The Mumbai Income Tax Appellate Tribunal (ITAT), in a landmark judgement, provided significant relief to homeowners participating in redevelopment projects. The tribunal said that homeowners swapping old flats for new ones in redevelopment projects, won’t be taxed under Section 56 of the Income Tax Act, which deals with “income from other sources”.
The case in question involved a taxpayer named Anil Pitale. Pitale exchanged a 1997-98 purchased flat for a newly redeveloped unit in 2017. The income tax department considered the difference between the new flat’s stamp duty value (Rs 25.17 lakh) and the indexed cost of the old flat (Rs 5.43 lakh), i.e., Rs 19.74 lakh, as taxable income under Section 56(2)(x). Moreover, this decision was also upheld by the Commissioner of Income Tax (Appeals).
However, now the ITAT ruled in favour of the taxpayer, setting aside the previous assessment. The ITAT stated that the transaction is an “extinguishment of rights in the old flat,” and not a case of receiving immovable property without adequate consideration. The tribunal ruled that Section 56(2)(x) does not apply to such redevelopment deals.
The tribunal noted that such transactions could be subject to capital gains tax provisions, allowing homeowners to claim deductions under Section 54 of the income tax act, if the proceeds are reinvested in another residential property.
“The tax authorities were not correct in law in assessing the impugned transaction under Section 56(2)(x)… Accordingly, we set aside the order passed by Ld CIT(A) and direct the AO to delete the addition,” read the order of the ITAT.
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