There has been a phenomenon increase in trend of getting
property developed by builders. More and more people are going in
for getting their property developed by builders, for which
consideration in form of a developed portion of the property
(mostly in form of one or more floors) is paid to the builders. A
complication that arises in structuring such transaction is the
taxation aspect of the capital gains arising on such transfer and
development of property. A recent judgment of Delhi high court in
the case of CIT v. Gita Duggal1 tries to clarify the
applicability of levy of capital gains on such transaction.
The taxpayer was the owner of a property comprising of basement,
ground floor, first floor and second floor. The taxpayer entered
into a development agreement with a builder in 2006, pursuant to
which the builder demolished the property and constructed a new
building comprising of three floors. In consideration of the
development rights, the taxpayer received INR 40 million and two
floors of the new building. Third floor was retained by the
builder. In other words, the taxpayer sold his residential property
to purchase two units of residential property in the same
whether the taxpayer should be given deduction under section 54
of the Act, in respect of different residential units in same
Before we discuss further, it would be worth discussing the
provisions of section 54 of Income tax act of 1961.
Section 54 of the Income tax Act of 1961
Section 54 provides exemption to capital gains arising from the
transfer of a residential house property (being building or lands
appurtenant thereto, the income of which is chargeable under the
head "Income from house property")
In respect of the above section, following points should be
1. Only an Individual or Hindu Undivided Family can claim
2. Under section 54 exemptions is available only if the capital
asset which is transferred is a residential house property (i.e.
building or land appurtenant thereto) whose income is taxable under
the head "Income from house property". The exemption is
available whether the residential house property is self occupied
(in such a case income of house property is nil or negative) or let
3. The house property which is transferred should be a long term
4. To claim the exemption the taxpayer will have to purchase a
residential house property (old or new) or construct a residential
house property (hereinafter referred to as "new residential
Observations and decision of High Court
1. The Hon'ble High Court, on elaborating the requirements
of sections 54 and 54F of the Income tax act, 1961, observed that
the Act required the taxpayer to construct a 'residential
house'. The only requirement is construction of a residential
unit and not the manner in which it is constructed. For convenience
it can be constructed into several units, which according to need
can be used conveniently and independently.
2. The only requirement to claim exemption under section 54F is
that it should be constructed for residential purposes and not
3. The Hon'ble High court also observed that section 54F
nowhere highlights/mentions that the house should be constructed in
a particular manner.
4. The high court held that several independent units can
constitute 'a residential house' and accordingly,exemption
under section 54 or 54F can be claimed by the taxpayer.
The above case very clearly explains and analyses the deduction
under section 54 of the Income tax act, 1961, wherein a residential
property is sold and sale proceeds earned are invested in another
residential unit. There has been a step rise in owners of old house
properties entering into development agreement with builders,
entrusting the latter to carry out development of their property
and making payment towards such development by giving rights of one
or more floors to such builders. Such an arrangement mutually
benefits both the owner and builder, the owner, with not enough
funds to carry out improvement of its property gets newly
constructed floors from builders and builder also earns his profit
by selling off the floors retained by him in carrying out such
The High court has very exhaustively explained the boundaries of
section 54 of the Income tax act, 1961 and provided for an
acceptable and welcome interpretation of the said section.
1 CIT v. Gita Duggal (ITA 1237/2011, dated 21 February
2013, Assessment tear 2007-08)
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The Mumbai bench of the Income Tax Appellate Tribunal ("Tribunal"), in the case of Sudhir Menon HUF v. Asst. CIT, in the context of the Section 56(2)(vii)(c) of the Income Tax Act, 1961 ("ITA"), has ruled that notional income arising on account of receipt of additional shares by the existing shareholders of the company, at a value which is below its fair market value ("FMV"), would not be subject to tax provided the additional shares are allotted pro rata to all shareholders.