No Income Tax on Buying a News Home in Exchange for an Old - Here's Why

If you own a society apartment that the builder or developer plans to renovate and you receive an offer to swap your old apartment for a new one, you will not be required to pay income tax on it.

The Mumbai Income Tax Appellate Tribunal (ITAT) recently decided that Section 56 of the Income Tax Act does not allow for the taxation of such an exchange. The Income Tax Act's Section 56 addresses income under the heading of "income from other sources."

Giving up rights in the previous apartment to obtain a new one is not regarded as taxable income, according to Mumbai ITAT bench members B R Baskaran (an accountant) and Sandeep Gosain (a judge). This is because it does not count as receiving a property for less than its value.

According to the bench's decision, this transaction does not constitute "receipt of immovable property for inadequate payment" and instead only represents the "extinguishment of rights in the former flat." In other words, a person is not required to pay any taxes on a transaction in which a builder offers them a new apartment in return for their old one.

In 1997–1998 Anil Pitale purchased an apartment in a housing organization. The society was redeveloped in accordance with the developer's agreement. In accordance with the arrangement, Pitale gave up his old apartment and received a new one in December 2017. Under the heading "Other Sources," the assessing officer added the difference between the stamp duty value of the new apartment and the indexed cost of acquisition for the old apartment as taxable income to the assessment order.

The indexed cost of purchasing the old apartment, which was around Rs. 5.43 lakh, was Rs. 19.75 lakh less than the stamp duty value paid for the new apartment, which was Rs. 25.17 lakh. The assessing officer (AO) and the CIT (Appeals) deemed this Rs. 19.74 lakh discrepancy to be taxable since it was classified as "revenue from other sources."

The addition was confirmed by the CIT (Appeals) after an appeal. Following an additional appeal, the ITAT ruled that obtaining a new apartment in place of an old one and putting the old one out of commission cannot be regarded as receiving immovable property for insufficient consideration.

At maximum, this transaction may result in capital gains tax implications, for which Pitale would be eligible to claim an exemption under Section 54 of the Income-tax Act, 1961 for investments in residential real estate. Consequently, the ITAT removed the additions that the tax authorities had made.