The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that the sale of a redeveloped flat qualifies as a long-term capital gain under the Income Tax Act, 1961, making the taxpayer eligible for indexation benefits and exemption under Section 54F, Indian Express reported.
The order came while hearing an appeal filed by a Mumbai couple after tax authorities denied them long-term capital gains treatment and Section 54F exemption on the sale of a redeveloped flat during the assessment year 2018-19.
According to the report, the case arose from an order dated December 30, 2025, passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC).
Rajesh Shamji Furia and his wife had purchased a 510-square-foot flat in 2006. The property later became part of a redevelopment project under a development agreement executed on February 15, 2013.
Under the redevelopment scheme, Furia received a new flat comprising the original area, an additional 30 per cent area without consideration, extra space purchased from the developer and 185 sq ft gifted by his mother.
The couple sold the redeveloped flat for ₹1.95 crore in 2018 and claimed exemption under Section 54F of the Income Tax Act.
However, the Assessing Officer (AO) treated the redeveloped flat as a completely new capital asset, classified the gains as short-term capital gains and denied indexation benefits as well as Section 54F exemption, as per Indian Express report.
The Commissioner of Income Tax (Appeals) upheld the AO’s decision, following which the taxpayers approached the ITAT.
The tribunal rejected the tax department’s interpretation, observing that redevelopment does not extinguish the owner’s rights or create an entirely new capital asset.
It held that ownership rights continue throughout the redevelopment process and merely shift from the old structure to the newly constructed premises.
The tribunal further noted that the Permanent Alternate Accommodation Agreement (PAAA) does not create ownership for the first time but only records the alternate premises allotted in place of the original property.
In Furia’s case, the tribunal observed that even if the holding period is calculated from the 2013 development agreement, the property had been held for nearly five years, exceeding the minimum period required for long-term capital asset classification.
The ITAT ruled that the redeveloped flat was a continuation of the existing capital asset and not a fresh acquisition. It directed the Assessing Officer to delete the addition of Rs 80.14 lakh, allow indexed cost of acquisition and grant exemption under Section 54F in accordance with law, Indian Express reported.
