No I-T on new flat received exchange for old under Section 56(2)(x)

The judgment is likely to benefit prospective homeowners who are planning to exchange their old homes for upgraded accommodations in newly developed residential projects

In a recent ruling, the Mumbai Income Tax Appellate Tribunal (ITAT) has held that receiving a new flat in exchange for an existing one, as part of a residential redevelopment project, is not taxable under Section 56 of the Income Tax Act.

 

The ruling was delivered by a bench including BR Baskaran (Accountant Member) and Sandeep Gosain (Judicial Member). Section 56 of the Income Tax Act deals with income categorised as ‘income from other sources’, but the tribunal mentioned that such redevelopment-related exchanges do not fall under its purview.

 

“The judgement is most certainly advantageous for potential homeowners contemplating sale of their existing residencies for boutique upcoming real estate projects. It also provides a significant incentive for real estate developers involved in such redevelopment projects,” said Keshav Singhania, head, private client, Singhania & Co.

 

What was the ITAT case?

 

The appellant/ assessee had purchased a flat in the financial year 1997-98 in Mahavir Nagar Tristar Co-op Housing Society. The society underwent redevelopment as per the agreement entered with the developer. As per the terms and conditions of the agreement, the assessee got a new flat in lieu of the old flat surrendered by him. The stamp duty value of the new flat was ₹25,17,700. The indexed cost of the old flat was ₹5,43,040. 

 

Accordingly, the AO assessed the difference between the above said values amounting to Rs 19,74,660 as income of the assessee under section 56(2)(x) of the Income Tax Act. The CIT(A) confirmed the same. The assessee has filed this appeal challenging the order dated 30-09-2024 passed by the CIT(A), NFAC, Delhi and it relates to the Assessment Year (AY) 2018-19. The assessee is aggrieved by the decision of CIT(A) in confirming the addition of ₹19,74,660 made by the AO under section 56(2)(x) of the Income Tax Act. The tribunal held that the tax department is not correct in law in assessing the transaction under section 56(2)(x) of the Income Tax Act. The ITAT quashed the order passed by CIT(A) and directed the AO to delete the addition made by him under section 56(2)(x) of the Income Tax Act.

 

Aditya Bhattacharya, partner, King Stubb & Kasiva, Advocates and Attorneys explains what does it mean for customers:

 

The ITAT has elucidated that the acquisition of a new flat in lieu of an old flat that has been relinquished does not constitute ‘income from other sources’. This ruling serves as a definitive directive to Assessing Authorities, advising against the initiation of scrutiny and demands on such exchanges by misclassifying them under Section 56(2)(x).

 

The ITAT specifically states that such a transaction can be termed as an extinguishment of rights in old flat rather than an income from other sources.