The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that the value of a new property to be received under a redevelopment agreement cannot be taxed before the property is completed and possession is handed over to the taxpayer.
The ruling came in a case where the Income Tax Department had added ₹1.3 crore to a taxpayer’s income under Section 56(2)(x) of the Income Tax Act. The tribunal directed that the addition be deleted, holding that a property under construction cannot be treated as having been received merely because a redevelopment agreement has been registered.
The case involved a taxpayer who had entered into two redevelopment agreements registered in December 2017. Under these agreements, the taxpayer was entitled to receive two new shops. The combined stamp duty value of the proposed shops was ₹1.3 crore.
The Income Tax Department treated the two new shops as properties received without consideration and brought their entire stamp duty value to tax under the head “income from other sources”. However, the taxpayer challenged this assessment on the grounds that the redevelopment project was still under construction and possession of the new shops had not been received.
The taxpayer also argued that the new shops were not being received free of cost. They were being provided in exchange for the surrender of tenancy rights in four existing shops. Therefore, the taxpayer contended that the transaction involved consideration and could not be treated as a transfer of property received without consideration.
The ITAT accepted these arguments. The tribunal observed that the tax provision could be invoked only when a taxpayer actually received an immovable property during the relevant financial year. The mere execution or registration of a redevelopment agreement creates only a contractual right to receive a property in the future.
According to the tribunal, this contractual right is different from the actual receipt of the immovable property. Since the new shops were still under construction, the taxpayer neither had possession of the premises nor the right to use or enjoy them. The property, therefore, could not be considered as received during the relevant financial year.
The tribunal also examined whether the new shops had been received without consideration. It accepted the taxpayer’s argument that the redevelopment arrangement involved an exchange of valuable rights. The taxpayer was surrendering existing tenancy rights in four shops and was to receive two newly developed shops in return.
The ITAT held that the transaction involved reciprocal consideration and could not be treated as a gratuitous transfer. The allotment of the new shops was linked to the surrender of the taxpayer’s existing rights, making it different from a transaction in which a property is received without any consideration.
Redevelopment projects often involve a considerable period between the signing of an agreement and the delivery of the replacement property. Construction work may take several years, during which the owner or tenant may not have possession or the right to occupy the new premises.
The decision is likely to provide relief to property owners, tenants and commercial premises owners involved in redevelopment arrangements. It reinforces the distinction between a future contractual right to receive a property and the actual receipt of a completed immovable property.
The ruling also recognises that redevelopment agreements generally involve an exchange of property or tenancy rights. A taxpayer receiving a new property in return for surrendering existing rights cannot automatically be considered to have received the new property without consideration.
The ITAT decision may help taxpayers facing similar additions under Section 56(2)(x), particularly where redevelopment projects remain incomplete and possession of the replacement property has not yet been handed over. However, the tax treatment of each redevelopment transaction would depend on the specific facts and terms of the agreement.
