Can taxpayers claim I-T exemption in sale of redeveloped flats? What ITAT Tax Appellate Tribunal ruled

The matter came to light when a bench of Judicial Member Siddhartha Nautiyal and Accountant Member Vikram Singh Yadav was hearing a plea by a Mumbai couple, challenging denial of long-term capital gains and Section 54F exemption on the sale of a redeveloped flat in 2018.

The assessment year in dispute was 2018-19, and the appeal arose from a December 30, 2025 order of the Commissioner of Income Tax (Appeals), NFAC.

Rajesh Shamji Furia and his wife had originally purchased a 510 sq ft flat in 2006, which became part of a redevelopment project under a development agreement executed on February 15, 2013.

Under the redevelopment scheme, Furia became entitled to a new flat comprising his original area, an additional 30 percent area without consideration, extra area purchased from the developer and 185 sq ft received as a gift from his mother.

In 2018, he sold the redeveloped flat for Rs 1.95 crore and claimed exemption under Section 54F of the I-T Act, 1961.

However, the Assessing Officer (AO) treated the redeveloped flat as a “completely new capital asset” and taxed the gains as short-term capital gains, and denied the Mumbai couple indexation and Section 54F relief.

Later, the Commissioner of Income Tax (CIT-Appeals) also upheld the AO’s decision, prompting Furia to approach ITAT.

The ITAT rejected the AO’s approach, denying Furia indexation and Section 54F relief, and observed that “a redevelopment scheme does not result in extinguishment of the owner’s proprietary rights followed by acquisition of an altogether fresh capital asset.”

It added, “The ownership rights of an existing member continue throughout the redevelopment process and merely undergo substitution from the old structure to the newly constructed premises.”

The ITAT also held that the Permanent Alternate Accommodation Agreement (PAAA) “neither creates ownership for the first time nor results in acquisition of an independent capital asset” but “merely identifies and records the permanent alternate premises allotted in substitution of the existing premises”.

In Furia’s case, the tribunal concluded that even if the holding period is reckoned from the 2013 development agreement, the asset was held “for almost five years” – well beyond the threshold for a long-term capital asset.

“The redeveloped flat was continuation of the existing capital asset and not acquisition of a fresh capital asset for the first time on January 1, 2018,” the Bench held. It directed removal of the AO’s addition of Rs. 80.14 lakh and allowed indexed cost of acquisition to grant exemption under section 54F in accordance with law.