A recent judgement by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has settled an important legal issue pertaining to raising of income tax demand on the basis of a Redevelopment Agreement.  

The tribunal has ruled that the mere execution and registration of a redevelopment agreement does not amount to receipt of an immovable property and therefore cannot lead to tax under an anti-abuse provision of the Income Tax Act. 

The ruling came on the appeal of a taxpayer who challenged a hefty tax demand raised by the income tax department on the basis of a redevelopment agreement he had signed. The income tax department demanded Rs 1.38 crore as tax on the basis of the stamp duty value of two alternative premises which were allotted to him under a redevelopment agreement. The income tax department maintained that the redevelopment agreement was taxable as it was registered. 

The tribunal, while setting aside the tax demand raised by the I-T department, held that the section 56(2)(X) of the I-T Act is applicable only when an assesses actually receives immovable property. This provision is meant to prevent tax evasion and money laundering through disguised gifts. 

Through its judgement, the Income Tax Appellate Tribunal has made it clear that registration of a redevelopment agreement merely amounts to a contractual right to receive the apartment in the future and does not amount to receipt of property where construction is still incomplete and the possession of the flat has not been given. In Mumbai where lots of residential societies are undergoing redevelopment, this ruling will come as a relief to thousands of people who are awaiting possession of their properties under the redevelopment agreement.