Opinion Of Eminent Legal Luminaries On Controversial Issues

Capital gains – Profit on sale of property used for residence – Redevelopment – Consideration in the form of corpus .[S. 2(47) & S. 54 / S. 54F]

QUERY: In case of redevelopment of property the consideration takes in the form of corpus, which is a real cash inflow and fair market value of the property to be developed, which is a deemed consideration for the purpose of exchange. Thus, there is exchange of property. Now, the question is in which year capital gain arises and when can exemption be claimed either under Section 54 or under section 54F?
ANSWER: In case of development of property the capital gain arises as per terms of the agreement. Generally, the agreement provides that the developer has right to enter and construct on the land of owner and owner parts with land only on receipt of certain portion of building to be constructed. Till then possession of land is not parted with. In such case, the amount received is to be treated as advance. Section 2(47) defines ‘transfer’ in relation to a capital asset, which includes an “exchange”. The Transfer of Property Act, 1882 provides that when two persons mutually transfer the ownership of one thing for the ownership of another, neither thing or both things being money only, such transaction is called an “exchange”. The transaction of an exchange involves the transfer of property by one person to another and reciprocally the transfer of property by that other to the first person. There must be a mutual transfer of ownership of one thing for the ownership of another. [CIT v. Rasiklal Maneklal 177 ITR 198 (SC)]. So, the capital gain arises at the time of exchange of property on the basis of fair value of the properties. At that time the person can claim an exemption under Section 54 / Section 54F of the Act, on complying the conditions mentioned in the section.
In case of redevelopment, similar principle would apply, subject to terms and agreement with the developer.
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