No Income Tax On Exchange Of Old Flats For New Ones, Says Mumbai ITAT

News18

21-04-2025

Last Updated:
When individuals exchange their old flats for new ones as part of redevelopment projects, they will not be liable to pay tax under Section 56 of the Income Tax Act, as per Mumbai ITAT.
In a landmark ruling, the Mumbai Income Tax Appellate Tribunal (ITAT) has offered major relief to homeowners participating in redevelopment projects. The tribunal clarified that when individuals exchange their old flats for new ones as part of such projects, they will not be liable to pay tax under Section 56 of the Income Tax Act, which deals with 'income from other sources".
The case in question involved a taxpayer, Anil Pitale, who had purchased a flat in 1997-98 and later exchanged it for a newly redeveloped unit in December 2017. The Income Tax Department had previously treated the difference between the stamp duty value of the new flat (Rs 25.17 lakh) and the indexed cost of the old one (Rs 5.43 lakh) — amounting to Rs 19.74 lakh — as taxable income under Section 56(2)(x). This classification was also upheld by the Commissioner of Income Tax (Appeals).
However, the ITAT set aside this assessment, stating that the transaction represented an 'extinguishment of rights in the old flat," rather than a case of receiving immovable property without adequate consideration. As a result, the tribunal held that Section 56(2)(x) does not apply to such redevelopment deals.
The tribunal also emphasized that such transactions could instead be governed by capital gains tax provisions. In such cases, homeowners may be eligible to claim deductions under Section 54 of the Income Tax Act, which allows for tax exemption on capital gains if the proceeds are reinvested in a new residential property.
'The tax authorities were not correct in law in assessing the impugned transaction under Section 56(2)(x)… Accordingly, we set aside the order passed by Ld CIT(A) and direct the AO to delete the addition," the ITAT said in its order.