MEKALA SHARATH REDDY (HUF),HYDERABAD V. DCIT, CIRCLE - 9(1), HYDERABAD

ITA 1799/HYD/2025

AI Insights

The case involves Shri Mekala Sharath Reddy (HUF), who appealed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, which upheld the assessment made by the Deputy Commissioner of Income Tax. The primary issue was the rejection of the assessee's claim for deduction under section 54F of the Income Tax Act, 1961, amounting to Rs.99,73,700, for investments made in multiple residential units. The Tribunal examined whether the deduction under section 54F could be claimed for multiple units based on the legal provisions applicable for the Assessment Year 2009-10, prior to the amendment by the Finance Act, 2014. The Tribunal found that the expression 'a residential house' used in the unamended section 54F included multiple residential units, thus allowing the deduction.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 846400 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2026
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Hyderabad
• Assessment Year: 2009-2010
• Appeal Filed On: 30-10-2025
• Other Referred Cases: CIT Vs. Syed Ali Adil, Vittal Krishna Conjeevaram Vs. ITO, Krishnagopal B. Nangpal Vs. DCIT, B. Slvasubramanian Vs. ITO, ACIT Vs. Sanjay B. Pahadia
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: AKASH DESHPANDE
• Keywords: Capital asset; Unexplained investment; Cost of acquisition; Capital Gains; Valuation report; Competent authority
• Section: 143(3); 54; 54F

Judgement Text

" ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 1 of 13 आयकर अपीलȣय अͬधकरण, हैदराबाद पीठ IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ DB-A ‘ Bench, Hyderabad ŵी रिवश सूद,Ɋाियक सद˟ एवं ŵी मधुसूदन साविड़या लेखा सद˟ समƗ | Before Shri Ravish Sood, Judicial Member A N D Shri Madhusudan Sawdia, Accountant Member आ.अपी.सं /ITA No.1799/Hyd/2025 (िनधाŊरण वषŊ/Assessment Year: 2009-10) Shri Mekala Sharath Reddy ( HUF) Hyderabad PAN: AAKHM9042H Vs. Dy. CIT Circle 9(1) Hyderabad (Appellant) (Respondent) िनधाŊįरती Ȫारा/Assessee by: Shri Akash Deshpande, CA राज̾ व Ȫारा/Revenue by:: Shri AVES Madhukar, Sr. AR सुनवाई की तारीख/Date of hearing: 16/03/2026 घोषणा की तारीख/Pronouncement: 25/03/2026 आदेश/ORDER Per Madhusudan Sawdia, A.M.: This appeal is filed by Shri Mekala Sharath Reddy (HUF) (“the assessee”), feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”) dated 28.08.2025 for the A.Y.2009-10. Printed from counselvise.com ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 2 of 13 2. The assessee has raised the following grounds of appeal: Printed from counselvise.com ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 3 of 13 3. The brief facts of the case are that the assessee is an individual who filed his return of income for the Assessment Year 2009–10 on 27.07.2009 declaring total income of Rs.50,69,730/-. During the year under consideration, the assessee had sold an immovable property for a consideration of Rs.1,50,00,000/-. After claiming indexed cost of acquisition of Rs.1,73,704/-, the assessee computed long-term capital gain at Rs.1,48,26,296/-. After claiming deduction under section 54 of the Income Tax Act, 1961 (“the Act”), the net capital gain of Rs.50,26,296/- was offered to tax by the assessee. This is the second round of appeal before this Tribunal. In the first round, the Learned Assessing Officer (“Ld. AO”) passed the assessment order on 27.12.2011, wherein the entire receipt of Rs.1,50,00,000/- was brought to tax in the hands of the assessee. Aggrieved by the order of the Ld. AO, the assessee had preferred an appeal before the Ld. CIT (A) and finally before this Tribunal. The Tribunal vide order dated 31.01.2020 in ITA No. 860/Hyd/2013 had restored the issue to the file of the Ld. AO with specific directions to examine the claim of deduction under section 54F of the Act as pe law. During the set-aside proceedings, the Ld. AO issued notices to the assessee. However, the assessee did not comply with the notices issued by the Ld. AO. Accordingly, the Ld. AO completed the assessment under section 143(3) read with section 254 and section 144B of the Act vide order dated 14.09.2021, assessing the income of the assessee at Rs.1,50,43,430/-. Printed from counselvise.com ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 4 of 13 4. Aggrieved by the order passed by the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). During the appellate proceedings, the Ld. CIT(A) called for a remand report from the Ld. AO. After considering the submissions made by the assessee as well as the remand report of the Ld. AO, the Ld. CIT(A) dismissed the appeal of the assessee and upheld the action of the Ld. AO. 5. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before this Tribunal. The Learned Authorized Representative (“Ld. AR”) submitted that the solitary issue involved in the present appeal is the rejection of the claim of the assessee for deduction under section 54F of the Act amounting to Rs.99,73,700/-. The Ld. AR submitted that the Ld. CIT(A) has rejected the claim of the assessee broadly on following three counts: (a) that the claim of deduction under section 54F of the Act is not allowable since the assessee has invested in multiple residential units and the deduction is allowable only in respect of one residential house. (b) that the assessee has constructed multiple independent residential units in deviation from the plan approved by the statutory authority and therefore the construction cannot be considered as eligible residential house for the purpose of section 54F. (c) that the assessee has failed to produce complete bank statements for the relevant period evidencing the utilisation of funds towards construction of the residential units. Printed from counselvise.com ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 5 of 13 6. Addressing the first objection of the Revenue, the Ld. AR submitted that the assessee had constructed a multi-floor residential building consisting of 13 residential units and the investment made therein qualifies for deduction under section 54F of the Act. The Ld. AR further submitted that for the Assessment Year 2009–10, the provisions of section 54F of the Act as they existed prior to amendment by the Finance Act, 2014 are applicable. It was submitted that prior to the amendment, the expression used in the statute was “a residential house”, whereas by the amendment made by the Finance Act, 2014 with effect from 01.04.2015, the expression was substituted by “one residential house in India”. It was also submitted that since the present case relates to Assessment Year 2009–10, the amended provisions are not applicable and the pre-amended provisions should be applied to the case of the assessee. The Ld. AR submitted that the expression “a residential house” has been interpreted by Courts and Tribunals to include multiple residential units and therefore the claim of deduction cannot be denied merely on the ground that the investment is made in more than one unit. In support of this contention, the Ld. AR relied upon the following judicial precedents: (a) Decision of the Hon’ble Andhra Pradesh High Court in the case of CIT Vs. Syed Ali Adil , 352 ITR 418. (b) Decision of the Hyderabad ITAT in the case of Vittal Krishna Conjeevaram Vs. ITO, 36 Taxmann.com 542. Printed from counselvise.com ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 6 of 13 (c) Decision of the Hon’ble Bombay High Court in the case of Krishnagopal B. Nangpal Vs. DCIT, 484 ITR 272. 6.1 The Ld. AR further submitted that though the decision of the Hon’ble Bombay High Court is rendered in the context of section 54, the principle laid down therein is equally applicable to section 54F since the language used in both provisions is identical for the relevant period. 7. Addressing the second objection of the Revenue, the Ld. AR submitted that the provisions of section 54F of the Act do not prescribe any condition that the construction must strictly conform to the plan approved by the statutory authority. It was submitted that the Income Tax Act does not impose any embargo that deduction shall not be allowed in case of deviation from approved plans. In support of this contention, the Ld. AR relied the decision of the Chennai Bench of the Tribunal in the case of B. Slvasubramanian Vs. ITO (45 taxmann.com 74) and the decision of the Mumbai Bench of the Tribunal in the case of ACIT Vs. Sanjay B. Pahadia (ITA No.6099/Mum/2014 dated 11.01.2017). Accordingly, the Ld. AR submitted that these decisions clearly hold that absence of approval or deviation from approved plan cannot be a ground to deny deduction under section 54F of the Act. 8. Addressing the third objection of the Revenue, the Ld. AR submitted that the assessee has furnished a valuation report which clearly establishes that the construction of the residential Printed from counselvise.com ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 7 of 13 units was carried out during the period from November 2008 to July 2009, which falls within the prescribed period under section 54F of the Act. It was further submitted that the lower authorities have not disputed the correctness or validity of the valuation report. The Ld. AR contended that if the Revenue had any doubt regarding the source of investment, appropriate action could have been taken under the provisions relating to unexplained investment. However, for the purpose of section 54F of the Act, the requirement is only regarding investment within the prescribed period, which stands duly established. Finally, the Ld. AR prayed before the Bench to allow the deduction of Rs.99,73,700/- under section 54F of the Act. 9. Per contra, the Learned Departmental Representative (“Ld. DR”), on the other hand, relied upon the orders of the lower authorities and submitted that the deduction under section 54F of the Act is allowable only in respect of investment in one residential house and not multiple units. The Ld. DR further submitted that the construction carried out by the assessee was not in accordance with the approved plan and therefore the same cannot be considered as eligible for deduction. It was also submitted that the assessee has failed to furnish complete bank statements evidencing the investment made in construction and therefore the claim has rightly been rejected by the lower authorities. Finally, the Ld. DR prayed before the Bench to uphold the orders of the lower authorities. Printed from counselvise.com ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 8 of 13 10. We have heard the rival submissions and perused the material available on record including the case laws relied upon. The solitary issue before us relates to the allowability of deduction under section 54F of the Act in respect of investment made in construction of multiple residential units. As far as the first contention of the assessee regarding applicability of the provision of unamended section 54F of the Act is concerned, we find merits in the submissions of the Ld. AR that for the Assessment Year under consideration, the provisions prior to amendment by the Finance Act, 2014 are applicable, wherein the expression used was “a residential house”. In this regard, we have gone through para nos.12 and 13 of the judgment of the Hon’ble Bombay High Court in the case of Krishnagopal B. Nangpal vs. DCIT (Supra), which is to the following effect: “12. For purpose of the present appeal, what is relevant is replacement of the expression 'a residential house' by the expression 'one residential house' by way of 2014 amendment. Prior to the 2014 amendment, capital gains arising from transfer of a long term capital asset, including a residential house, qualified for exemption if the same was invested for purchase or construction of 'a residential house'. The department has disallowed the claim of the Assessee for adjustment of the entire capital gain arising of sale of the flat in Mumbai, on the ground that the Assessee has purchased seven row houses in project at Pune. According to the department, exemption under Section 54 (1) of the Act is applicable only in respect of investment made in purchase of only one residential house and is not permissible for the purchase of multiple residential houses. The ITAT has accordingly granted the benefit of Section 54(1) of the Act in respect of one of the seven row houses purchased by the Assessee. 13. In our view, the amendment brought in by Finance (No.2) Act 2014 makes the position clear that after the amendment, Printed from counselvise.com ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 9 of 13 the capital gains can be adjusted against purchase of only 'one' residential house. The word 'a' is consciously replaced by the legislature by the word 'one' by way of amendment making the intention clear that after the amendment, it is impermissible to adjust the capital gains arising out of one house towards purchase of more than one houses. 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 amendment by specifically using the word 'one'.” 11. On perusal of the above, we find that the Hon’ble High Court has clearly held that the substitution of the word “a” by the word “one” is prospective in nature and indicates that prior to amendment, there was no restriction limiting the deduction to a single residential unit. Though the said decision was rendered in the context of section 54 of the Act, we find that the relevant language used in section 54F of the Act is pari materia and therefore the ratio laid down by the Hon’ble Bombay High Court would squarely apply to the present case. Accordingly, respectfully following the judicial precedent laid down by the Hon’ble Bombay High Court, we hold that for Assessment Year 2009–10, deduction under section 54F of the Act cannot be denied merely because the assessee has constructed multiple residential units. Accordingly, the first contention of the assessee is accepted. 12. As far as the 2nd contention of the assessee with regard to construction as per plan approved by the statutory authorities is concerned, we have gone through the decisions relied upon by the Ld. AR, particularly para no. 6 of the order of the Chennai Bench of the Tribunal in the case of B. Slvasubramanian Vs. ITO (Supra), which is to the following effect: Printed from counselvise.com ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 10 of 13 “6. We have heard the submissions made by the representatives of both the sides. We have also perused the orders of the authorities below as well as the documents placed on record by the ld Counsel for the assessee. It is not disputed that the assessee is not in possession of plot on which a residential building is in existence. The assessee has allegedly utilized the Long Term Capital Gain arising from the sale of shares towards the construction of a new residential house after demolition of old building on the plot- in-question. The assessee has claimed exemption u/s.54F on the ground that the assessee has invested Long Term Capital Gains arising from sale of shares towards construction of a new house within the prescribed period as mentioned in the Act. However, the contentions of the assessee has been rejected by the authorities below for the reason that the assessee has not placed on record the approved building plan from the Municipal Corporation. The assessee has admitted the fact that the new residential house has been constructed without the approval of the Municipal Corporation. Rather, in support of his contentions, the ld.Counsel for the assessee has placed on record an interim order dated 08-02-2007 from the Corporation of Salem, wherein it has been stated that the assessee has constructed a new building without the permission of the Commissioner of Salem Corporation. The assessee has also placed on record the building plan and the estimation for the construction of a new house of demolition of the existing building. Reliance cannot be placed on the building plan as it is not approved by any statutory authority. However, the fact that the assessee has constructed a new house is proved by the interim order issued by the Corporation of Salem wherein it has been stated that the assessee has put up a new construction without permission of the Commissioner, Salem Corporation. The provisions of section 54F mandates the construction of a residential house, within the period specified. However, there is no condition that the building plan of the residential house constructed should be approved by the Municipal Corporation or any other competent authority. If any person constructs a house without approval of building plan, he will be raising construction at his own risk and cost. As far as for availing exemption u/s.54F, approval of building plan is not necessary. The approved building plan, certificate of occupation etc. are sought to substantiate the claim of new Printed from counselvise.com ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 11 of 13 construction. In the present case, the fact that the assessee has raised new construction is evident from the interim order issued by the Corporation of Salem.” 13. We have also gone through para no. 13 of the order of the Mumbai Bench of the Tribunal in the case of ACIT vs. Sanjay B. Pahadia (Supra), which is to the following effect: “13. Thus, the only dispute that is left to be resolved by us is whether the approach followed by the AO was fair and justified and in accordance with law and facts of this case or not. In this regard, our considered view is that the AO has gone wrong on law as well as on facts. As far as legal position is concerned, the issue before us is whether the assessee is eligible to claim exemption u/s 54/54F on the basis of his investment in acquisition of one residential house property or not. In our considered view, whether the house property is built upon an approved plan or not and whether the two flats have been converted into one after obtaining requisite approvals from the local authorities or not, shall not fall in the domain of Income-tax proceedings, so long as other conditions as prescribed under the law are duly fulfilled. Legal position has been threadbare clarified by Hon'ble Bombay High Court in the judgements relied upon by the Ld. CIT(A) in the case of CIT v. Devdas Naik (supra) as well as CIT v. Raman Kumar Suri (supra) wherein in the similar facts it was held that even if two flats were acquired under two distinct agreements, but if the flats were constructed in such a view that adjacent units of the flats can be combined into one, then the assessee would be eligible to claim the benefit on the entire amount invested in two flats combined into one by the assessee. Thus, on legal principle, the AO's action was not proper, therefore, it has rightly been reversed by Ld. CIT(A).” 14. On perusal of the findings given by the Chennai Bench of the Tribunal in the case of B. Slvasubramanian Vs. ITO (Supra) and the Mumbai Bench of the Tribunal in the case of ACIT vs. Sanjay B. Pahadia (Supra), we find that it has been held by both the Benches of the Tribunal that there is no condition under section 54F of the Act requiring compliance with approved plans of Printed from counselvise.com ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 12 of 13 the statutory authority. We also find that the only condition prescribed under section 54F of the Act is that the assessee should construct a residential house within the prescribed period. The statute does not impose any requirement regarding approval of construction plans. Accordingly, we accept the 2nd contention of the assessee. 15. The third contention of the assessee regarding furnishing of complete bank statements evidencing the investment, we find that the assessee has furnished a valuation report which clearly establishes that the construction was carried out during the period from November 2008 to July 2009, which is within the prescribed period. We further find that the lower authorities have not doubted the correctness of the valuation report. In such circumstances, the claim of the assessee cannot be denied merely on the ground of non-furnishing of bank statements. If the Revenue had any doubt regarding the source of investment, appropriate action could have been taken under the relevant provisions of the Act. Accordingly, the 3rd contention of the assessee is also accepted. 16. In view of the above, we hold that the assessee has duly satisfied the conditions prescribed under section 54F of the Act. Accordingly, we direct the Ld. AO to delete the corresponding addition. Printed from counselvise.com ITA No1799 of 2025 Mekala Sharath Reddy HUF Page 13 of 13 17. In the result, the appeal of the assessee is allowed. Order pronounced in the Open Court on 25th March, 2026. Sd/- Sd/- (RAVISH SOOD) JUDICIAL MEMBER (MADHUSUDAN SAWDIA) ACCOUNTANT MEMBER Hyderabad, dated 25th March, 2026. Vinodan/sps Copy to: S.No Addresses 1 Mekala Sharath Reddy (HUF), C/o Fiscal Law Partners, Advocates, #102, Sri Sai Sampada Complex, Street No. 6, Habsiguda, Hyderabad – 500 007 2 Dy.CIT Circle 9(1) IT Towers, Masab Tank, AC Guards, Hyderabad 500004 3 Pr. CIT - Hyderabad 4 DR, ITAT Hyderabad Benches 5 Guard File By Order Printed from counselvise.com KAMALA KUMAR ORUGANTI Digitally signed by KAMALA KUMAR ORUGANTI Date: 2026.03.26 12:00:56 +05'30' "