In a significant judgment that could bring relief to many taxpayers entangled in long-pending capital gains exemption disputes, the Bombay High Court has ruled that investments in multiple residential units qualify for exemption under Section 54(1) of the Income Tax Act—as it stood prior to its amendment in 2014.
The decision carries major implications for legacy cases where taxpayers had reinvested capital gains from the sale of a residential property into more than one house but were denied relief on the grounds that the law permitted exemption for only a single residential house.
The Division Bench comprising Chief Justice Alok Aradhe and Justice Sandeep V. Marne held that for the Assessment Year 1995–96, the Assessee was entitled to the full exemption on capital gains arising from the sale of a residential flat in Mumbai, as the proceeds were used to purchase seven row houses in Pune.
Interpretation Favours Assessee in Pre-2015 Cases
The Court observed that prior to its amendment by the Finance Act, 2014, Section 54(1) used the phrase “a residential house”, which was descriptive in nature, and not restrictive in number. The amendment—which replaced “a” with "one residential house"—came into effect from April 1, 2015, and therefore did not apply to the assessment year in question.
Citing decisions of the Karnataka High Court (Arun K. Thiagarajan) and Madras High Court (Tilokchand & Sons), the Bombay HC reaffirmed the view that the word "a" in the unamended section included plural residential units, and that the law's intention was to promote reinvestment in residential property—not to cap the number of houses.
Further, the Court underscored that beneficial provisions such as Section 54(1) must be interpreted liberally. It invoked the Supreme Court’s decision in Mavilayi Service Cooperative Bank Ltd., which laid down that where two interpretations are possible, the one favouring the assessee should prevail.
The Assessee was represented by Nishant Thakkar, Jasmin Amalsadwala, and Bhavesh Bhatia, while the Revenue was represented by Akhileshwar Sharma.
Commenting on the ruling, Amit Maheshwari, Tax Partner at AKM Global, said that "The Bombay High Court’s ruling provides critical clarity on the interpretation of Section 54 as it stood prior to the 2014 amendment. By holding that exemption can be claimed on investment in multiple residential units—not just one—the Court has reaffirmed a liberal and taxpayer-friendly interpretation of this beneficial provision.
This judgment aligns with earlier High Court views and confirms that the phrase ‘a residential house’ was never intended to restrict reinvestment to a single property. However, earlier as well, there were varied opinions if the multiple properties which are adjacent would need to satisfy the test of one house or not.
The implications are significant for legacy cases where exemption claims were denied merely on account of multiple units being purchased. It underscores that the tax benefit under Section 54 is tied to the residential nature and reinvestment purpose—not the number of units. This decision reinforces legal certainty and ensures fair relief to taxpayers in similar cases pending adjudication."
A Path Forward for Similar Appeals
With this ruling, the Bombay High Court has aligned itself with a more assessee-friendly interpretation adopted by other High Courts. It reinforces that, unless a legislative amendment specifically limits the scope—as was done post-2014—courts should read beneficial provisions broadly.
The judgment sets a strong precedent and may now be relied upon by assesses involved in similar disputes from earlier years, potentially paving the way for fresh relief in appeals and reassessments.
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