Redevelopment Agreement with the Builder: Taxation on receipt of Bigger size flat in lieu of old Flat


  • Redevelopment Agreement with the Builder: Taxation on receipt of Bigger size flat in lieu of old Flat


  • Query]
  • We are 9 Flat owners staying in a Scheme in Nagpur. We have entered into an agreement with a builder on 16/06/2021 for redevelopment of our flats. The agreement for redevelopment & sale was done for  2.14 crores. I am a pensioner and except for pension and interest income, I don’t have any other income. Now, while filling my income tax return, I observed that a pop up information about the above agreement is showing the sale of the flat. We are only going to get flat with additional area in return and no monetary benefits are being availed. Kindly guide me as to how this transaction is to be shown in the returns? After completion of the flat sale deed will be executed which will also reflect in my account? What Will be the treatment at that time? [TGK – **]
  • Opinion:
  1. Timing of Taxation:
    Under the Indian Income Tax Law, the capital gain tax liability arises on the “Transfer” of capital assets. The capital gain transaction is no where dependent on the receipt of any amount/ sale consideration. The definition of “Transfer” according to Sec 2(47) Income Tax Act, 1961 in relation to a capital asset includes sale, exchange, or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. An exchange involves the transfer of property by one person to another and reciprocal transfer of property by that other person to the first person of some other property. There must be a mutual transfer of ownership of one thing for the ownership of another.
  2. In your specific case, you are handing over/ surrendering rights over the old flat and in exchange you would be receiving back a new flat of bigger size. Handover of the flat pursuant to the agreement of redevelopment & sale as mentioned in your query tantamount to the transaction of “Transfer” under the Income Tax Act-1961 & the same would result in “Capital Gain” income in your hands.
  3. Even though there is no transaction of money or flow of money in the transactions, still the “Capital gain” would be there in your hands. Capital gain accrues in your hand at the time of singing the agreement for redevelopment/sale.  However, the tax liability may not be there in your case by virtue of availability of capital gain exemption U/s 54.
  4. Capital Gain Exemption U/s 54:
    Under section 54 of the Income Tax Act, 1961, if any residential property which is held for a period of more than 2 years is sold or given for redevelopment and thereafter a new flat is purchased or acquired within a period of 1 year before or 2 years after the sale or new house property is constructed within a period of 3 years after the transfer then capital gain arising on the transfer of the old flat will be exempt to tax u/s. 54 of the Income Tax Act, 1961 to the extent of the cost of a new flat.
  5. New Flat pursuant to redevelopment agreement – Whether it will be treated as Purchase or Construction for capital Gain Exemption U/s 54?:
    In the case of redevelopment, the new flat to be acquired is normally treated as construction for the purpose of the Section 54. As a result, if the new flat is acquired by the owner within a period of 3 years from the surrender of the original flat then the capital gain arising from the sale of the original flat can be claimed as exempt u/s. 54 of the Income Tax Act. Further, the allotment of a flat or a house by a cooperative society of which the assessee is the member, is also treated as construction of the house [Circular No. 672, dated 16-12-1993].
  6. What if the transaction is not completed within a period of 2 years/3 years?:
    One must carefully note that if the new flat is not acquired by the owner within a period of 3 years then the income tax authorities may disallow the exemption during the course of the assessment proceeding. However, subject to litigation at appellate forum, the courts have consistently held that the taxpayers shall be entitled to claim exemption in respect of capital gains even though the construction is not completed within the statutory time limit of 3 years/2 years. One may refer Sashi Varma v CIT (1997) 224 ITR 106 (MP). Further, the Delhi High Court in [CIT v R.C. Sood (2000) 108 Taxman 227 (Del) has applied the same analogy where the assessee made substantial payment within the prescribed time and thus acquired substantial domain over the property, although the builder failed to hand over the possession within the stipulated period.
    In short, even if the new flat is handed over after a period of 3 years pursuant to the redevelopment agreement then also the taxpayers are allowed the capital gain exemption U/s54 by the judiciary.
  7. Word of Caution:
    If the new flat acquired by the original owner pursuant to the redevelopment agreement (on which taxpayers have claimed exemption u/s. 54) is sold within a period of three years from the date of its allotment then the capital gain exemption claimed earlier would become taxable in the year the new flat is transferred.
  8. In your specific case, the receipt of extra carpet area over and above the existing area could be claimed as exemption u/s. 54 of the Income Tax Act, 1961 and no capital gain tax liability would be there in your hands.
  9. Disclosure in the Income Tax Returns Forms:
    Now, various high value transactions are getting captured at the income tax portal through various sources. In your case also, the pop up information shows that you have signed an agreement. You would be required to show the transactions of capital gain while filing your income tax return.