ITAT Delhi Ruling: Multiple Floors in a Redeveloped Property Qualify as a Single Residential House for Capital Gains Exemption

The computation of long-term capital gains (LTCG) and the subsequent exemptions claimed in cases of property redevelopment have long been subjects of intense litigation. A critical issue often arises when a property owner enters into a collaboration agreement with a developer and receives multiple constructed floors in return. The core dispute is whether these multiple floors constitute "one residential house" for the purpose of claiming tax relief.

In a landmark judicial intervention, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, in the case of Ranjan Sen Jain Vs ITO, delivered a comprehensive ruling addressing this exact controversy. The tribunal clarified the legal position regarding the scope of exemption under Section 54 and Section 54F of the Income-tax Act, 1961 for Assessment Year 2020-21, alongside resolving disputes related to the determination of Fair Market Value (FMV) as of 01.04.2001 and the admission of additional evidence under Rule 46A.

Background and Factual Matrix

The dispute originated from the assessment proceedings initiated under Section 143(3) read with Section 144B of the Income-tax Act, 1961.

The assessee had inherited a residential property situated in Vasant Vihar, New Delhi, following the passing of his mother in the year 1997. After successfully converting the property into a freehold asset, the assessee executed an initial collaboration agreement in 1999 with a developer. Under this initial arrangement, the builder was granted rights to the first floor, while the assessee retained ownership of the remaining portions of the building.

Years later, in 2018, the assessee, along with the respective owners of the first-floor units, entered into a fresh collaboration agreement with M/s Uppal Housing Pvt. Ltd. The objective was the complete demolition and reconstruction of the existing structure.

According to the terms of this new agreement:

  • The assessee was allocated the basement, ground floor, third floor, and the open terrace.
  • The developer retained the second floor as their share of the reconstructed property.
  • The assessee also received a monetary compensation of Rs. 75 lakh from the builder.

Upon completion of the project, the assessee filed his income tax return, claiming capital gains exemption under Section 54 and Section 54F on the entire constructed area allotted to him (i.e., the basement, ground floor, and third floor).

During the scrutiny proceedings, the Assessing Officer (AO) raised two primary objections regarding the assessee's tax computation: