ITAT: Redeveloped flat can't be taxable as 'other income'

MUMBAI: Income Tax Appel-late Tribunal (ITAT), Mumbai bench, has ruled in favour of a taxpayer who received a flat worth Rs 11.7 crore in a redevelopment project in lieu of sur-rendering his tenancy rights.

ITAT held that the transac-tion-viz surrender of tenan-cy rights amounted to transfer of a capital asset-and that the taxpayer, V Asher, was eligible for exemption under Section 54F of the Income Tax (I-T) Act. The tribunal further held that the value of the flat could not be taxed under the head 'Income from other sources'.

During scrutiny of the case for the year 2019-20, the I-T officer noted that the tenancy ar-rangement was not genuine. He, therefore, treated the value of the flat as 'Income from other sources', taxable at the applicable slab rate, and denied the exemption claimed by Asher under Section 54F.

Section 54F provides for capital gains tax exemption when an individual sells a long-term capital asset, such as surrender of tenancy rights, and invests the proceeds in a residential ho-use. If the entire amount recei-ved on sale or surrender of the capital asset is invested in a new house, no capital gains tax arises.

A proportionate exemp-tion is available in cases of par-tial investment. According to the I-T depart-ment, the tenancy agreement executed between the taxpayer and his family members was a colourable device created to avoid tax, as the property origi-nally belonged to family mem-bers and the tenancy was for-malised only shortly before redevelopment.

However, Asher submitted that the tenancy existed since 2013 and was supported by rent receipts, electricity bills, and records from the Maharashtra Housing and Area Develop-ment Authority (Mhada), which recognised him as a tenant in the redevelopment scheme.

ITAT took cognisance of the evidence showing that Asher had been occupying the premises as a tenant for seve-ral years. It held that surren-der of tenancy rights amounts to transfer of a capital asset. Accordingly, the tax tribunal ruled that the treatment of Rs 11.7 crore as 'Income from other sources' was not sustai-nable and that the taxpayer was entitled to claim exemption under Section 54F.