Redeveloped Residential Flat Is Continuation Of Original Asset: ITAT Mumbai Confirms Long-Term Capital Gain And Section 54/54F Relief
1. Background Of The Dispute
In Rajesh Shamji Furia Vs ITO (ITAT Mumbai), the core controversy was whether a flat received in a redevelopment project, and sold shortly thereafter, should be treated as a new, short-term capital asset, or as a continuation of the original long-term capital asset.
The assessee, an individual, had:
- Originally purchased a residential Flat No. 2 (510 sq. ft.) in the financial year 2006-07.
- The housing society later entered into a redevelopment arrangement with a developer via a Development Agreement dated 15.02.2013.
- Under this arrangement, the assessee became entitled to:
- The original carpet area,
- 30% additional area free of cost, and
- Additional area purchased from the developer, and
- Some area received from his mother.
Pursuant to this redevelopment scheme, the assessee ultimately received Flat No. 503 in the new building “Majala Priya Girish Vihar” as Permanent Alternate Accommodation. This flat was formally documented under an Agreement for Permanent Alternate Accommodation dated 12.01.2018, and then sold on 20.01.2018 for consideration of ₹21,95,48,000.
The assessee treated the gain as Long-Term Capital Gain (LTCG) and claimed:
- Indexation benefit, and
- Exemption under section 54/54F of the Income Tax Act 1961 on reinvestment in another residential house.
The Assessing Officer (AO), however, treated the redeveloped flat as a newly acquired asset on 12.01.2018 and taxed the gain as Short-Term Capital Gain (STCG), denying both indexation and Section 54/54F relief. The CIT(Appeals), NFAC confirmed the AO’s stand.
The assessee carried the matter to the ITAT Mumbai.
2. Facts Considered By The Tribunal
2.1 Original Acquisition And Redevelopment Scheme
Key factual elements reviewed by the Tribunal were:
- The assessee and his wife had jointly acquired the original flat (510 sq. ft.) in FY 2006-07.
- The society entered into a redevelopment agreement with a developer via Development Agreement dated 15.02.2013.
- Under this Development Agreement:
- Each existing member was entitled to permanent alternate accommodation in the redeveloped building.
- Such entitlement comprised:
- The original carpet area, and
- 30% extra area free of charge.
- In addition:
- The assessee acquired further area from the developer under the same scheme.
- The assessee’s mother transferred 185 sq. ft. to him, which also became part of the redeveloped flat.
Ultimately, all these components were consolidated into Flat No. 503, which was handed over under Agreement for Permanent Alternate Accommodation dated 12.01.2018.
2.2 Components Of The Redeveloped Flat
Flat No. 503 comprised:
- The original 510 sq. ft.
- The additional 30% free redevelopment area.
- 185 sq. ft. received by way of transfer from the assessee’s mother.
- 55 sq. ft. of extra area purchased separately from the developer for ₹26,00,000.
The flat was then sold on 20.01.2018, within days of executing the Permanent Alternate Accommodation Agreement.
2.3 AO’s Treatment Under Section 56(2)(x)
The AO initially examined Section 56(2)(x) of the Income Tax Act 1961, as the stamp duty value of the property exceeded the amount of ₹26,00,000 paid for the 55 sq. ft. additional area.
- The assessee clarified that:
- The flat was essentially received in exchange for the old flat under redevelopment.
- The sum of ₹26,00,000 related solely to the extra 55 sq. ft. area purchased from the builder.
The AO accepted this explanation and correctly concluded that Section 56(2)(x) was not triggered, as the main flat was not a purchase at undervalue but a consequence of redevelopment.
However, the real dispute arose at the stage of computing capital gains.
3. AO And CIT(A) View: New Asset, Short Holding, STCG
3.1 AO’s Stand
For capital gains purposes, the AO reasoned as follows:
- Under the redevelopment scheme, the old flat was transferred to the developer.
- In return, a new, distinct flat (Flat No. 503) was allotted under the Agreement for Permanent Alternate Accommodation dated 12.01.2018.
- Therefore, Flat No. 503 was treated as acquired only on 12.01.2018.
- Since the flat was sold on 20.01.2018, the holding period was less than 24 months.