Section 54 relief: ITAT allows tax exemption on 23 flats, wipes out ₹8 crore demand
A Bengaluru bench of the Income Tax Appellate Tribunal (ITAT) has granted complete relief to a landowner who faced a long-term capital gains (LTCG) tax demand of more than ₹8 crore after entering into a joint development agreement (JDA) with a builder. While the tribunal agreed that capital gains arose when the development rights were transferred, it held that the taxpayer was still entitled to full exemption under Sections 54 and 54F by treating all 23 flats received under the redevelopment project as a single residential house.
The ruling pertains to Assessment Year 2011-12 and is based on the law as it stood before amendments introduced by the Finance (No. 2) Act, 2014 and the later insertion of Section 45(5A). Therefore, its applicability is largely confined to older redevelopment agreements.
ITAT upholds taxability of JDA but grants complete exemption
The taxpayer, along with two co-owners, had entered into a JDA in March 2011 to develop about 3 acres and 10 guntas of land in Bengaluru. In return, the owners were allotted 69 residential flats, of which the taxpayer’s share was 23 flats, besides certain cash consideration.
The Income Tax Department reopened the assessment and held that the execution of the JDA itself amounted to a “transfer” under Section 2(47)(v) of the Income-tax Act because possession of the land had been handed over to the developer. Based on this, it computed long-term capital gains exceeding ₹8 crore.
The tribunal agreed with the department that handing over possession under the JDA triggered capital gains taxation in the year the agreement was executed. However, it disagreed with the method adopted to compute the gains. It held that the builder’s construction cost could not be treated as the landowner’s consideration. Instead, the consideration should be based on the stamp duty value of the flats allotted to the landowner along with any monetary consideration received. The tribunal also directed that indexed cost of acquisition and improvement be allowed while recomputing the gains.
Why the taxpayer ultimately paid no tax
The bigger relief came under Sections 54 and 54F.
The tax department argued that each of the 23 flats should be treated as a separate residential unit, making the taxpayer ineligible for exemption on all the units.
The ITAT rejected this contention, relying on earlier Karnataka and Delhi High Court rulings applicable to the pre-2015 legal regime. It held that multiple flats received under a single redevelopment project could be regarded as one residential house for claiming exemption. As a result, the entire capital gain qualified for exemption, effectively wiping out the taxpayer’s tax liability.
The ruling, however, should not be seen as a blanket precedent for current redevelopment projects. The Finance (No. 2) Act, 2014 amended Sections 54 and 54F to restrict the exemption to “one residential house in India”, while Section 45(5A), introduced later, generally shifts the taxation of eligible JDAs to the year in which the completion certificate is issued. Consequently, taxpayers entering into redevelopment agreements today will largely be governed by the amended provisions rather than this decision.
