Pranav B Prem

In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Mumbai has held that the value of a new flat received through the redevelopment of a housing society is not taxable under Section 56(2)(x) of the Income Tax Act, 1961. The decision, delivered by the bench comprising Shri B.R. Baskaran (Accountant Member) and Shri Sandeep Gosain (Judicial Member), pertains to the case of Anil Dattaram Pitale v. Income Tax Officer-16(2)(1) (ITA No. 465/Mum/2025) for the Assessment Year 2018-19.

Background of the Case

The appellant, Anil Dattaram Pitale, had purchased a flat in the financial year 1997-98 in the Mahavir Nagar Tristar Co-op Housing Society. The society later underwent redevelopment pursuant to an agreement with a developer. In accordance with the terms of the redevelopment agreement, the appellant surrendered his old flat (C-5/28) and, in exchange, received a newly constructed flat (B-1102) vide a registered agreement dated 26th December 2017. The stamp duty value of the new flat was Rs. 25,17,700, while the indexed cost of the old flat was Rs. 5,43,040. The Assessing Officer (AO) treated the difference between these values, amounting to Rs. 19,74,660, as "income from other sources" under Section 56(2)(x) of the Income Tax Act and added this amount to the taxable income of the assessee. This addition was subsequently confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)], prompting the assessee to challenge the decision before the ITAT.

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ITAT's Observations and Ruling

The tribunal carefully examined the facts and legal provisions and found merit in the appellant's arguments. It observed: "The facts discussed above would show that the assessee got a new flat in the redeveloped property in lieu of old flat. Hence, it is a case of extinguishment of old flat and in lieu thereof, the assessee has got new flat as per the agreement entered with the developer for redevelopment of the society. Thus, it is not a case of receipt of immovable property for inadequate consideration that would fall within the purview of the provisions of sec. 56(2)(x)."

The tribunal further emphasized that Section 56(2)(x) of the Act applies to cases where a person receives property without consideration or for inadequate consideration. In this instance, however, the new flat was received as a replacement for the old flat, which amounts to an "extinguishment" of rights in the old flat rather than a gift or transfer without adequate payment.

Applicability of Capital Gains Provisions

The bench also discussed the potential applicability of capital gains provisions. It observed: "At the most, this transaction may attract the provisions relating to capital gains, in which case, the assessee should be entitled for deduction of cost of new flat u/s 54 of the Act. In that case, there will be no tax liability upon the assessee on account of these transactions."

This implies that if any tax liability were to arise, it would fall under capital gains provisions rather than Section 56(2)(x). However, the tribunal made it clear that even under capital gains provisions, the assessee would be eligible for an exemption under Section 54, which allows a deduction when capital gains are reinvested in a residential property.

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ITAT's Final Decision

Concluding its analysis, the ITAT categorically rejected the Revenue's interpretation and held that the addition under Section 56(2)(x) was legally unsustainable. It ordered the deletion of the assessed income: "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." The appeal was allowed in favor of the assessee, providing relief from the additional tax burden imposed by the Revenue.

Appearance

Assessee by: Dr. K. Shivaram a/w. Mr. Shashi Bekal

Revenue by: Shri Kiran Unavekar, Sr.DR

Cause Title: Anil Dattaram Pitale V. ITO

Case No: ITA No. 465/Mum/2025

Coram: Sandeep Gosain [Member (Judicial)], B.R. Baskaran [Member(Accountant)]

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