Full indexed cost allowed; Section 54 exemption upheld on multiple floors in landmark ruling
In a significant win for homeowners, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has allowed the full indexed cost of acquisition on an entire original property and upheld Section 54 capital gains exemption on multiple floors received after redevelopment.
The February 20 order deletes a long-term capital gains (LTCG) addition made by the assessing officer in the case of Seeta Nayyar, offering clarity for taxpayers facing similar disputes.
The redevelopment dispute
Nayyar and her husband owned a residential property on a 500-square yard plot in Maharani Bagh, New Delhi.
In 2012, they signed a redevelopment agreement with Chetanya Buildcon.
- The old house was demolished.
- A ground-plus-three-floor building was constructed at the builder’s cost.
- The builder received the first floor and 22.5% undivided land share.
- The owners retained the ground, second and third floors, 77.5% land share, and â‚ą2.5 crore in cash.
Nayyar computed LTCG but claimed the full indexed cost of the entire original property and set it off against Section 54 exemption on the two floors she received.
The assessing officer disagreed.
- Indexed cost restricted to 22.5%
- Section 54 exemption denied
- Argument: Two floors cannot qualify as “one residential house” after the 2014 amendment
Tribunal’s interpretation: Substance over form
The ITAT reversed both adjustments.
On indexed cost, the Bench held that the capital asset transferred was the entire immovable property. Therefore, indexation under Section 48 applies to the full property—not merely the builder’s land share.
This interpretation prevents artificial fragmentation of cost allocation in redevelopment structures.
On Section 54, the tribunal adopted a practical view.
Except for one floor given to the builder, the rest remained with the assessee and her husband. The builder was not free to sell to outsiders.
Therefore:
- The two floors formed part of one residential house
- The 2014 amendment limiting exemption to one house did not apply adversely
- Section 54 relief was valid
The ruling reframes how “one residential house” should be interpreted in redevelopment contexts.
Why this matters
Section 54 grants exemption from LTCG if gains are reinvested in purchasing or constructing a residential house within specified timelines.
After the 2014 amendment, tax officers have frequently denied claims where multiple units were received—even within the same building.
This order signals a more holistic and pragmatic interpretation.
As advocate Prakash Jotwani, who represented Nayyar, noted, the Bench recognized the economic substance of the transaction.
For homeowners in metros like Mumbai and Delhi—where redevelopment deals are common—this ruling could ease prolonged litigation and substantial tax exposure.
It also clarifies two critical principles:
- Full indexation applies to the entire transferred asset
- Multiple floors in the same structure can qualify as a single residential house
In a market where aging bungalows routinely give way to vertical structures, that clarity could reshape ongoing LTCG assessments.
TL;DR:
Mumbai ITAT allowed full indexed acquisition cost and Section 54 exemption on multiple floors received after redevelopment. The tribunal ruled that the entire original property qualifies for indexation and that two floors in the same building constitute one residential house, offering major relief to homeowners in LTCG disputes.
AI summary:
- ITAT allows full indexed cost on entire property
- Section 54 exemption upheld on two floors
- 2014 “one house” rule interpreted pragmatically
- â‚ą2.5 crore cash and land share part of redevelopment deal
- Relief for homeowners in LTCG cases
