Mr Furia and his wife lived in a 510 square feet flat in a housing society in Chunabhatti, Sion, Mumbai, which he purchased in FY 2006-07. In FY 2012-13, the housing society entered into a redevelopment agreement with a builder, and as a result, Furia received a new flat in the same housing society with 30% more area.
This new flat was given to Furia by the builder after they signed an Agreement for Permanent Alternate Accommodation on January 12, 2018. Just eight days later, on January 20, 2018, Furia sold this redeveloped flat for Rs 1.95 crore, treating the profits from this sale as long term capital gain (LTCG) and claimed the Section 54F LTCG tax exemption.
Furia claimed that he used the full Rs 1.95 crore LTCG to buy a new residential flat in a different location.
However, the Income Tax Assessing Officer from Bandra (East) believed that the transfer of the old flat to the developer as part of the redevelopment deal was a separate transaction from the subsequent sale of Furia’s old flat. On this ground, the AO treated the gains as short-term capital gains (STCG), which meant Furia lost the Section 54F tax exemption and was now liable for paying taxes on the sale of his flat for Rs 1.95 crore.
The Assessing Officer rejected the tax exemption claim under Section 54F and also denied the indexation benefit and made an addition of Rs 80.14 lakh, representing Furia’s 50% share of the short-term capital gain.
The Commissioner of Appeals upheld the AO’s decision and observed that the redevelopment arrangement was not a simple case of sale and purchase but involved transfer of rights in the original flat followed by allotment of a newly constructed and substantially larger flat under the redevelopment scheme.
Unhappy with the order, Furia appealed to ITAT Mumbai. On July 16, 2026, he won the case in ITAT Mumbai. Kiran Mehta and Ravi Dasiya represented him before ITAT Mumbai.
Vikram Singh Yadav, Accountant Member and Siddhartha Nautiyal, Judicial Member of ITAT Mumbai, heard his case.
How did Furia win this case without paying taxes after selling his redeveloped flat?
Chartered Accountant Suresh Surana said to ET Wealth Online that in this case, ITAT Mumbai held that a redeveloped flat represents a continuation or substitution of the ownership rights attached to the original property and is not necessarily a new capital asset acquired only when the Permanent Alternate Accommodation Agreement (PAAA) is executed.
Surana says that Furia won the case in ITAT Mumbai because the redeveloped flat was held to be a continuation of his pre-existing property rights and not a new asset acquired only eight days before its sale.
The ITAT Mumbai classified the Rs 1.95 crore gains as LTCG and allowed the Section 54/54F and also cancelled the Rs 80.14 lakh income tax notice.
The Assessing Officer accepted that Section 56(2)(x) was not attracted because the redeveloped flat had been received following the redevelopment arrangement and the payment of Rs 6 lakh related only to the additional area purchased.
However, for the purpose of computing capital gains, the AO treated the redeveloped flat as a new and independent asset acquired on the date of the PAAA. Since the flat was sold eight days after that, the gain was classified as STCG.
The ITAT Mumbai disagreed with the AO and observed that redevelopment does not ordinarily extinguish the existing owner’s proprietary rights and result in the acquisition of an entirely fresh asset.
Surana says: “Instead, the ownership rights continue throughout the redevelopment process and are substituted from the old premises to the newly constructed premises.”
The PAAA merely identified and documented the permanent alternate accommodation to which the taxpayer had already become entitled under the development agreement; it did not create ownership rights for the first time.
Surana says: “Accordingly, the execution date of the PAAA could not be regarded as the starting point for computing the holding period.”
ITAT Mumbai further ruled that the relevant consideration is the date on which enforceable rights in the property arose and not the date on which the PAAA or conveyance document was subsequently executed. The taxpayer’s original ownership rights had arisen in 2006 and continued throughout the period of redevelopment.
Even if the holding period was conservatively computed from the development agreement dated February 15, 2013, the property had been held for nearly five years before being sold on January 20, 2018, substantially exceeding the prescribed period of 24 months.
ITAT Mumbai also held that the different components of the redeveloped flat could not be divided into separate capital assets merely because additional area was received or purchased under the redevelopment arrangement.
How did Furia get a 30% larger flat in the redevelopment agreement?
Under the redevelopment arrangement which the housing society signed and Furia agreed to, he became entitled to permanent alternate accommodation comprising the area of the original flat, an additional 30% carpet area without consideration, an area of 185 sq. ft. transferred by his mother and a further 55 sq. ft. purchased from the developer for Rs 6 lakh.