ITAT Mumbai rules redeveloped flat sale eligible for LTCG relief, deletes tax demand

A homeowner who sold his redeveloped Mumbai apartment for Rs 1.95 crore just eight days after signing the allotment agreement does not owe short-term capital gains tax, the Income Tax Appellate Tribunal has ruled.

The Mumbai bench of the ITAT determined that a redeveloped flat represents a continuous substitution of pre-existing property rights rather than the creation of an entirely new asset, delivering clarity for urban housing societies undertaking modern renewal projects.

What happened in the dispute

The taxpayer, Mr Furia, originally bought a 510-square-foot flat in Chunabhatti, Sion, during the 2006-07 financial year. In 2012-13, the housing society entered into a formal redevelopment pact with a builder. Under that contract, Furia was allotted an upgraded replacement flat offering 30 per cent more space at no extra cost, alongside 185 square feet transferred from his mother and an additional 55 square feet acquired from the developer for Rs 6 lakh.

The builder executed the Agreement for Permanent Alternate Accommodation on 12 January 2018. Eight days later, on 20 January 2018, Furia sold the newly constructed flat for Rs 1.95 crore. He treated the profit as long-term capital gains and sought an exemption under Section 54F, stating that he ploughed the entire sale sum into another residential property.

An assessing officer in Bandra East rejected that position. The officer concluded that handing over the old apartment and receiving the new unit were distinct events, meaning the redeveloped premises constituted a fresh capital asset acquired only on the date of the accommodation agreement. Because the flat was sold eight days later, the officer treated the profit as short-term capital gains, denied indexation and statutory exemptions, and added Rs 80.14 lakh—representing Furia's 50 per cent share—to his taxable income. The Commissioner of Income Tax (Appeals) subsequently endorsed that assessment.

How ITAT Mumbai resolved the holding period

Furia took the dispute to the tribunal, represented by Kiran Mehta and Ravi Dasiya. A bench comprising Accountant Member Vikram Singh Yadav and Judicial Member Siddhartha Nautiyal overturned the tax department's stance.

The tribunal held that redevelopment does not extinguish a homeowner's underlying proprietary interest. Instead, existing rights continue uninterrupted and transfer directly from the demolished premises to the replacement unit. The execution of an accommodation agreement merely documents and identifies the specific physical flat already promised under the overarching development pact; it does not generate initial title.

The tribunal observed that even if the holding duration were measured conservatively from the society's development contract signed on 15 February 2013, the taxpayer held enforceable rights for nearly five years before the January 2018 sale. That comfortably surpassed the statutory 24-month threshold required for long-term classification.

The bench also held that additional space bundled into the final allotment could not be carved out into isolated capital assets. By classifying the entire Rs 1.95 crore transaction as a long-term capital gain, ITAT Mumbai permitted the statutory rollover and cancelled the Rs 80.14 lakh tax demand.