The assessee entered into a collaboration agreement with one Mr. K for dismantling an old building and construction of ground floor, first floor and second floor. In terms of the collaboration agreement, the assessee kept the rights of ground floor and second floor with roof rights of the first floor. The assessee declared the fair market value of the property at Rs. 1,25,10,000 for the assessment year 2016-17. After reducing the indexed cost of acquisition at Rs. 21,16,515, he declared long-term capital gains at Rs. 1,03,93,485. The assessee then claimed exemption under section 54 of the Income-tax Act, 1961 at Rs. 1,24,50,000 on the long-term capital gains. The Assessing Officer did not accept the claim of exemption under section 54 on the ground that the assessee had sold the rights of the first floor to the builder and kept the ground and second floors to himself under the collaboration agreement. Therefore, he treated the long-term capital gains on proportionate sale value of the first floor which came to Rs. 34,64,495 (one-third of the long-term capital gains as calculated by the assessee at Rs. 1,03,93,485) as the deemed long-term capital gains on transfer of rights of the first floor to Mr. K and taxed it in the hands of the assessee. The Commissioner (Appeals) enhanced the income. On appeal :

Held, that sections 54 and 54F use the expression “a residential house” which is not “a residential unit”. Sections 54 and 54F require 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. There is nothing in these sections which requires 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. The fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the deduction under section 54 or section 54F. It is neither expressly nor by necessary implication prohibited. Thus, the assessee was entitled to exemption. (AY 2016-17)