ITAT Delhi Grants Relief on Capital Gains Tax for Redeveloped Home Inherited from Mother
A Delhi resident recently won a significant tax relief case concerning long-term capital gains from a property redevelopment agreement. The Income Tax Appellate Tribunal (ITAT) ruled in favor of the man, who had received Rs 75 lakh from a builder as part of a redevelopment deal. The tax department had initially issued a notice, classifying the property as multiple residential units, which would affect his tax exemption claim.
Background of the Case
The individual inherited 400 square yards of leasehold land from his mother in 1997 and converted it to freehold by 1999. He had a single-storey house built on the property in 1978. In late 1999, he entered into an agreement with a developer to demolish the existing structure and construct a new building. Under this agreement, he retained rights to the basement, ground floor, second floor, and open terrace, while the builder received the first floor, which was later divided into three separate units.
In 2018, the man and the other owners of the first floor decided to redevelop the property again, entering into a new agreement with a different builder. This agreement outlined the distribution of ownership rights post-reconstruction. The man was to receive the basement, ground floor, third floor, and open terrace, while the builder would take the second floor.
Tax Dispute and Tribunal Ruling
The man received Rs 75 lakh as part of the 2018 redevelopment agreement and claimed an exemption under Section 54 for long-term capital gains on the portions of the building allotted to him. However, the Income Tax Officer rejected his claim, arguing that the basement, ground floor, and third floor constituted separate residential units, thus limiting his exemption to only the ground floor.
The ITAT examined whether the portions could be treated as separate residential houses for tax exemption purposes. The tribunal found that having multiple floors capable of independent use within a single building does not automatically classify them as separate residential properties. It referenced a prior ruling from the Delhi High Court, which clarified that acquiring multiple floors in the same residential property does not equate to owning multiple residential houses.
The tribunal also criticized the Assessing Officer for dismissing the valuation reports from registered valuers without adequate justification. The ITAT directed the Assessing Officer to recalculate the capital gains based on the man’s computations, ultimately resulting in no taxable long-term capital gain.
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