Capital Loss Allowed on Surrender of Flat Allotment Rights: ITAT Mumbai

Ketan Pravinchandra Kamdar Vs DCIT (ITAT Mumbai)

Capital Loss Claim Allowed as Flat Allotment Right Held Capital Asset: ITAT Mumbai

The appeal before the ITAT Mumbai arose from the order dated 26.11.2025 passed by the CIT(A)/NFAC for AY 2020-21. The assessee challenged the treatment of ₹26,93,950 received on surrender of rights in an immovable property as “Income from Other Sources” instead of considering it under the head “Capital Gains,” and also challenged the consequential disallowance of a long-term capital loss of ₹5,67,922.

The assessee, an individual, filed his return of income on 14.12.2020 declaring income of ₹11,00,090. During scrutiny assessment, the Assessing Officer noted that the assessee had received ₹26,93,950 from Proviso Builders and Developers, on which tax had been deducted at source under Section 194A. In response to the show cause notice, the assessee explained that he had been issued an allotment letter for Flat No. A-1402 in Sai Proviso Aashlesha Building on 11.06.2012. The flat was surrendered on 03.07.2019, and the compensation received on surrender represented consideration for transfer of a capital asset, resulting in a long-term capital loss. The Assessing Officer rejected the explanation, treated the compensation as income from other sources, and disallowed the long-term capital loss.

Before the CIT(A), the assessee reiterated that the allotment letter created a right in the immovable property, constituting a capital asset under Section 2(14). He submitted that he had invested ₹81,44,500 in the flat, of which ₹73,30,050 had been paid to the builder, held the right for seven years, and surrendered it in favour of Anita U. Kutte and Umesh Kutte. The builder paid compensation of ₹26,93,950 while deducting TDS under Section 194A. The assessee contended that deduction of TDS under the wrong provision could not alter the character of the receipt and that, after indexation, he had incurred a long-term capital loss of ₹5,67,922.

The CIT(A) upheld the Assessing Officer’s action, observing that there was no registered agreement or instrument demonstrating an enforceable right capable of specific performance. The CIT(A) held that the allotment letter by itself did not automatically constitute a capital asset under Section 2(14) and relied on the builder’s deduction of TDS under Section 194A by treating the payment as interest. The reliance placed by the assessee on Movaliya Bhikhubhai Balabhai was distinguished, and the claim of long-term capital loss was also rejected.

Before the Tribunal, the assessee argued that the allotment letter conferred a transferable right in the flat, which he held for seven years before surrendering it. He maintained that the builder had wrongly deducted tax under Section 194A and that the true nature of the receipt was compensation for surrender of a capital asset.

The Revenue supported the orders of the lower authorities, contending that the private agreement between the parties did not determine the nature of income and that the builder had deducted TDS under Section 194A.

The Tribunal found that neither the allotment of the flat nor the payment of ₹26,93,950 by the builder was disputed. It observed that the assessee claimed compensation on surrender of his rights in the flat and that the lower authorities had relied upon the builder’s deduction of TDS under Section 194A. The Tribunal held that the provision under which tax is deducted at source is only a machinery provision for collection of tax and does not conclusively determine the character, classification, or head of income in the hands of the recipient. The true nature of the receipt must be determined from the surrounding facts and circumstances.

Relying on the Bombay High Court decision in CIT v. Vijay Flexible Containers, the Tribunal noted that the right to obtain conveyance of immovable property is “property” within the meaning of Section 2(14) and therefore constitutes a capital asset. Relinquishment of such right amounts to a transfer under Section 2(47). The Tribunal observed that compensation received upon relinquishment of such rights is to be treated accordingly and that mere deduction of TDS under a particular provision does not determine the taxability or the head of income.

Holding that the builder’s deduction of TDS under Section 194A did not determine the nature of the receipt, the Tribunal allowed the assessee’s appeal.

Cases Discussed:

• Rupesh Rashmikant Shah v. Union of India [2019] 108 taxmann.com 181 (Bombay)
• ITO v. Sangappa S. Kudarikkannur [2018] 96 taxmann.com 541 (Bangalore Trib.)
• Satnam Overseas Export v. DCIT [2017] 88 taxmann.com 791 (Delhi Trib.)
• Movaliya Bhikhubhai Balabhai (2016) 388 ITR 343 (Gujarat)
• CIT v. Smt. Laxmidevi Ratan [2008] 296 ITR 363 (MP)
• ACIT v. Smt. Hansaben B. Mehta [2004] 90 ITD 44 (Mumbai Trib.)
• CIT v. Vijay Flexible Containers [1990] 186 ITR 693 (Bombay)
• CIT v. Tata Services [1980] 122 ITR 594 (Bombay)

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. This appeal by assessee is directed against the order of Id. CIT(A)/NFAC, Delhi dated 26.11.2025 for Assessment Year (AY) 2020-21. The assessee has raised following grounds of appeal:

“I. Confirming the addition of Rs.26,93,950/- by treating the compensation received on surrender of right in immovable property as Income from Other Sources instead of Long Term Capital Loss arising on transfer of a capital asset.

1. The Ld. CIT(A) erred in law and on facts by confirming the addition of Rs. 26,93,950/- for compensation received on surrender of right in immovable properly as Income from Other Sources instead of Long-Term Capital Loss arising from transfer of Capital Asset.

2. The Ld. CIT(A) failed to appreciate the facts that:

i) On issue of allotment letter by the builder on 11.6.2012 for a Flat No. A1402 in Sal Proviso Aashlesha Building there is a right in immovable property which constitutes a Capital Asset within the meaning of section 2(14) of the Income Tax Act, 1961.

ii) On issue of surrender letter dated 03.072019 there is transfer of right in Flat No. A-1402 being an immovable property and compensation received thereof is taxable as Long Term Capital Gains/Loss.

iii) Surrender/termination of right in an immovable property tantamount to a “Transfer” as defined under section 2(47) of the Income-tax Act, 1961.

iv) Merely in the absence of a registered sale deed executed does not mean there is no transfer of a capital asset for an immovable propetty.

v) Merely because the builder on surrender of right in the flat gave compensation for which deducted TDS u/s 194A (applicable for Interest) treated the income as Income from Other Sources instead of Capital Gains.

vi) Case Laws relied upon on the subject have not been correctly interpreted or distinguished.

3. The Income from transfer of the right in an immovable property is required to be considered as transfer of a capital asset and accordingly to be taxed under the head Capital Gains instead of Income from Other Sources.

II. Confirming of disallowance of claim of Long-Term Capital Loss of Rs. 5,67,922/-

1. The Ld. CIT(A) erred in facts and in law in confirming the disallowance of the claim of Long-Term Capital loss of Rs.5,67,922/- and treating the compensation received of Rs 26,93,950/- as Income from Other Sources.

2. The Ld. CIT(A) failed to appreciate the fact that;

i) On allotment of flat is a right in immovable property consequently it is a Capital Asset as per section 2(14) of the Income Tax Act, 1961.

ii) On surrender of right in an immovable property is Transfer as per section 2(47) of the Income Tax Act, 1961.

iii) Compensation received on surrender of right in a capital asset is taxable under the head Capital Gains.

3. The Income from transfer of the right in an immovable property is required to be considered as transfer of a capital asset and accordingly to be taxed under the head Capital Gains instead of Income from Other Sources.

The Appellant craves leave and reserves the right to add, alter, amend, modify or delete any of the ground/s before or during the course of the hearing.

The Appellant reserves the right to produce additional evidence before or during the course of the hearing.

Each one of the above grounds of appeal is without prejudice to the other.”

2. Brief facts of the case are that assessee is an individual, filed his return of income for assessment year (A.Y.) 2020-21 on 14.12.2020 declaring income of Rs. 11,00,090/-. Case was selected for scrutiny. The Assessing Officer (AO) was having information that assessee has received interest income from Proviso Builders and Developers of Rs. 26,93,950/- on which TDS was made under section 194A. On show cause notice, the assessee submitted that assessee was issued allotment letter of a flat by builder on 11.06.2012. The said flat was surrendered by assessee on 03.07.2019 and on surrender of such capital asset, the assessee earned long term capital loss. The reply of assessee was not accepted by AO. The AO disallowed the claim of capital gain and treated the compensation of Rs. 26,93,950/- as income from ‘other sources. Consequently, the long-term capital loss of Rs. 5,67,922/- was disallowed.

3. Aggrieved by the disallowance / additions in the assessment order, the assessee filed appeal before Id. CIT(A). Before Id. CIT(A), the assessee again furnished detail written submission and reiterated that assessee is high net worth individual and having own capital of more than Rs. 104.81 crore. He has diversified in investment into various capital assets. The details of various investments were furnished along with fixed asset and investment in mutual fund, loan and advances and other investment. The assessee reiterated that he was allotted Flat No. 1402 in Sai Proviso Aashlesha Building on Plot no. 13,14,15,16, Sector 4A, Kopar Khaine Navi Mumbai. The assessee surrendered the flat and discontinued with the purchase of the said flat sold was sold to Anita U. Kutte and Umesh Kutte. In lieu of surrender of Flat, the builder paid compensation of Rs. 26,93,950/-. The builder deducted TDS under section 194A. The assessee further explained that flat was purchased for a cost of Rs. 81,44,500/-, out of which Rs. 73,30,050/- was paid to the builder. The assessee held right in the Flat for a period of seven (7) years and that is why he claimed long term capital gain (loss) of Rs. 5,67,922/- on the basis of indexation. The builder deducted TDS on wrong section, which will not change in the character of income in the hand of assessee which is capital gain. The assessee relied on certain case law.

4. The Id. CIT(A) on considering the submission of assessee upheld the action of AO by taking view that there is no registered agreement or instrument to demonstrate enforceable right, capable of specific performance. Mere existence of allotment letter without any other right would not automatically translate into a capital asset within the meaning of section 2(14) for the purpose of capital gain. The builder has deducted TDS under section 194A by treating it as interest. The reliance in case law in Movaliya Bhikhubhai Balabhai (2016) 388 ITR 343 (Gujarat) was not accepted by Id. CIT(A) by taking view that ratio of decision is distinguishable and cannot be mechanically extended to a private commercial arrangement for booking and subsequent cancellation of a flat, particularly when the fundamental existence of a capital asset itself is not established. Once the treatment of other sources was upheld, the claim of ‘long term capital loss’ also become out of consideration. Further, aggrieved the assessee filed present appeal before Tribunal.

5. We have heard the submissions of both the parties and have gone through the orders of lower authorities carefully. The learned authorised representative (Id AR) of the assessee submits that the assessee was allotted Flat No. 1402 in Sai Proviso Aashlesha Building, Sector 4A, Kopar Khaine Navi Mumbai. By way of allotment letter the assessee got transferrable right in the asset (flat). The assessee held such right in the Flat for a period of 7 years. The assessee surrendered the said flat in favour of Anita U. Kutte and Umesh Kutte, copy of surrender letter dated 03.07.2019 is placed on record. In lieu of surrender of Flat, the builder paid compensation of Rs. 26,93,950/-. The builder wrongly deducted TDS under section 194A. The flat was purchased for a cost of Rs. 81,44,500/-, out of which Rs. 73,30,050/- was paid to the builder, on the basis of indexation, the assessee suffered long term capital loss of Rs. 5,67,922/-. The builder deducted TDS on wrong section, which will not change in the character of income in the hand of assessee which is capital gain. To support his submissions, the Id AR of the assessee relied on the following case laws;

• CIT Vs. Tata Services [1980], 122 ITR 594 (Bombay),
• CIT Vs. Vijay Flexible Containers [1990] 186 ITR 693 (Bombay),
• CIT Vs. Smt. Laxmidevi Ratan [2008] 296 ITR 363 (MP),
• ACIT Vs. Smt. Hansaben B. Mehta [2004] 90 ITD 44 (Mumbai Trib.),
• Satnam Overseas Export Vs. DCIT [2017] 88 taxmann.com 791 (Delhi Trib.),
• Rupesh Rashmikant Shah Vs. Union of India [2019] 108 taxmann.com 181 (Bombay),
• ITO Vs. Sangappa S. Kudarikkannur [2018] 96 taxmann.com 541 (Bangalore Trib.)

6. On the other hand, the Ld. Sr. DR for the Revenue supported the order of lower authorities. The Ld. Senior departmental representative (Sr. DR) for the revenue submitted that the private agreement between the parties will not determine the nature of head of income. Admittedly, the builder has deducted TDS under Section 194 A and the receipt is to be treated as income from other sources.

7. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case laws relied by Ld. AR of the assessee. We find that the lower authorities have not disputed the allotment of flat in favour of assessee. Further, payment of Rs. 26,93,950/- paid by the builder is also not in dispute. The builder while making the payment deducted in TDS under Section 194A. The assessee has claimed that on surrender/transfer of his right in flat in favour of Anita U. Kutte and Umesh Kutte, he was paid a compensation of Rs. 26,93,950/- in addition to the payment made by assessee to builder. As a result of the assessee suffered long term capital loss. Before us, the Ld.AR of the assessee vehemently argued that mere deduction of tax (TDS) under wrong provision will not determine the nature of receipt in the hand of assessee. We are conscious of the facts that the section or category under which a payer deducts tax at source (TDS) is a machinery provision for tax collection. Mere deduction of tax at source does not conclusively determine the character, classification, or “head of income” in the hands of the recipient. The payer deducts TDS based on their internal accounting interpretation or a cautious approach to avoid penalty/disallowance. However, the exact taxability must be evaluated based on the true nature of the recipient’s activities and surrounding facts and circumstances. In other way, the TDS cannot decide the chargeability to tax of the receipt and not to decide whether receipt is ‘capital’ or ‘revenue’ in nature in the hands of recipient or to decide the ‘head of income’ under which a particular receipt is to be taxed must be evaluated based on the true nature of the recipient’s activities and surrounding facts and circumstances.

8. We find that Honble Jurisdictional High Court in CIT Vs. Vijay Flexible Containers (Supra), while considering the question of law whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the compensation received by the assessee, cannot be treated as ‘capital gains’ in the hands of the assessee. It was held that capital asset is defined by section 2(14) to mean “property of any kind held by an assessee”. The word, ‘transfer’ in relation to a capital asset is defined in section 2(47) to include, the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein. Thus, the right to obtain a conveyance of immovable property fell within the expression ‘property of any kind ‘used in section 2(14) and was, consequently, a capital asset. The Hon’ble High Court further held that the assessee acquired under the agreement for sale the right to have the immovable property conveyed to him. He was under the law entitled to exercise that right not only against his vendors but also against a transferee with notice or a gratuitous transferee. He could assign that right what he acquired under the agreement for sale was, therefore, property within the meaning of the Act and, consequently, a capital asset. His giving up of the right to claim specific performance by conveyance to him of the immovable property was a relinquishment of the capital asset. There was, therefore, transfer of a capital asset within the meaning of the Act. The assessee acquired a capital asset by reason of the agreement for sale and there was a transfer of that capital asset when the assessee entered into consent terms and relinquished it, and that capital asset had been acquired for the cost paid as and by way of earnest money under the agreement for sale. Thus, the amount of compensation received by the assessee minus the earnest money paid and the legal and other expenses was correctly treated by the ITO as capital gain in the hands of the assessee.

9. Thus, in view of the aforesaid factual and legal discussion, we are of the view that mere deduction of tax by payer under a particular section will not determine the nature of receipt in the hand of the recipient. Thus, the ground of the appeal raised by the assessee is allowed.

10. In the result, the appeal of the assessee is allowed.

Order was pronounced in the open Court on 12/06/2026.