The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has delivered an important ruling in Ranjan Sen Jain v. ITO, reiterating that exemption under Section 54 of the Income-tax Act, 1961 cannot be denied merely because the new residential property consists of multiple floors, provided the floors collectively constitute a single residential house. The Tribunal also held that the Assessing Officer could not arbitrarily reject a registered valuer’s report for determining the fair market value (FMV) without referring the matter to the Departmental Valuation Officer (DVO).
The dispute arose from the redevelopment of the assessee’s inherited residential property through a collaboration agreement with a builder. During assessment, the Assessing Officer restricted the exemption under Section 54 to only one floor of the reconstructed property and substituted the fair market value adopted by the assessee with government circle rates for computing capital gains. These findings were upheld by the Commissioner (Appeals), leading to the appeal before the Tribunal.
The Tribunal observed that the mere existence of separate floors or independently usable portions does not automatically convert a residential building into multiple residential houses. Relying upon recent decisions of the Delhi High Court, including Pr. CIT v. Lata Goel and earlier precedents such as CIT v. Gita Duggal, the Tribunal held that multiple floors forming part of one residential property continue to qualify as one residential house for the purposes of Section 54. Consequently, the assessee was held entitled to the exemption in respect of the entire reconstructed residential property rather than only one floor.
On the issue of computation of capital gains, the Tribunal found that the Assessing Officer had rejected valuation reports prepared by registered valuers without identifying any specific defect and without making a reference to the DVO. Instead, the Assessing Officer substituted the valuation with an estimated figure based on circle rates. The Tribunal held that such an approach was unsustainable and accepted the valuation supported by the registered valuer, directing the Assessing Officer to recompute the capital gains accordingly. The Tribunal also noted that the builder’s certificate regarding construction cost constituted crucial evidence that ought to have been considered.
This judgment reinforces two significant principles in capital gains taxation. First, the expression “one residential house” under Section 54 should be interpreted in a practical manner where multiple floors together constitute a single residential property. Secondly, valuation reports prepared by registered valuers cannot be discarded arbitrarily, and where the Revenue disputes such valuation, the proper course is to obtain an independent valuation through the DVO rather than substitute an ad hoc estimate.
For taxpayers undertaking redevelopment projects through collaboration agreements, this ruling provides important guidance on the availability of Section 54 exemption and the determination of fair market value while computing capital gains.
