Mumbai: In a significant ruling for property owners participating in redevelopment projects, the Mumbai Income Tax Appellate Tribunal (ITAT) has held that consideration received for the transfer of development rights is taxable as ‘capital gains’ and not as ‘income from other sources’. The tribunal further held that where the statutory conditions are satisfied, the taxpayer is entitled to claim exemption under Section 54EC of the Income-Tax (I-T) Act, by investing the capital gains in notified bonds. Such reinvestment would reduce the taxable component of capital gains.The order assumes particular significance against the backdrop of the large number of redevelopment projects transforming Mumbai and its suburbs. Thousands of residents of ageing cooperative housing societies are entering into redevelopment agreements with builders, often receiving a combination of larger residential premises, monetary compensation, corpus funds and other benefits. As redevelopment gathers pace, the tax treatment of such receipts has become an increasingly important issue for individual taxpayers.The case arose from a redevelopment arrangement involving a taxpayer in Bandra (represented by her legal heir before the ITAT). Under the redevelopment agreement, she transferred her share of development rights to the developer and received a consideration of Rs 50 lakh. The taxpayer invested in eligible bonds and sought an exemption under Section 54EC. The I-T officer, however, treated the consideration received as ‘income from other sources’, thereby denying the exemption available for capital gains.The ITAT held that the development rights constituted a capital asset. The consideration was received for transferring valuable rights attached to immovable property and therefore fell squarely within the ambit of capital gains taxation. Since the receipt was assessable under the head ‘capital gains’, the taxpayers claim for exemption under section 54EC could not be denied merely because the I-T officer had adopted an incorrect head of income.The tax tribunal directed the I-T to verify compliance with the conditions prescribed under Section 54EC and allow the exemption accordingly. The key conditions under this section are that the taxpayer must invest the capital gains within six months of the transfer of property/development rights, the exemption is available only up to a limit of Rs 50 lakh and the bonds must be held for the fixed tenure (which is currently five years and was earlier three years).
