ITAT Mumbai rules no tax on redevelopment property value before possession

The Income-Tax Appellate Tribunal in Mumbai has deleted a Rs 1.3 crore tax addition on a property owner in a redevelopment case, ruling that Section 56(2)(x) can only apply when the property is actually received, not while still under construction. The tribunal also held that the new property was gi

MUMBAI: The Mumbai bench of the Income-Tax Appellate Tribunal (ITAT) has directed the deletion of a Rs 1.3 crore addition to a taxpayer’s income, ruling that tax under Section 56(2)(x) of the Income-Tax Act cannot be levied on a property that is still under construction and not yet handed over.

The case involved a property owner who had entered into a redevelopment agreement and was to receive two new shops in exchange for surrendering tenancy rights in four existing shops. The income-tax department had sought to tax the stamp duty value of the new property in the year the agreement was registered, before the taxpayer had taken possession.

ITAT observed that Section 56(2)(x) applies only when a taxpayer actually receives an immovable property during the relevant financial year “without any consideration” or for inadequate consideration. “Mere execution or registration of a redevelopment agreement creates only a contractual right to obtain a property in future upon completion of construction,” the tribunal noted. It added that where the building was still under construction and the taxpayer had neither possession nor the right to enjoy the property, there could be no receipt of the immovable property itself.

The tribunal also accepted the taxpayer’s argument that the transaction was for consideration, since the new shops were allotted in return for the relinquishment of valuable tenancy rights. Relying on previous judicial precedents, ITAT held that this could not be equated with a gratuitous transfer attracting tax under Section 56(2)(x).

Ketan Vajani, the chartered accountant who represented the taxpayer, said: “A redevelopment project takes a long period of time; generally it takes 3–5 years after signing the agreement to get the new property. While Section 56(2)(x) provides for taxation in the year of receipt, in several cases the I-T department has been taxing the stamp duty value in the year of entering into the agreement, which is unfair to the taxpayer.” He added that the decision would help taxpayers mitigate unintended consequences.