Big relief for flat owners: Exchanging Old Flat for New? You’re Not Liable for Tax, Says ITAT Mumbai
If your residential building or society is set to undergo redevelopment anytime soon, or you have agreed to exchange your current accommodation with your builder or developer for a redeveloped, new residence, you have some reason to rejoice!
A recent verdict by the bench members B.R Baskaran (accountant member) and Sandeep Gosain (judicial member) of the Mumbai ITAT (Income Tax Appellate Tribunal) held that receiving a new flat in an ongoing redevelopment residential project in lieu of erstwhile existing residential flat is not taxable under Section 56 of the Income Tax act, which deals with income under the head of “income from other sources.”
Per the bench, this exchange is merely the “extinguishment of rights in the old flat” and would not amount to “receipt of immovable property for inadequate consideration.” In other words, merely the exchange of an old flat for a new one does not give rise to any taxable income.
Notably, Section 56(2)(x)(b) of the Income Tax Act, 1961, notes that any immovable property received, the stamp duty value of which exceeds Rs 50,000, will be taxed under the head ‘Income from Other Sources.
Explains Experts, “This judgment would certainly be beneficial to homeowners in the future who would consider swapping their existing homes with the luxurious apartments in the new residential project. Although the extinguishment of the old flat and receipt of new property instead of the old flat does not give rise to a taxable event, the sale of new property in the future would entail capital gains tax implications.”
This can also potentially pave the way for city residents to exchange their old houses for new, luxury apartments at minimal cost.
Says Experts, “The Tax Department was wrong in its interpretation of the law, as Section 56(2)(x) is for gifts, and in the case of redevelopment projects, the old flat owner does not get that new flat as a free gift, but it is in exchange for the old flat, which has been surrendered. The recent ITAT judgment rightly pointed out that this transaction will not be treated as a gift, and hence, the question of it being taxed under the head “ Income from other sources” does not arise.
Expert further clarifies that “ITAT mentioned in the order that this transaction may be taxed under the head capital gains. In cases of residential house capital gain sales, taxpayers can get a Section 54 exemption if they purchase/construct another from the capital gain amount.”
In this case, ITAT pointed out that the gain from this transaction will be deemed to be invested under Section 54, so there will not be any tax liability even if the above income is taxed under the head of capital gain. “This clarification from ITAT in the order will bring much-needed clarity in the redevelopment projects tax litigations faced by flat owners,” adds Expert