Sec 54 benefit: Exchange of Old Flat under redevelopment

CA Vinay parmar , Last updated: 20 June 2013  

Hello Friends, there are many Redevelopment of Buildings cases are coming up and thus would like to write an Article on the above, wherein Old Flats are Exchange with New Flats along with cash or other consideration under the Redevelopment Agreement.

The confusion is that whether in such cases benefits of Section 54 and Section 54EC are available or not?

Before that let me give a brief description on Section 54 & section 54EC

Long Term Capital Gain from the Transfer of Residential House Property (Section 54)

The exemption under the Section 54 is available only an individual or a HUF who transfers (or sells) a residential house/property that results in a long-term capital gain, and then invests the amount of gain in acquiring a new residential house. This exemption is available subject to fulfilment of the following requirements: 

(i) The transferor shall be an individual or the HUF, 

(ii) The asset to be transferred must be of long-term capital asset, being buildings or lands appurtenant thereto, being a residential house,

(iii) The income from such residential house shall be assessable under the head "Income from House Property", 

(iv) The transferor assessee should purchase a residential house in India within a period of one year before or two years from the date of transfer or construct a residential house within three years from the date of the transfer of the original house. (Construction must be completed within these 3 years.), and

(v) The new house property purchased or constructed has not been transferred within a period of three years from the date of purchase or construction.

Long Term Capital Gain Exemption for Investment in Certain Bonds (Section 54EC)

This exemption is is available an individual, HUF, company or any other person who invests the long term capital gain, within 6 months of a the transfer of the capital asset, in any of the specified bond (issued on or after April 1, 2006) redeemable after 3 years:

a. National Highway Authority of India (NHAI), or

b. Rural Electrification Corporation Ltd. (REC)

There is a limit of Rs. 50 lakh on the investments on or after April 1, 2007.

Now Coming back to our main question whether the above two section benefit is available when the  Old flat is Exchange with new flat under the redevelopment agreement with the builder.

Let me explain you with the help of an case Law:-

SMT VEENA GOPE SHROFF V. ITO  [2013] 33  344  (Mumbai - Trib)

In the Instant case assessee had exchanged an old flat with new flat and got cash compensation under the development agreement with the builder. The assessee Claims Exemption under sec 54 and 54EC from capital gain arising on the transfer of the Old flat. During the assessment , the AO disallowed the exemption under sec 54 and 54EC on the ground that assessee had neither Purchase a house property nor constructed a new residential house. The Assessee on the other hand, contented that new flat has been constructed by builder and its possession was handed over to her within the period of 3 year from the date of transfer and therefore this amounted to an construction of a new flat.

The Tribunal held in favour of Assessee as under:-

1. The assessee had exchanged an old flat with new flat constructed by builder under development agreement which amounted to transfer under section 2 (47)

2. Thus the only condition which was required to be satisfy was that assessee either had to Purchase a new residential flat within the prescribed limit or construct a new residential flat within the period of 3 year from the data of transfer;

3. The acquisition of new flat under a development of agreement in exchange of the old flat amounted to an construction of new flat. This view was supported by the decision of the Tribunal in the case of Jatinder Kumar Madan v. ITO [2012] 51 SOT 583 316 (Mum);

4. Therefore the provision of section 54 were applicable and assessee was entitled to exemption if the new flat had been constructed with in the period of 3 years from the date of transfer;

5. Since cash Compensation was part of consideration for the transfer of the old flat and the assessee had invested the money in NABARD bonds, the exemption under sec 54EC would also be available.


The Benefit of section 54 and 54EC is available only when the new flat  under redevelopment is completed within the period of 3 years from the date of transfer. 

Thank You

CA Vinay Parmar

Published by

CA Vinay parmar
(Chartered Accountant)
Category Income Tax   Report

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