Big relief for flat owners: No income tax payable if you get a new flat in exchange for old, rules Mumbai ITAT

If you own a society flat that is scheduled to undergo redevelopment by the builder or developer and get an offer to exchange the older one with a new accommodation, you won’t have to pay any income tax on it.

In a recent judgement, the Mumbai Income Tax Appellate Tribunal (ITAT) ruled that such an exchange cannot be taxed under Section 56 of the Income Tax Act. Section 56 of the Income Tax Act deals with income under the head of “income from other sources.”

The bench members B R Baskaran (accountant member) and Sandeep Gosain (judicial member) of the Mumbai ITAT said that giving up rights in the old flat to get a new one is not considered taxable income, as it doesn’t count as receiving a property for less than its value.

The bench’s ruling said this exchange is merely the “extinguishment of rights in the old flat” and does not amount to “receipt of immovable property for inadequate consideration.” In other words, if someone is offered a new flat from a builder in exchange for their old one, the individual is not liable to pay any tax on the deal.

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What was the case?

One Anil Pitale bought a flat in a housing society in 1997-98. The society underwent redevelopment, and per the agreement with the developer. Pursuant to the agreement, Pitale got a new flat in December 2017 in lieu of the old flat surrendered. The assessing officer considered the difference between stamp duty value of new flat and the indexed cost of acquisition in respect of old flat as taxable income under the head – Other Sources and made the addition in the assessment order.

There was a difference of Rs 19.75 lakh between the stamp duty value paid for the new flat, which stood at Rs 25.17 lakh, and the indexed cost of acquisition of the old flat, which came to around Rs 5.43 lakh. This difference of Rs 19.74 lakh was categorised as “income from other sources” and, hence, held taxable by the assessing officer (AO) and, subsequently, by the CIT (Appeals).

On appeal, the CIT (Appeals) confirmed the addition. On further appeal, the ITAT held that extinguishment of old flat and receiving new flat in lieu of old flat cannot be considered as immovable property received for inadequate consideration.

At most, this transaction can attract capital gains tax implications for which Pitale would be entitled to claim an exemption for investment in house property under Section 54 of the Income-tax Act, 1961. Accordingly, the ITAT deleted additions made by tax authorities.

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’.

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ITAT observations on the matter

According to the tribunal “the provisions of Sec. 56(2)(x) will not be applicable to the facts of the present case. At most, this transaction may attract the provisions relating to capital gains, in which case, the assessee should be entitled to the deduction of the cost of the 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.”

ITAT is of the view 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.”

Harsh Bhuta, Partner, Bhuta Shah & Co LLP, says the recent decision of Mumbai Income-tax Appellate Tribunal has given “reason to cheer to homeowners. It has been a current trend in various cities where the homeowners exchange their existing old residential accommodation with the builders / developers for an accommodation in the proposed residential project.”

The Mumbai ITAT held that receiving a new flat in an ongoing redevelopment residential project in lieu of erstwhile existing residential flat amounts to extinguishment of rights in old flat. Consequently, the deeming fiction of ‘receipt of immovable property for inadequate consideration’ is not applicable in this transaction and cannot be covered under the ambit of ‘Income from Other Sources.’

This judgement would certainly be beneficial to homeowners in future who would consider swapping their existing homes with the luxurious apartments in the new residential project, says Shah. Although, the extinguishment of old flat and receipt of new property in lieu of old flat does not give rise to a taxable event, the sale of new property in future would entail the capital gains tax implications, he added.