By Vimal Punamiya, FCA, LLB
Accommodation Times Bureau
As per Section 54 of the Income Tax Act, 1961, if any residential property which was held
for a period of more than 2 years is sold or given for redevelopment and the new flat is
purchased or acquired within a period of 1 year before or 2 years after the sale or constructed
within 3 years after the sale then capital gain arising on the transfer of the old flat will be exempt
to tax u/s. 54 of the Income Tax Act, 1961 to the extent of the cost of such new flat.
In the case of redevelopment, the new flat to be acquired is treated as constructed for the
purpose of the Section 54. Thus, if the new flat is acquired by the owner within a period of 3
years from the surrender of the original flat then the capital gain arising from the sale of the
original flat can be claimed to be exempted u/s. 54 of the Income Tax Act.
If the new flat is not acquired by the owner within a period of 3 years then the Assessing Officer
at his discretion can disallow the same at any time during the assessment.
However, allotment of a flat or a house by a cooperative society, of which the assessee is the
member, is also treated as construction of the house [Circular No. 672, dated 16-12- 1993].
Further, in these cases, the assessee shall be entitled to claim exemption in respect of capital
gains even though the construction is not completed within the statutory time limit. [Sashi Varma
v CIT (1997) 224 ITR 106 (MP)]. Delhi High Court has applied the same analogy where the
assessee made substantial payment within the prescribed time and thus acquired substantial
domain over the property, although the builder failed to hand over the possession within the
stipulated period. [CIT v R.C. Sood (2000) 108 Taxman 227 (Del)].
Hence, relying upon the above judgments, even if in the case of development, the new flat is
acquired by the owner after a period of 3years from the surrender of the old flat, an assessee
can claim exemption u/s. 54.
If the new flat acquired to claim exemption u/s. 54 is sold within a period of three years from the
date of purchase then the capital gain exemption claimed earlier would become taxable in the
year the new flat is transferred.
Thus, Receipt of extra carpet area over and above the existing area could be claimed as
exemption u/s. 54 of the Income Tax Act,1961.
Further, we would like to state that under the definition of “Transfer” according to Sec 2(47)
Income Tax Act, 1961, transfer, in relation to a capital asset, includes sale, exchange, or
relinquishment of the asset or the extinguishment of any rights therein or the compulsory
acquisition thereof under any law.
An exchange involves the transfer of property by one person to another and reciprocally the
transfer of property by that other to the first person. There must be a mutual transfer of
ownership of one thing for the ownership of another. Hence, the acquisition of new flat would be
considered as exchange and would be considered as transfer for the purpose of capital gain.
Argument could not be made that no cost is incurred by any member for the acquisition of the
new flat and hence capital gain cannot be computed and the case does not fall within the ambit
of Section 55(2). The member is forgoing his rights in the old flat. And hence, it would be
considered as the cost of acquisition of the new flat.
However, if the residential flat is held for a period of less than 3 yrs than the receipt of extra area
by the individual members would be taxable in the hands of the individual members.