Mumbai is witnessing a plethora of redevelopment projects, under which flat owners get new redeveloped flats. When this new flat is sold, litigation arises on whether the ‘new flat’ should be treated as a long-term capital asset, which typically gives rise to lower taxes, as opposed to short term capital gains, which are taxed at the applicable slab rate.Currently, an immovable property becomes a long-term capital asset if it is held for more than 24 months.In a significant ruling, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that the period of holding of a redeveloped flat is to be reckoned from the date when rights in the new premises crystallised under the redevelopment agreement, and not from the date of the Permanent Alternate Accommodation (PAA) agreement through which the redeveloped flat is handed over. Gautam Nayak, tax partner at CNK & Associates said, “The ITAT has expressed a view that a redevelopment scheme does not result in extinguishment of the owner’s proprietary rights followed by acquisition of an altogether fresh asset. The ownership rights of an existing member continue throughout the redevelopment process and merely undergo substitution from the old structure to the newly constructed premises.”In this decision, in the case of Rajesh (last name withheld), the ITAT held that as a fresh capital asst is not created, the gains arising on sale of the redeveloped flat qualified as a long-term capital gains (LTCG), entitling the taxpayer to indexation benefits and exemption under section 54, held the ITAT. Section 54 grants exemption from long-term capital gains tax if the capital gains arising from the sale of a residential house are invested in another residential house, subject to meeting certain conditions. The taxpayer, jointly with his wife, had purchased a 510 sq. ft. flat in Dec 2006. Under a redevelopment agreement executed on Feb 15, 2013, every member of the housing society became entitled, without any monetary consideration, to a new flat comprising the original carpet area along with an additional 30% carpet area.The redeveloped flat also included an additional 185 sq. ft. gifted by the taxpayer's mother and another 55 sq. ft. purchased from the developer for Rs 6 lakh. The flat was handed over under a PAA agreement dated Jan 12, 2018, and sold eight days later for Rs 1.95 crore. The taxpayer treated the gains as long-term capital gains and claimed exemption under section 54.During assessment, the I-T officer held that the allotment of the redeveloped flat under the PAA agreement in Jan 2018, resulted in the acquisition of a new and independent capital asset. Since it was sold within days, the I-T officer treated the gains as short-term capital gains, denied indexation as well as the exemption under Sections 54. He treated Rs. 80 lakh (attributed to 50% of the share held by Rajesh) as taxable short term capital gains. This was upheld by the Commissioner (Appeals). Reversing the order of the Appellate Commissioner, the tribunal observed that in a redevelopment project the ownership continues seamlessly, with the old premises being substituted by the redeveloped flat. The tribunal further held that the period of holding of a capital asset must be determined from the point at which enforceable rights in the property arise, and not merely from the execution of the conveyance or PAA agreement.Ruling in favour of the taxpayer, the ITAT noted that while the taxpayer's original ownership dated back to 2006, his rights to the redeveloped premises had, at the very least, crystallised upon execution of the development agreement on Feb 15, 2013. Since the flat was sold only on Jan 20, 2018, the holding period exceeded five years, comfortably qualifying it as a long-term capital asset.In this case, the ITAT did not need to decide whether the holding period should be reckoned from 2006 (the date of purchase of the original flat).However, Anil Harish, advocate and partner at D.M. Harish and company said, “Based on the principle accepted by the ITAT, the taxpayer, if needed, can argue that the rights to the new flat emanated from the acquisition of the original flat. Thus, the holding period should be from the date of acquisition of the original asset.”The Central Board of Direct Taxes should issue a circular confirming the principles set out in this ITAT decision and should clarify the situation, added Harish.