The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that the sale of a redeveloped flat should be treated as a long-term capital gain under the Income Tax Act, 1961. The decision allows taxpayers to claim indexation benefits and exemption under Section 54F of the Act.
The order was passed while hearing an appeal filed by a Mumbai couple who were denied long-term capital gains treatment and tax exemption under Section 54F on the sale of their redeveloped property during the assessment year 2018-19.
The case involved Rajesh Shamji Furia and his wife, who had purchased a 510-square-foot flat in 2006. The property was later included in a redevelopment project following a development agreement signed on February 15, 2013.
As part of the redevelopment arrangement, the couple received a new flat that included the original area, an additional 30% area provided by the developer without any cost, extra space purchased from the developer and 185 square feet transferred by Furia’s mother. The redeveloped flat was subsequently sold for Rs 1.95 crore in 2018, and the couple claimed exemption under Section 54F.
However, the Assessing Officer (AO) considered the redeveloped flat as a newly acquired capital asset. The gains from the sale were classified as short-term capital gains, and the couple was denied indexation benefits and exemption under Section 54F.
The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), upheld the AO’s decision, following which the taxpayers approached the ITAT.
Rejecting the tax department’s argument, the tribunal observed that redevelopment does not terminate an owner’s rights or result in the creation of an entirely new asset. It stated that ownership continues throughout the redevelopment process, with rights merely transferring from the old structure to the newly constructed premises.
The ITAT further noted that a Permanent Alternate Accommodation Agreement (PAAA) does not establish ownership for the first time but only documents the alternate accommodation provided in exchange for the original property.
In Furia’s case, the tribunal observed that even if the holding period was considered from the 2013 development agreement, the property had been held for nearly five years, making it eligible for long-term capital asset classification.
The ITAT concluded that the redeveloped flat represented a continuation of the original asset and not a fresh acquisition. It directed the Assessing Officer to remove the addition of Rs 80.14 lakh, allow the indexed cost of acquisition and grant Section 54F exemption as per applicable provisions.
Source: Money Control
