over its actual use.
On the alternate claim under Section 54, the ITAT took a taxpayer-friendly stance. Since the assessee had already claimed Section 54 on the first flat (Mahindra Aspen), the CIT(A) had rejected the second claim. However, citing the Supreme Court ruling in Goetze (India) Ltd. vs. CIT, the Tribunal set aside the matter and directed the Assessing Officer to:
- Freshly examine the assessee’s eligibility for Section 54 exemption on the Shanti Niketan flat.
- Verify the qualifying investment in the new residential house.
- Give the assessee proper opportunity of being heard.
- Recompute the taxable capital gain.
The appeal was allowed for statistical purposes.
Key Takeaway: Even if a residential flat is used as a clinic or office for many years, it does not automatically qualify for Section 54F (commercial asset) exemption. However, the assessee may still claim relief under Section 54 if other conditions are met.
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