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Redevelopment Flat Value Not Taxable as Income from Other Sources, Rules ITAT
Moneylife Digital Team 25 March 2025
Economy & Nation
In a significant ruling, the Mumbai bench of the income tax appellate tribunal (ITAT) provided relief to Anil Dattaram Pitale concerning the taxability of a new, bigger-sized flat received in a redevelopment project. The tribunal set aside the addition made under section 56(2)(x) of the Income-tax (I-T) Act and held that such transactions should not be taxed as income from other sources.
 
In an order last week, the ITAT bench comprising accountant member BR Baskaran and judicial member Sandeep Gosain said, "The facts discussed above would show that the assessee (Mr Pitale) got a new flat in the redeveloped property in lieu of old flat. Hence, it is a case of extinguishment of old flat and in lieu thereof, the assessee has got new flat as per the agreement entered with the developer for the redevelopment of the Society. Thus, it is not a case of receipt of immovable property for inadequate consideration that would fall within the purview of the provisions of Section 56(2)(x) of I-T Act. Accordingly, we are of the view that the provisions of Section 56(2)(x) will not be applicable to the facts of the present case."
 
Mr Pitale had purchased a flat in the Mahavir Nagar Tristar Co-operative Housing Society in the financial year (FY)1997-98. The society later entered into a redevelopment agreement with a developer, under which Mr Pitale was allotted a larger flat on 26 December 2017 in exchange for surrendering his old unit.
 
The assessing officer (AO) determined the stamp duty value of the new flat to be Rs25.17 lakh, while the indexed cost of the old flat was Rs5.43 lakh. Citing the difference of Rs19.74 lakh, the AO assessed the amount as 'income from other sources' under section 56(2)(x) of the I-T Act. This decision was upheld by the commissioner of income tax (appeals) (CIT(A)).
 
The ITAT ruled in favour of Mr Pitale. The tribunal observed that the transaction involved the extinguishment of the old flat and the acquisition of a new one under a redevelopment agreement rather than a transfer of immovable property for inadequate consideration.
 
The tribunal clarified that since the new flat was received in exchange for the old one, it did not fall within the ambit of section 56(2)(x). Instead, the transaction could, at most, attract capital gains tax, in which case Mr Pitale would be eligible for exemption under section 54 of the Act. This exemption would nullify any tax liability arising from the transaction.
 
"At the most, this transaction may attract the provisions relating to capital gains, in which case, Mr Pitale should be entitled to deduction of the cost of the new flat under Section 54 of the Act. In that case, there will be no tax liability upon Mr Pitale on account of these transactions," the bench said.
 
With this ruling, the ITAT has provided significant clarity on the tax treatment of properties acquired through redevelopment projects. The decision ensures that taxpayers undergoing redevelopment do not face unwarranted tax burdens under section 56(2)(x). The tribunal has directed the AO to delete the addition made under this section, granting full relief to Mr Pitale.
 
This judgment is expected to set a precedent for similar cases, benefiting numerous taxpayers involved in redevelopment projects across the country.
 
(Case No. ITA No. 465/Mum/2025  Date: 17 March 2025)
 
Comments
muralichodavarapu
3 weeks ago
a very judicious order which would benefit tax payers having old flat and obtaining a new flat in lieu thereof and with no capital gains by getting benefit of section 54
Reply
dipak.varma
3 weeks ago
Then what about GST? Why GST is levied on PAAA?
Reply
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