In a ruling that could ease the tax burden for several property owners undertaking redevelopment of old homes, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has allowed the full indexed cost of acquisition on the entire original property and upheld capital gains exemption under Section 54 of the Income-tax Act, 1961, on multiple floors received in a new structure.
In an order pronounced on February 20, the ITAT deleted an addition of long-term capital gains (LTCG) made by the assessing officer in the case of appellant Seeta Nayyar.
Nayyar and her husband owned a residential house on a 500-square yard plot at Maharani Bagh, New Delhi. In 2012, they entered into a redevelopment agreement with builder Chetanya Buildcon, which demolished the old structure and constructed a ground-plus-three-floor building at its own cost. In exchange, the builder received the first floor and a 22.5 per cent undivided share in the land, while the owners received the ground floor (husband), the second and third floors (Nayyar), a 77.5 per cent undivided share in the land, and ₹2.5 crore in cash.
The assessee computed LTCG but claimed the full indexed cost of the entire original property and set it off against the Section 54 deduction on the cost of the two new floors she received.
The assessing officer restricted the indexed cost of acquisition to only 22.5 per cent — the builder’s land share — and denied Section 54 relief, arguing that the assessee had “invested in two floors”, which, after the 2014 amendment, could not be treated as a single residential house.
Section 54 grants exemption from LTCG tax on the sale or transfer of a residential house, provided the capital gain is reinvested in purchasing or constructing another residential house within two years (purchase) or three years (construction). A 2014 amendment restricted the exemption to only one residential house.
Reversing both adjustments, the tribunal held: “The capital asset transferred was the existing immovable property, in lieu of which the assessee and her husband received the constructed area along with an undivided share in the land. Therefore, the cost of acquisition with indexation benefit under Section 48 of the Act would be available for the entire property and cannot be limited to 22.5 per cent...”
On the Section 54 claim, the Bench observed: “Except for one floor given to the builder, the rest of the building remained in the possession of the assessee and her husband. It is not a case where the builder was given the authority and freedom to develop the property for sale to outsiders. Therefore, the two floors given to the assessee are part of one residential house and cannot be considered as more than one in number.”
 "Mumbai ITAT ruling offers major tax relief for home redevelopment projects")
