In a decision expected to benefit homeowners engaged in property redevelopment, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that taxpayers can claim the full indexed cost of acquisition on the original property and avail capital gains exemption under Section 54 of the Income-tax Act, 1961, for multiple floors received in a reconstructed building.
The order, pronounced on February 20, set aside an addition of long-term capital gains (LTCG) made by the assessing officer in the case of Seeta Nayyar. The tribunal’s ruling clarifies the tax treatment of redevelopment arrangements where original property owners receive newly constructed units in exchange for granting development rights.
Nayyar and her husband jointly owned a residential property built on a 500-square-yard plot in Maharani Bagh, New Delhi. In 2012, they entered into a redevelopment agreement with Chetanya Buildcon. Under the arrangement, the developer demolished the existing house and constructed a new ground-plus-three-storey building at its own expense.
As part of the agreement, the builder was allotted the first floor along with a 22.5% undivided share in the land. The owners retained a 77.5% undivided share in the land and received the ground floor, the second floor and the third floor in the new building. In addition, they were paid Rs 2.5 crore in cash. The ground floor was allotted to Nayyar’s husband, while the second and third floors were allotted to Nayyar.
The assessing officer had treated the transaction in a manner that resulted in a higher LTCG liability. However, the ITAT held that the indexed cost of acquisition should apply to the entire original property and that exemption under Section 54 could be claimed on multiple residential units received through redevelopment.
The ruling is likely to provide clarity and tax relief to homeowners involved in similar redevelopment projects, particularly in metropolitan areas where such arrangements are common.
Source: Business Standard
