Selling your flat for a new one? New flat not taxable under income tax rules, says Mumbai tribunal

In a significant ruling, the Mumbai Income Tax Appellate Tribunal (ITAT) has determined that homeowners who exchange their old flats for new ones during redevelopment projects will not incur income tax liabilities. The decision clarifies that such exchanges do not fall under Section 56 of the Income Tax Act, which governs income from other sources. This outcome will benefit homeowners involved in redevelopment agreements with builders or developers, as it exempts them from additional tax obligations when upgrading their accommodations. 

The recent judgment involved a case where a homeowner, Anil Pitale, exchanged his flat, originally purchased in 1997-98, for a newly developed flat in December 2017. The assessing officer had previously considered the difference in stamp duty value between the new and old flats as taxable income.

However, the ITAT ruled that this transaction constitutes the "extinguishment of rights in the old flat" rather than a "receipt of immovable property for inadequate consideration," thus exempting it from Section 56 taxation. 

The ITAT further elaborated that instead of applying Section 56, the scenario might be subject to capital gains tax rules. 

As per the tribunal, the provisions of Section 56(2)(x) do not apply to the current case scenario. It is possible that this transaction could fall under the provisions concerning capital gains, in which case, the assessee may be eligible for a deduction of the cost of the new flat under Sec. 54 of the Act. If this is the case, the assessee will not have any tax liability arising from these transactions.

ITAT stated that tax authorities were “not correct in law in assessing the impugned transaction u/s 56(2)(x) of the 3 ITA No. 465/Mum/2025 Act. Accordingly, we set aside the order passed by Ld CIT(A) and direct the AO to delete the addition made by him u/s 56(2)(x) of the Act.”

Homeowners like Pitale could claim deductions under Section 54 of the Act, covering the cost of the new flat, which would mitigate any tax liability. The tribunal's decision to overturn the tax authorities' assessments offers "reason to cheer to homeowners," especially in urban areas where redevelopment trends are prevalent. 

The ruling came in light of a difference noted between the stamp duty value of the new flat, at Rs 25.17 lakh, and the indexed cost of acquisition of the old flat, which was Rs 5.43 lakh. Originally, this Rs 19.74 lakh difference was classified as "income from other sources" by the assessing officer and confirmed by the CIT (Appeals). However, the ITAT directed that this assessment be annulled, stating that the authorities were "not correct in law in assessing the impugned transaction." 

According to Harsh Bhuta, Partner at Bhuta Shah & Co LLP, the ITAT's decision aligns with the current trend of homeowners exchanging older properties for residences in new projects. The decision underscores that in such exchanges, the taxable event does not occur until the sale of the new property, at which point capital gains tax will apply. For now, homeowners can proceed with redevelopment projects without the concern of immediate tax liabilities on the new property acquisition.