Redeveloped Flat on Surrender of Tenancy Rights Taxable as Capital Gains; Section 54F Relief Allowed: ITAT Mumbai

Anant Ramchandra Dhotre Vs ITO (ITAT Mumbai)

Redeveloped Flat on Surrender of Tenancy Rights Taxable as Capital Gains; Section 54F Relief Allowed: ITAT Mumbai

Material Facts: The assessee, who had inherited tenancy rights in a Municipal Corporation property at Dadar, Mumbai, surrendered those tenancy rights pursuant to redevelopment of the building. The original tenanted premises measured about 441 sq. ft., which, after adding fungible area, came to approximately 600 sq. ft. Under the redevelopment arrangement, the assessee was initially to receive a flat measuring 730 sq. ft. However, following litigation before the Bombay High Court regarding re-allotment, the Court directed the developer to allot the assessee an 830 sq. ft. flat on the 22nd floor, pay hardship compensation of Rs.14,50,000, and bear stamp duty and registration charges. The assessee also paid Rs.4,60,000 to the developer for additional amenities.

The Assessing Officer treated the additional 230 sq. ft. received in the redeveloped flat as a benefit taxable under section 56(2)(x). Based on the stamp duty value, the Assessing Officer computed the value of the additional area at Rs.35,34,870, reduced Rs.4,60,000 paid for amenities, and added Rs.30,74,870 as income from other sources.

Procedural History

The assessment was completed under section 143(3) read with section 144B. The Commissioner of Income Tax (Appeals)/NFAC confirmed the addition, holding that the additional 230 sq. ft. represented a distinct benefit taxable under section 56(2)(x). The assessee appealed before the ITAT Mumbai.

Legal Issues

The Tribunal considered:

• Whether the additional area received in the redeveloped flat on surrender of tenancy rights was taxable under section 56(2)(x).
• Whether the transaction was chargeable under the head “Capital Gains”.
• Whether the assessee was entitled to deduction under section 54F.

Relevant Statutory Provisions

The order refers to sections 2(47), 14(E), 45, 48, 54F and 56(2)(x) of the Income-tax Act, 1961.

Assessee’s Submissions

The assessee submitted that:

• Section 56(2)(x) was not applicable.
• The additional area formed part of the consideration received from the builder on surrender of tenancy rights.
• No income accrued on receipt of the redeveloped ownership flat.
• The additional area was received pursuant to the Bombay High Court’s order.
• Alternatively, deduction under section 54F was available since the consideration received on surrender of tenancy rights had been reinvested in the new residential flat, and the assessee satisfied the prescribed conditions.

Tribunal’s Findings and Reasoning

The Tribunal noted that there was no dispute that:

• the assessee had surrendered tenancy rights in the old property;
• tenancy rights constituted a capital asset; and
• transfer of tenancy rights by surrender attracted the provisions governing capital gains.

The Tribunal observed that the Bombay High Court had specifically directed the developer to provide an 830 sq. ft. flat to the assessee. It also noted that the payment of Rs.4,60,000 made by the assessee was for better and additional amenities, as evidenced by the builder’s receipt, and not towards acquisition of the additional area.

The Tribunal held that the transaction involved extinguishment of rights in the old tenanted premises in exchange for a new flat by way of permanent alternate accommodation. It constituted a transfer of tenancy rights within the meaning of section 2(47), giving rise, if at all, to income chargeable under the head “Capital Gains” under sections 45 and 48.

The Tribunal further held that the case was not one of receipt of immovable property for inadequate consideration so as to attract section 56(2)(x). The additional area received under the redevelopment arrangement could not be treated as income from other sources. Referring to the decision of the Supreme Court in CIT vs. Meghalaya Steels Ltd., the Tribunal observed that income covered under another head could not be assessed under the head “Income from Other Sources.”

The Tribunal also accepted the assessee’s alternative claim under section 54F. It observed that the value of the new flat represented the consideration received on surrender of tenancy rights together with the amount paid by the assessee for additional amenities. Since the entire consideration arising from surrender of the tenancy rights had been reinvested in the new residential property, the assessee was eligible for deduction under section 54F. The Tribunal referred to the coordinate bench decision in Balmukund P Acharya vs. ITO, which involved a similar factual matrix.

Final Ruling

The ITAT Mumbai held that the addition of Rs.30,74,870 made under section 56(2)(x) was not justified and deleted it. The Tribunal also held that the assessee was eligible for deduction under section 54F on reinvestment of the consideration received on surrender of tenancy rights. Having decided the appeal on merits, it left the legal grounds open. The appeal was allowed.

Cases Discussed

• CIT vs. Meghalaya Steels Ltd. (Supreme Court of India), [2016] 67 taxmann.com 158 (SC)
• Balmukund P Acharya vs. ITO (ITAT Mumbai), [2015] 15 taxmann.com 244 (Mum)

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal is filed by the assessee is against the order of CIT(A)/National Faceless Appeal Centre (NFAC) vide DIN: ITBA/NFAC/S/250/2025-26/1080735328(1) dated 15-Sep-2025 passed against assessment order u/s 143(3) rws 144B of the Income-tax Act, 1961 (hereinafter referred to as the Act) by the Assessment Unit of the Income-tax Department (NeAC) for the Assessment Year 2018-19.

2. Assessee has raised the following grounds of appeal:

ON NATURAL JUSTICE

1. In the facts and circumstances of the case and in law, the impugned order passed by the Learned Commissioner of Income tax (Appeals), [“Ld. CIT (A)”] deserves to be quashed and set aside for failure of principles of Natural Justice in as much as the order is a non-speaking order, sans any independent reasoning is passed without giving due consideration to the submissions filed by the Appellant.

ON JURISDICTION:

2. In the fact in circumstances of the case and in law, the implied assessment order passed u/ s 143(3) r.w.s. 144B of the Income Tax Act, 1961 [“the Act” for short] by the National Faceless Assessment Centre /National E-assessment Centre [“the NFAC” or “the AO” for short] is bad in law and void for want of jurisdiction.

3. In the facts and circumstances of the case and in law the impugned assessment order is bad in law and void since the same is passed in violation of section 144B of the Act.

4. In the facts and circumstances of the case and in law the impugned assessment order is bad in law and void also because the same is barred by limitation under the provisions of the Act.

ON MERITS:

5. In the facts and circumstances of the case and in law, the Learned Commissioner of Income tax (Appeals), [“Ld. CIT (A)”] erred in confirming the action of the Ld. AO in making an addition of 230,74,870/ – in the hands of the Appellant by invoking the provisions of section 56(2)(x) of the Act.

6. While doing so, the learned CIT(A), failed to appreciate that:

i. The provisions of section 56 (2)(x) are not at all applicable in the present case;

ii. To the admission of the learned Assessing Officer (AO) himself, the additional area of 230 square feet (sq. ft.) received by the Assessee is a part of the consideration received from the builder on surrender of tenancy rights and therefore cannot be treated as income from other sources;

iii. No income actually accrued to the Appellant on receipt of a constructed ownership flat in the redeveloped building on surrendering his tenancy rights;

iv. In any case, the receipt of additional area is in pursuance of the order of the Hon’ble High Court and therefore cannot at all be treated as income and certainly cannot be treated as income from other sources.

7. In the facts and circumstances of the case and in law, the orders of the lower authorities deserve to be reversed, being completely contrary to law, and it is prayed accordingly.

8. Without prejudice to the above, in the facts and circumstances of the case and in law, the learned CIT(A) erred in not allowing the exemption under section 54F of the Act to the appellant since the constructed flat received by the appellant is in lieu of surrender of tenancy rights and all the conditions prescribed under section 54F are fulfilled by the appellant and therefore the entire consideration on surrender of tenancy rights is invested in the new constructed flat and therefore the same is exempt under section 54F of the Act.

9. In the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the Ld. AO in segregating the flat received by the assessee into two separate components on frivolous and superficial grounds.

2.1. The issue involved in this appeal is in respect of addition made on account of invoking provisions of section 56(2)(x) towards flat received by the assessee by way of permanent alternate accommodation upon surrendering of the tenancy rights in the old tenanted property.

3. Briefly stated, facts relevant in this regard are that assessee was a tenant of the building in Dr. D.L. Vaidya Road, Dadar (W) Mumbai. The old flat was a tenanted property of the Municipal Corporation of Greater Mumbai. The original tenant was the father of the assessee, Shri Ramachandra Laxman Dhotre. He died on 03.02.1999. Assessee inherited the tenancy. This flat was Room No. 1, Plot No. 30, New Miranda Wadi, D.L. Vaidya Road, Dadar (W), Mumbai 400 028, admeasuring 441 Sq. Ft. After adding fungible area, the area came to about 600 Sq. Ft. As per the Development Agreement of 2007, by way Permanent Alternate Accommodation, assessee was to get a new flat on 1st Floor of 730 Sq. Ft. but, due commercial construction on 1st floor, assessee was re-allotted a flat on the 23rd floor. Being aggrieved on this re-allotment, assessee approached the Hon’ble High Court of Bombay in the suit no.877 of 2016. Hon’ble Court ordered to allot flat on the 22nd floor, plus stamp duty and registration charges were to be paid by the developer. In, addition, the developer was to give the assessee Rs.14,50,000/- towards legal hassles compensation. An amount of Rs.4,60,000/- was paid by the assessee for extra amenities.

3.1. Direction given by the Hon’ble Court in the aforesaid suit filed by the assessee vide order dated 26.10.2016 is extracted below:

“1. Heard the learned Advocates appearing for the parties and the following order is passed by consent:

i. The Defendants shall provide a Flat admeasuring 830 sq.ft. (carpet area) on the 22nd Floor of the Suit building to the Plaintiff.

An Agreement for Permanent Alternate Accommodation shall be executed within a period of three weeks from today by and between the parties and an amount of Rs.14,50,000/ – shall be paid towards hardship compensation to the Plaintiff upon execution of the Agreement for Permanent Alternate Accommodation.

The additional stamp duty and registration charges shall be borne by the Defendants.”

3.2. The area of flat occupied by the assessee including fungible area was around 600 Sq. Ft. In the agreement for providing permanent alternate accommodation, assessee has been allotted a flat of 830 Sq. Ft. in lieu of surrendering the tenancy right. Ld. Assessing Officer computed the value of the extra area of 230 Sq. Ft., on the basis of value adopted for stamp duty purpose at Rs.35,34,870/- and added Rs.30,74,870/- as the income of assessee under the head ‘income from other sources’ u/s 56(2)(x) after giving credit for the amount of Rs.4,60,000/- further paid by the assessee.

3.3. Ld. Assessing Officer computed the amount taxable in the hands of the assessee as under, against which assessee went in appeal before the ld. CIT(A). This appeal is against the addition of Rs.30,74,870/-made u/s 56(2)(x) of the Act. The computation made by the ld. AO in this regard is as under:

4. Assessee furnished detailed submissions and explanations at the first appellate stage. He also alternatively submitted that deduction u/s.54F is available to him since the value of new flat represents consideration received for surrendering the rights in the old flat plus Rs.4,60,000/- paid by him as this consideration receivable on surrender of rights of old tenanted flat stood re-invested in the new flat. According to him, there is no taxable income generated on the said transaction as the entire consideration receivable on surrender of tenancy rights in the old tenanted property has been reinvested in the new property. He does not own any other residential property and thus, entitled for deduction u/s. 54F.

4.1. Ld. CIT(A) after considering the facts of the case and submissions made by the assessee, did not find favor with him and confirmed the addition made by the ld. Assessing Officer by applying section 56(2)(x) for the fair value of the additional benefit received without adequate consideration. He noted that additional 230 sq. ft. received by the assessee represents a distinct benefit which falls within the purview of section 56(2)(x). Aggrieved, assessee is in appeal before the Tribunal.

5. Ld. Counsel for the assessee reiterated the aforesaid factual position. He referred to the documentary evidences placed in the paper book filed by the assessee containing 128 pages to corroboratively demonstrate the factual matrix. Reliance was also placed on the decision of Coordinate Bench in the case of Anil Dattaram Pitale vs. ITO in ITA No. 465/Mum/2025, dated 17.03.2025 which is also for the same assessment year, i.e., Assessment Year 2018-19.

6. We heard both the parties and perused the material on record. We have given thoughtful consideration to the orders of the authorities below as well as judicial precedents relied upon. At the outset, there is no dispute on the surrender of tenancy rights in the old tenanted property against which assessee has received the new flat by way of permanent alternate accommodation. Also, there is no dispute that tenancy right is a capital asset whose transfer by way of surrender attracts provisions of section 45, so as to bring to charge capital gain arising thereon. Such capital gain is an income under the head ‘capital gain’ as provided u/s. 14(E).

6.1. The bone of contention is on the additional area of 230 sq. ft. which the assessee received comprised in the total area of 830 sq. ft in the new flat against the area of 600 sq. ft. of the old tenanted flat. In this regard, the direction given by Hon’ble Jurisdictional High Court of Bombay in the suit filed by the assessee against the developer has the direct bearing. In para-1(i) of the judgement by the Hon’ble Court, the direction given to the builder is to provide a flat admeasuring 830 sq. ft. (carpet area) on the 22ⁿd floor of the suit building to the assessee. Thus, what the assessee got from the developer against the surrender of old tenanted flat is under the direction of the Hon’ble Court.

6.2. On the other aspect of assessee making a payment of Rs. 4,60,000/- to the developer, the fact of the matter is that it was paid for the extra amenities which the assessee availed from the builder while taking over the new flat. In this regard, the receipt issued by the builder, placed in the paper book categorically mentions that it received the said amount from the assessee for providing better and additional amenities/facilities in the flat of the Rehab Building. Contents of this receipt are reproduced for ready reference:

“Received of and from the within named Mr. Anant. R. Dhotre the sum Rs.4,60,000/ – (Rupees four lakh sixty thousand only) vide cheque No. 307285 date 26/ 07/ 07 drawn on Dena Bank for providing better and additional Amenities/ facilities in the Flat of the building, which will be developed by us on plot No. 144, TPS-IV Mahim Division, known as Fernandes wadi for Manshati co-op Hsg Soc Lt D.L. Vaidya Rd, Dadar (W). Mumbai 400 028.”

6.3. Thus, on the above factual matrix what the ld. Assessing Officer has sought to tax is the extra area granted by the developer of 230 sq. ft. (830-600) in the new property. He computed excess of stamp duty valuation of the property over the amount paid for allotment of the permanent alternate accommodation on the excess area of 230 sq. ft and gave credit for the amount paid by the assessee of Rs. 4,60,000/-for extra amenities and added the same in the hands of the assessee as income from other sources by applying the provisions of section 56(2)(x).

7. On the above factual matrix, we find that it is a case of extinguishment of rights in an old flat in lieu of which assessee has received a new flat by way of permanent alternate accommodation. There is a transfer of tenancy rights by way of surrender falling within the meaning of section 2(47). Income if any, on this transaction is chargeable as capital gain, u/s. 45 r.w.s. 48. It cannot be treated as an income falling under the head income from other sources’ to apply section 56(2)(x). This is not a case of receipt of an immovable property by the assessee for inadequate consideration, so as to come within the purview of section 56(2)(x). We refer to the decision of Hon’ble Supreme Court in the case of CIT vs. Meghalaya Steels Ltd. [2016] 67 taxmann.com 158 (SC) wherein it was held that if a particular income is covered under any other head, it cannot be included under the head `income from other sources’.

7.1. Present case before us is not a case where what assessee received is a freebie extended to him so as to apply the deeming provision of the section 56(2)(x). In the alternate for the stand taken by the ld. AO, assessee is entitled to claim deduction u/s. 54F. The consideration receivable on transfer of surrender of tenancy rights is the same as market value of this asset as at the point of time when it was given to the assessee without any payments made by him. Assessee had paid an extra amount of Rs. 4,60,000/- for the amenities/facilities in the new asset. Thus, the value of the new flat represents the consideration received for surrendering the rights in the old flat plus Rs.4,60,000/-paid by the assessee. The entire consideration receivable on this account towards surrender of rights in the whole tenanted property, has been reinvested in the new property making assessee eligible for deduction u/s. 54F. In this regard, we make useful reference to the decision of Coordinate Bench in the case of Balmukund P Acharya vs. ITO [2015] 15 taxmann.com 244 (Mum) which dealt with similar factual matrix and held in favor of the assessee. On this accord also, there is no taxable income arising in the hands of the assessee for the impugned transaction. Accordingly, addition made by the ld. Assessing Officer by applying provisions of section 56(2)(x) are bad in law and not justified. The same is deleted. Grounds raised by the assessee in this regard are allowed.

8. Since we have dealt on issue raised by the assessee on the merits of the case, legal issues raised are not adjudicated upon and left open.

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

Order is pronounced in the open court on 05 June, 2026