No Income Tax Liability If You Receive New Accommodation In Lieu Of Old One Says ITAT Mumbai

Often developers decide to redevelop old buildings when they begin to deteriorate. In such cases, residents of such buildings agree to give up their accommodation for redevelopment, provided that the builder gives them accommodation in the same place once the redevelopment is complete. However often the receipt of the redeveloped flat by the resident leads to the levy of income tax.

The Mumbai ITAT (Income Tax Appellate Tribunal) said in a recent case that if an owner of a flat receives a new flat in exchange for the flat previously owned by him or her following the redevelopment of the housing society, the owner will not have to pay income tax on such an exchange.

The bench stated that such an exchange is simply an “extinguishment of rights in the old flat” and not a “receipt of immovable property for inadequate consideration.”

Prior to the ruling Section 56(2)(x)(b) of the Income Tax Act, 1961 was often applied on such receipts of property. Section 56(2)(x)(b) states ‘any immovable property received, the stamp duty value of which exceeds Rs 50,000, will be taxed under ‘Income from Other Sources.’

The case in which the ruling was given was made in a case titled ‘Anil Dattaram Pitale v. ITO (ITAT Mumbai)’. Pitale bought a flat in 1997-98. The flat purchased by Pitale was in a Cooperative Group Housing Society (CGHS). Pitale had an agreement with the builder that he would be allocated a new flat if the society was redeveloped provided he gave up his older accommodation.

The builder provided Pitale with a new flat in December 2017 after he surrendered his previous one. The stamp duty for the new flat amounted to Rs 25,17,700. This amount was Rs 19,74,660 greater than the indexed cost of acquisition of Pitale’s original flat which stood at Rs 5,43,040.

The Rs 19.74 lakh difference was classified as “income from other sources” and declared taxable. However, the ITAT in its ruling said that the Rs 19.74 lakh amount was not taxable. The ITAT added that Pitale had no tax liability for receiving the new house.

“We are of the view that the provisions of Sec. 56(2)(x) will not be applicable to the facts of the present case. At most, this transaction may attract the provisions relating to capital gains, in which case, the assessee should be entitled to the deduction of the cost of the new flat u/s 54 of the Act. In that case, there will be no tax liability upon the assessee on account of these transactions,” the ITAT said.