In a significant relief for homeowners entering redevelopment deals, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that multiple floors received in a redeveloped property can still be treated as one residential house for claiming tax exemption under Section 54.
The ruling came in the case of Seeta Nayyar vs ACIT for Assessment Year 2015–16, where the tribunal also allowed full indexed cost of acquisition on the entire property, rejecting the tax department’s restrictive view.
What was the case about?
The taxpayer, along with her husband, owned a residential property in Delhi. In October 2012, they entered into a redevelopment agreement with a builder.
As per the agreement, the builder demolished the old construction and built a new multi-storey building. As per agreement, the builder took one floor and 22.5% land share and the original owner was given multiple floors and Rs 2.5 crore.
While filing returns for AY 2015–16, the taxpayer declared long-term capital gains of over Rs 3.37 crore and claimed deduction under Section 54 exceeding Rs 4.40 crore.
Tax department’s objection
The Assessing Officer (AO) raised two key objections:
-Indexation benefit was restricted only to 22.5% of land transferred to the builder
–Section 54 exemption was denied on grounds that multiple floors meant more than one house
This led to a higher taxable capital gain being added to the taxpayer’s income.
What ITAT said
The tribunal disagreed with the tax department on both counts. It held that the redevelopment agreement resulted in transfer of the entire property, not just part of it. Therefore, full indexed cost of acquisition must be allowed, not limited to the developer’s share.
On Section 54, ITAT made a crucial observation: Multiple floors received in the same redeveloped building cannot be treated as separate houses and that they form part of one residential unit, making the taxpayer eligible for exemption. Accordingly, the tribunal allowed the appeal in favour of the taxpayer.
What this means for taxpayers
Commenting on the ruling, Jignesh Shah, Partner – Direct Tax, Bhuta Shah & Co., said: “The Hon’ble Mumbai ITAT… has held that an exemption under Section 54… cannot be denied… where… couple of floors were allotted to the owner… The floors provided by the builder are considered to be part of one residential house and cannot be considered as more than one residential property.”
He added that this strengthens the position for taxpayers in similar redevelopment arrangements: “Based on the above judicial precedent, the multiple floors received in the same building… can be considered as one residential house property and the exemption under Section 54… can be claimed for such multiple floors…”
Structuring redevelopment deals: Key takeaway
The ruling also highlights the importance of how redevelopment agreements are drafted.
Shah explained: “The taxpayers can enter into a redevelopment agreement… such that in lieu of the old residential building… a new residential house property should be built… A portion… should be received by the owner, and residual part… can be given to builder…”
He further noted: “There should not be separate dates for transfer of land and building… Also, the redevelopment agreement should be drafted in such a manner that the builder would not have exclusive authority… to develop the property for sale to the outsiders.”
Why this ruling matters
This decision is particularly relevant for homeowners in cities like Mumbai and Delhi, where redevelopment deals are common.
The ruling clarifies two critical aspects:
Full tax benefit on entire property can be claimed
Multiple floors ≠ multiple houses for tax purposes
For taxpayers, this could mean significant savings on capital gains tax, provided agreements are structured carefully.
It is important to note that this is a ruling of the Income Tax Appellate Tribunal (ITAT). ITAT decisions can be challenged before the High Court and, thereafter, the Supreme Court. Therefore, legal positions may evolve depending on further appeals.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.