Indexed Cost of Acquisition applies to whole property on redevelopment; deduction for single residential house allowed after verification.

Where an owner transfers an existing residential property to a developer for redevelopment in exchange for constructed area, undivided land share and consideration, that transaction constitutes a transfer of the capital asset and the assessee is entitled to apply indexed cost of acquisition/construction to the entire property for capital gains computation; additionally, where the retained constructed floors together constitute one residential house the assessee may claim the deduction for investment in a residential house, subject to verification of the computation by the assessing officer.

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Issues: (i) Whether indexed cost of acquisition/construction is allowable for the entire property when an owner transfers an immovable property to a developer for redevelopment in consideration of constructed area and undivided share; (ii) Whether the assessee is eligible for deduction under Section 54 of the Income-tax Act, 1961 when, after redevelopment, the assessee receives multiple floors constituting a single residential house.

Issue (i): Whether indexed cost of acquisition/construction is allowable for the entire property transferred under a redevelopment arrangement.

Analysis: The assessee and her husband handed over the existing residential property for redevelopment and, in lieu thereof, received constructed area (multiple floors) plus undivided share in land and monetary consideration. The terms of the redevelopment agreement show that the old residential property was transferred and consideration was received in the form of built-up area and undivided land share. The transfer therefore falls within the meaning of transfer under Section 2(47) of the Income-tax Act, 1961 and the capital asset transferred was the existing immovable property; accordingly the cost of acquisition with indexation under Section 48 applies to that capital asset.

Conclusion: Indexed cost of acquisition/construction is allowable for the entire property and cannot be restricted to 22.5% of the undivided share; this disallowance by the Assessing Officer is deleted. (Decision in favour of the assessee.)

Issue (ii): Whether the assessee is eligible for deduction under Section 54 of the Income-tax Act, 1961 when, post redevelopment, the assessee receives multiple floors that together constitute one residential house.

Analysis: Except for the one floor handed over to the developer, the remaining floors were retained by the assessee and her husband as part of the single newly constructed residential building; the developer did not receive authority to develop and sell to outsiders. The factual matrix therefore shows that the assessee retained a single residential house in the form of multiple floors and is entitled to the benefit of Section 54 subject to factual verification of the computation by the Assessing Officer.

Conclusion: The assessee is eligible to claim deduction under Section 54 of the Income-tax Act, 1961; Assessing Officer directed to verify and allow the computation. (Decision in favour of the assessee.)

Final Conclusion: The appeal is allowed on both decided issues, directing deletion of the disallowance of indexed cost and directing the Assessing Officer to verify and allow deduction under Section 54.

Ratio Decidendi: Where an owner transfers an existing residential property for redevelopment in exchange for constructed area and undivided land share, such transfer is a transfer of the capital asset under Section 2(47) of the Income-tax Act, 1961 and the assessee is entitled to indexation under Section 48 for the entire property and, if the retained constructed floors constitute one residential house, to deduction under Section 54 of the Income-tax Act, 1961.

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