ITAT Mumbai Deletes Rs 1.3-Crore Tax Addition on Redevelopment Property
The Mumbai bench of the Income-Tax Appellate Tribunal has ruled that property owners cannot be taxed on the value of new premises promised under a redevelopment agreement before taking actual possession, ordering the deletion of a Rs 1.3 crore tax addition made against a local taxpayer.
The case arose after an income-tax assessing officer brought the entire stamp duty value of two new commercial shops, aggregating to Rs 1.3 crore, to tax under the head "income from other sources." The taxpayer had entered into two redevelopment agreements registered in December 2017. The tax authorities treated the future shops as having been received without consideration under Section 56(2)(x) of the Income-Tax Act.
Challenging the addition, the taxpayer contended that the redevelopment project was still under construction and that physical possession of the two shops had not been delivered. The taxpayer also demonstrated that the alternate accommodation was granted directly in exchange for surrendering existing tenancy rights in four shops, meaning the allotment was backed by reciprocal consideration rather than being a gratuitous transfer.
Setting a significant precedent for property owners facing similar litigation, the tribunal ruled that a property that is yet to be built and handed over cannot be treated as having been received merely because an agreement was registered. The ITAT bench observed that the mere execution or registration of a redevelopment agreement creates only a contractual right to obtain a property in the future upon completion of construction. Where a taxpayer has neither possession nor the right to enjoy the property, no taxable receipt of immovable property takes place.
The tribunal also affirmed that the transaction involved valid reciprocal consideration. Relying on earlier judicial precedents, the ITAT held that the allotment of the two new units in return for the relinquishment of tenancy rights could not be equated with an acquisition without consideration under Section 56(2)(x).
Chartered accountant Ketan Vajani, who represented the taxpayer, pointed out that redevelopment projects generally take three to five years from agreement signing to completion. He noted that while the law provides for taxation in the year of receipt, the department has routinely taxed stamp duty values at the time of signing agreements while ignoring that new properties are provided in lieu of old ones. He stated that the ITAT decision will help protect taxpayers from unintended tax consequences.
