The man said that he had invested the entire Rs 1.95 crore from the sale in purchasing another residential flat at a different location. (Image for representative purpose only)
You buy a flat and after some years the housing society gives it for redevelopment. You then sell the redeveloped flat within days of getting it and claim long-term capital gains exemption.But the Income Tax Department treats these as two different transactions and applies short-term capital gains tax. What do you do?In one such case a man faced a tax notice and subsequently had to appeal before the Income Tax Appellate Tribunal (ITAT), where he won relief.
What the case is about
The man had purchased a 510-square-foot flat in a housing society in Mumbai, during FY 2006-07, where he lived with his wife. Many years later, in FY 2012-13, the housing society entered into a redevelopment agreement with a builder.
Under the arrangement, the man was allotted a replacement flat in the same society. This flat had 30% more area than his original home.Also Read | Man enters JDA for land, gets 6 flats from builder and transfers 5 to wife, but gets tax notice; ITAT Delhi deletes Rs 4.14 crore additions after finding no stock-in-trade conversion or saleThe builder handed over the redeveloped flat to the man after the two parties entered into an Agreement for Permanent Alternate Accommodation in 2018.However, eight days after signing the agreement, the man sold the redeveloped flat for Rs 1.95 crore.On his part, he classified the profit from this transaction as long-term capital gains (LTCG) and sought a tax exemption under Section 54F.
The man said that he had invested the entire Rs 1.95 crore from the sale in purchasing another residential flat at a different location, making him eligible for the exemption.However, the Income Tax Assessing Officer (AO) took a different view. According to the AO, the transfer of the original flat to the developer under the redevelopment arrangement and the subsequent sale of the redeveloped flat were actually two separate transactions.With this view, the AO classified the gains as short-term capital gains (STCG), and denied the man the Section 54F exemption. This made the proceeds from the Rs 1.95 crore sale taxable. He also disallowed the benefit of indexation.The AO added Rs 80.14 lakh to the man’s taxable income, which was 50% share of the short-term capital gains.Also Read | Medicine shop owner deposited Rs 2.47 crore cash, faced unexplained money tax notice; ITAT Delhi says Income Tax Dept could not counter his evidence, rules in his favourThe Commissioner of Appeals also upheld the AO’s assessment. The appellate authority observed that the arrangement could not be treated as a straightforward sale and purchase.Instead, it involved the transfer of rights in the original flat, followed by the allotment of a newly constructed, substantially larger property under the redevelopment scheme.The man challenged the order before ITAT Mumbai. On July 16, 2026, the tribunal ruled in his favour.
Why did the homeowner win the case?
Chartered Accountant Suresh Surana told ET that ITAT Mumbai considered the redeveloped flat to be a continuation or substitution of the ownership rights associated with the original property.The tribunal held that such a property is not necessarily a new capital asset acquired only upon the execution of the Permanent Alternate Accommodation Agreement (PAAA).Under the redevelopment arrangement entered into by the housing society and accepted by the man, he was entitled to permanent alternate accommodation that included the area of his original flat, an additional 30% in carpet area at no cost, 185 square feet transferred by his mother and another 55 square feet purchased from the developer for Rs 6 lakh.The tribunal also ruled that the various portions of the redeveloped flat could not be treated as separate capital assets simply because the man received additional space or purchased extra area as part of the redevelopment arrangement.Also Read | Homebuyer paid Rs 91 lakh upfront for a Rs 1.24 crore property, but circle value rose to Rs 1.46 crore by registration; why ITAT Kolkata gave her tax relief and deleted Rs 11.35 lakh additionThe AO had accepted that Section 56(2)(x) did not apply to the transaction, since the man received the redeveloped flat under the redevelopment arrangement. The payment of Rs 6 lakh was considered to relate only to the additional area he had purchased.For calculating the capital gains, however, the AO treated the redeveloped flat as a separate asset acquired afresh on the date the Permanent Alternate Accommodation Agreement (PAAA) was signed. Since the man sold the property just eight days later, the resulting profit was classified as short-term capital gains (STCG).ITAT Mumbai rejected this interpretation, observing that redevelopment does not generally terminate an existing owner's property rights and replace them with ownership of an entirely new asset.Explaining the reasoning, Surana said: “Instead, the ownership rights continue throughout the redevelopment process and are substituted from the old premises to the newly constructed premises.”According to this interpretation, the PAAA only recorded and specified the permanent alternate accommodation that the taxpayer was already entitled to receive under the development agreement. It did not establish his ownership rights for the first time.Also Read |Man jointly bought Rs 80 lakh property with father and wife but didn't file ITR; taxman added Rs 55.2 lakh as unexplained money, but ITAT grants relief after proof of family contributionsSurana said: “Accordingly, the execution date of the PAAA could not be regarded as the starting point for computing the holding period.”The tribunal further clarified that the holding period must be calculated from the date on which the taxpayer acquired enforceable rights over the property, rather than the subsequent execution of the PAAA or a conveyance document. In this case, those rights originated in 2006 and remained in place throughout the redevelopment process.ITAT also considered an alternative calculation based on the development agreement dated February 15, 2013. Even if the holding period were counted from that date, the man had held the property for nearly five years before selling it on January 20, 2018. This was well beyond the prescribed 24-month period.ITAT Mumbai treated the gains of Rs 1.95 crore as long-term capital gains, allowed relief under Section 54/54F and set aside the Rs 80.14 lakh income tax addition.Also Read | Mother nominated son for savings account, but both died; Farmer father faced long delays, got money but lodged a compliant, Consumer Commission orders bank to pay Rs 15,000 relief