Mumbai: It is not uncommon for property owners, be they flat owners or owners of commercial premises who have entered into a redevelopment agreement, to find themselves embroiled in tax litigation.At times, income-tax (I-T) authorities seek to tax the value of the alternate (new) property they would receive. And, to take it a step further, this action is taken before the owner has got possession of the new property.A recent case before Mumbai bench of Income-Tax Appellate Tribunal (ITAT) sets a favourable precedent for taxpayers caught in a similar situation.In this case, the tax tribunal directed deletion of an addition of Rs 1.3 crore to that taxpayer’s income, which was made by I-T department under Section 56(2)(x) of the I-T Act. ITAT observed that the provision can be invoked only when a taxpayer actually receives an immovable property during the relevant financial year, ‘without any consideration’ or for an inadequate consideration.A property that is yet to be constructed and has not been handed over to a taxpayer cannot be treated as having been ‘received’ merely because a redevelopment agreement has been registered, held ITAT. It further held that the transaction was ‘for consideration’ as the new property was in lieu of that relinquished under the redevelopment agreement.The taxpayer had entered into two redevelopment agreements, which were registered in Dec 2017. The stamp duty value of the two new shops that would be allotted to him aggregated to Rs 1.3 crore. The I-T officer treated these shops as having been received without consideration and brought their entire stamp duty value to tax under the head ‘income from other sources’.In this case, the taxpayer contended that the redevelopment project was still under construction and that he had not received possession of the two new shops. He also pointed out that the alternate accommodation was being provided in exchange for surrender of his existing tenancy rights in four shops, and therefore it cannot be said that the transaction was without consideration.Ketan Vajani, chartered accountant who represented the taxpayer, said, “A redevelopment project takes long period of time; generally it takes 3-5 years after having signed the agreement to get the new property. While Section 56(2)(x) provides for taxation in the year of receipt, in several cases, I-T department has been taxing the stamp duty value in the year of entering into the agreement, which is unfair to the taxpayer.”“More important, receipt of the new property cannot be said to be without consideration, since it is in lieu of the old one. I-T department normally ignores this part while taxing the stamp duty value, which is also not in accordance with the I-T provisions. This decision will help the taxpayers to mitigate such unintended consequences,” he added.Hearing the matter, ITAT bench observed: “Mere execution or registration of a redevelopment agreement creates only a contractual right to obtain a property in future upon completion of construction.” It stated 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 tax tribunal also accepted the taxpayer’s argument that the transaction involved reciprocal consideration. Relying on previous judicial precedents, ITAT held that the two shops were allotted in return for relinquishment of valuable tenancy rights and, therefore, could not be equated with a gratuitous transfer attracting tax under Section 56(2)(x).
