Acquisition of a new flat in exchange of an old flat is deemed construction and allows section 54 benefits

SMT. VEENA GOPE SHROFF V. ITO (Mumbai - Tribunal)

Where possession of new flat was received within 3 years from date of transfer, in exchange of an old flat under development agreement, it amounted to construction of property under section 54.

In the instant case, the assessee had exchanged an old flat for a new flat and got cash compensation under the development agreement with the builder. She claimed exemptions under section 54 and 54EC from capital gains arising on account of transfer of old flat. During assessment, the Assessing Officer (AO) disallowed the exemption under sec. 54 and 54EC on the ground that the assessee had neither purchased a house property nor constructed a new residential house. On appeal, the CIT (A) confirmed the disallowance made by AO. The assessee, on the other hand, contended that new flat had been constructed by the builder and its possession was handed over to her within a period of three years from the date of transfer and, therefore, this amounted to construction of a new flat.

The Tribunal held in favour of assessee as under:

• The assessee had exchanged an old flat with a new flat constructed by the builder under development agreement which amounted to transfer under section 2(47);
• Thus, the only other condition which was required to be satisfied was that assessee either had to purchase a new residential flat within the prescribed limit or construct a new residential flat within a period of 3 years from the date of transfer;
• The acquisition of a new flat under a development agreement in exchange of the old flat amounted to construction of new flat. This view was supported by the decision of the Tribunal in the case of Jatinder Kumar Madan v. ITO (2012) (Mumbai);
• Therefore, the provisions of section 54 were applicable and assessee was entitled to exemption if the new flat had been constructed within a period of 3 years from the date of transfer;
• Since cash compensation was part of consideration for transfer of the old flat and the assessee had invested the money in NABARD bonds, the exemption under section 54EC would also be available. The assessee’s new flat got completed within a period of 3 years from the date of transfer of the old flat. Therefore, the assessee’s claim of exemption under section 54 was to be allowed and the order of the CIT(A) was set aside.