The Income Tax Appellate Tribunal (ITAT) has given a big relief to house owners, particularly those involved in redeveloping their old houses. The ITAT has stated that if a person buys a new flat in place of their old flat or house, they will not have to pay tax under Section 56 of the Income Tax Act. Section 56 relates to “income from other sources.

Case Related to Mumbai ITAT

This case is related to the Mumbai bench of the Income Tax Appellate Tribunal (ITAT). A taxpayer named Anil Pitale had bought a flat in 1997–98. In December 2017, he gave the flat to a developer in exchange for a new flat under a redevelopment project. When the new flat was registered, its stamp duty value was about five times higher than that of the old flat.

Income Tax Department Treated Difference as Income

The Income Tax Department considered the difference between the stamp duty value of the new flat (₹25.17 lakh) and the indexed cost of the old flat (₹5.43 lakh), which was ₹19.74 lakh, as taxable income under Section 56(2)(x) of the Income Tax Act. Tax was demanded based on this. Anil Pitale appealed to the Commissioner of Income Tax (Appeals), but the decision of the tax department was upheld.

Taxpayer Approached ITAT

After that, Anil Pitale took the matter to the Income Tax Appellate Tribunal in Mumbai. The ITAT rejected the assessment of the Commissioner of Appeals and said that the transaction involved giving up rights in the old flat. It is not a case of receiving property without paying money. So, Section 56(2)(x) does not apply in this case.

Relief Under Section 54 is Possible

The tribunal further said that such transactions are part of capital gains, and the taxpayer can get an exemption under Section 54 of the Income Tax Act. This section allows tax exemption on capital gains if the money is used to buy another residential property. That means, if you sell your old house and buy a new one, you can claim a tax exemption.

Previous Order Cancelled

In its final order, the ITAT said, “The tax authorities did not apply the law correctly while making the assessment under Section 56(2)(x). So, we cancel the order of the CIT(A) and direct the Assessing Officer to remove the addition.” This means the taxpayer does not have to pay tax in this case.