By IndiaHub 
For those who might not know, Section 54 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. Saroj took advantage of this tax rule and claimed a tax exemption of Rs 2.2 crore crore and thus she had to pay no income tax.
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.
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.”
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.”
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.”
Lawyer Nilesh Modi says: There are two key takeaways for me from this decision:
- Clerical errors should not defeat justice. A mere mistake in quoting the wrong section in the ITR, shouldn’t deny a taxpayer of their rightful exemption. Justice must not be sacrificed at the altar of rigid technicalities. What matters is rightful entitlement based on facts.
- As Michelangelo said, ‘Trifles make perfection, and perfection is no trifle.’ This couldn’t be more true in tax compliance. Even minor slip-ups while filing the ITR, can result into tax litigation. A ‘four-eye review’ before submission of ITR, can go a long way in preventing avoidable errors.”
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].