1. Facts of the Case
- The assessee owns an old flat constructed in 1983.
- There are 16 such flats in the building.
- The flat owners collectively agree to redevelop the building and hand over possession to a builder.
- As part of the redevelopment agreement:
- Each flat owner will receive a new redeveloped flat, and
- An additional monetary compensation of ₹8,00,000.
- The builder will retain the remaining flats.
The assessee seeks clarity on:
- Whether the monetary compensation is taxable.
- Whether the exchange of the old flat for a new flat is a transfer under capital gains provisions.
- If tax is applicable, how can it be legally minimized or avoided?
2. Issues in the Case [Questions]
- Is the ₹8 lakh compensation taxable in the hands of the assessee?
- Does the exchange of the old flat for a new flat amount to a transfer under capital gains?
- What is the cost of acquisition and how is capital gain computed?
- Are there exemptions available under the Income Tax Act to avoid or defer tax liability?
3. Legal Principles Covered
A. Section 2(47) – Definition of Transfer
- Under Section 2(47) of the Income Tax Act, transfer includes the relinquishment of an asset or any arrangement allowing possession of property under an agreement.
- The act of giving the old flat to the builder in exchange for a new one and cash qualifies as a transfer and is liable to capital gains tax.
B. Section 45(5A) – Special Provision for Capital Gain on Joint Development Agreements
- Introduced w.e.f. AY 2018–19, applies when:
- An individual/HUF transfers land or building under a registered development agreement.
- Capital gain arises in the year the certificate of completion is issued by the competent authority.
- Capital gain = Stamp duty value (SDV) of new flat on completion date + monetary consideration (₹8 lakhs) – Indexed cost of acquisition of the old flat.
In this case, capital gains will be taxed in the year the Completion Certificate is issued.
C. Computation of Capital Gains
- Full value of consideration = SDV of the new flat + ₹8,00,000.
- Cost of acquisition: Indexed purchase cost (from 1983), as per Cost Inflation Index (CII).
- Capital gain = (SDV + ₹8,00,000) – Indexed cost of the old flat.
Example (assumed values):
- Fair market value (FMV) of new flat on completion = ₹60,00,000.
- Indexed cost of old flat = ₹5,00,000 (assumed).
- Capital gain = ₹60,00,000 + ₹8,00,000 – ₹5,00,000 = ₹63,00,000.
Tax applicable:
- Long-term capital gain (LTCG) at 20% with indexation benefit under Section 112.
D. Exemption under Section 54
- Section 54 provides exemption from LTCG if:
- Gains are invested in purchase/construction of a new residential house in India within prescribed time limits.
- Since the assessee is receiving a new residential flat in exchange, the investment condition is deemed to be fulfilled.
Section 54 exemption can be claimed for the capital gain portion attributed to the new flat.
4. Possible Judgement / Advisory
1. ₹8 Lakh Compensation:
- Treated as part of sale consideration, and hence taxable as part of capital gains.
- No separate exemption for cash unless reinvested in property qualifying under Section 54.
2. Exchange of Flat:
- Considered a transfer under Section 2(47).
- Taxable under capital gains in the year of completion under Section 45(5A).
3. Tax Planning Advice:
- Claim exemption under Section 54 for capital gain portion attributed to the value of the new flat.
- If cash compensation (₹8 lakhs) is also reinvested in:
- another house within 2 years or
- construction within 3 years,
then additional exemption under Section 54 can be claimed.
