Mumbai ITAT Rules: No Income Tax Required to be Paid on New Flat in Exchange of Old One:

Mumbai ITAT Rules: No Income Tax Required to be Paid on New Flat in Exchange for Old One

If your building or housing society is going to be rebuilt or upgraded soon, or if you have made a deal with your builder to give up your current home in return for a redeveloped one, then there’s good news for you. A recent judgment by the Mumbai Income Tax Appellate Tribunal (ITAT), made by two members, B.R. Baskaran and Sandeep Gosain, said that if you are receiving a new flat as part of a building redevelopment project in exchange for your old flat, then you don’t have to pay any income tax on it under Section 56 of the Income Tax Act. That section usually covers money or property received from other sources, but in this case, it doesn’t apply. The bench has said that giving up your old flat to get a new one in a redevelopment project is just ending your rights in the old flat. It’s not the same as getting property for less than its actual value. So, simply exchanging an old flat for a new one doesn’t count as taxable income. Note, Section 56(2)(x)(b) of the Income Tax Act, 1961, says that if you receive a property like a house, flat, or land, and its stamp duty value is more than Rs. 50,000, then it can be taxed as income under "Income from Other Sources."

What exactly was the case?

An individual, Anil Dattaram Pitale, purchased a flat in 1997-98 in a cooperative society. The society went through redevelopment. As per its rule, Mr. Pitale was given a new flat in December 2017 in return for his old flat. In this case, the new flat's stamp duty value was Rs. 25,17,700, while the adjusted (indexed) cost of the old flat was Rs. 5,43,040. So, the difference between the two was Rs. 19,74,660 and was seen by the tax officer as a gain. This amount was treated as “income from other sources” and marked as taxable. The CIT (Appeals) also agreed with this decision. When the case was registered in the Income Tax Appellate Tribunal (ITAT), the decision was taken in favour of the owner. The ITAT said that they believe that Section 56(2)(x) is not applicable in this case. This could potentially be considered a capital gains transaction. And in that case, the homeowner can claim a tax exemption under Section 54 for buying the new flat. Therefore, the homeowner is not required to pay any tax on this deal. The Mumbai ITAT also said in its judgment that the tax department was wrong to apply Section 56(2)(x) to this case. Hence, the tribunal cancelled the earlier order passed by the CIT (Appeals) and told the Assessing Officer (AO) to remove the added tax under Section 56(2)(x).