Major relief for homeowners: ITAT rules redeveloped flats not taxable as 'other income'

Mumbai redevelopment news: Income Tax Appellate Tribunal says transfer is 'extinguishment' of rights, not asset replacement or income gain

In a big relief to homeowners in Mumbai and other cities whose projects are undergoing redevelopment, the state Income Tax Appellate Tribunal (ITAT) has held that the cost of a new flat provided to a homeowner during a redevelopment project ought to be exempted from tax as 'Income from Other Sources' under Section 56(2)(x) of the Income Tax Act.

Mumbai redevelopment news: Income Tax Appellate Tribunal says transfer is 'extinguishment' of rights, not asset replacement or income gain. (Picture for representational purposes only) (Mehul R Thakkar/HT)

“Receiving a new flat in lieu of an old one is a case of 'extinguishment' of property rights and not a case of receipt of immovable property for inadequate consideration. Hence the ITAT rightly ruled in favor of the taxpayer,” says Vivek Jalan, partner, Tax Connect Advisory Services.

The ruling clears the air regarding taxes on such transactions. “It says that a new flat in return for an old one in a project undergoing redevelopment is not treated as taxable income, thus avoiding the undue taxes in such cases,” says Amit Mamgain, director, Yugen Infra, a real estate company.

Specifics of the case

Specifically, the taxpayer A. Pitale bought a flat in a housing society in 1997-98. On the redevelopment of the society, he was provided a new flat in December 2017. Initially, the Income Tax officer was considering the difference between the stamp value of the new flat, that is, ₹25.1 lakh from the indexed cost of the old flat, ₹5.4 lakh, amounting to ₹19.7 lakh. He defined that as taxable 'Income from Other Sources.' But as the ITAT expressed Pitale's favor,' this was not a case of receipt of immovable property at inadequate consideration but rather a valid replacement of a former asset’.

What does this mean?

Developers are focusing on redevelopment projects all over the country in recent times. Only last week, the Municipal Corporation of Delhi tied-up with the Housing & Urban Development Corporation (HUDCO) to plan redevelopment of model flats in Minto Road, Azadpur and Model Town. In fact, in Mumbai where land is running out, redevelopment is the only way the city’s growing housing needs can be accommodated.

“This is definitely a landmark ruling and can set a precedent for future taxation for redevelopment agreements across India. It clarifies that new flats given in lieu of the old one during redevelopment will not be considered as taxable income and can afford clarity and possibly relief for many homeowners involved in such redevelopment projects over the country,” says Mamgain.

Agrees Jalan, “Across the country, as flats grow older, redevelopment business will gain speed. Hence this ruling of ITAT clears the air rightly as far as taxation is concerned.”

It should be noted that while this judgement provides relief, capital gains would still apply when the property is sold in the future.

Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics