Tushar Uday Talwalkar Vs ITO (ITAT Mumbai)
Summary: The appeal was filed by Tushar Uday Talwalkar against the order of the NFAC, Delhi passed under Section 250 of the Income-tax Act, 1961 for AY 2017-18. The impugned appellate order arose from reassessment proceedings under Section 147 read with Section 144B, in which an addition of Rs.33,41,818/- had been made under Section 56(2)(vii)(b).
The assessee was an individual engaged in the retail business of stationery. He had not originally filed a return because his income was below the taxable threshold. Reassessment proceedings were subsequently initiated after information was received concerning an immovable-property transaction during FY 2016-17 in which the consideration reflected was lower than the stamp duty value. In response to notice under Section 148 dated 31.07.2022, the assessee filed a return declaring total income of Rs.74,030/-.
The transaction arose from redevelopment of existing premises at Goregaon East, Mumbai, where the assessee was a sub-tenant/occupant along with his father. Under an Agreement for Providing Permanent Alternate Accommodation (PAA) dated 06.06.2016, the assessee and his father were entitled to receive 550 sq. ft. of PAA on ownership basis in consideration of relinquishing their existing tenancy/sub-tenancy rights. The assessee’s individual entitlement was 200 sq. ft. The PAA had not been received or put into his possession during the relevant year.
The stamp valuation authority valued the entire 550 sq. ft. PAA at Rs.91,90,000/-. The Assessing Officer proportionately attributed Rs.33,41,818/- to the assessee’s 200 sq. ft. share and treated the amount as receipt of immovable property without consideration under Section 56(2)(vii)(b). The CIT(A) sustained the addition, principally observing that no documentary evidence or valuation report had been produced to establish the market value of the surrendered tenancy rights and that the registered agreement created enforceable rights notwithstanding subsequent delivery of possession.
Before the Tribunal, the assessee submitted that the authorities had fundamentally misconstrued the transaction. The PAA was not acquired gratuitously. The assessee possessed valuable pre-existing sub-tenancy/occupancy rights and the developer agreed to provide alternate accommodation in exchange for relinquishment of those rights. The assessee therefore contended that surrender of the existing rights constituted valuable non-monetary consideration and that there was no receipt of immovable property “without consideration” within the meaning of Section 56(2)(vii)(b).
The assessee further argued that the proposed PAA had not been received during the relevant previous year. Reliance was placed on Snehalata Heramb Dhayagude vs JAO, ITA No. 258/Mum/2026, and on ITO v. Varun Jaisingh Asher, in which the Mumbai Tribunal held that tenancy rights constitute a capital asset under Section 2(14), surrender constitutes transfer under Section 2(47), and residential premises allotted by the developer in exchange for surrender of tenancy rights represents consideration for the transfer. The assessee also relied upon the Supreme Court decision in CIT v. D.P. Sandu Bros. Chembur (P.) Ltd., which held that tenancy rights are capital assets, surrender constitutes transfer and consideration received on surrender is a capital receipt; where a receipt properly falls under a specific head, it cannot be brought to tax under the residuary provisions of Section 56.
The Departmental Representative supported the orders of the lower authorities, contending that the registered agreement conferred valuable and enforceable rights upon the assessee in the proposed immovable property, while no monetary consideration had been paid. It was also argued that the assessee had not furnished a valuation report or other cogent material quantifying the value of the surrendered tenancy/sub-tenancy rights.
The Tribunal held that the transaction could not be examined by isolating the proposed PAA from the pre-existing sub-tenancy/occupancy rights surrendered by the assessee. The arrangement was reciprocal: the assessee relinquished valuable existing occupancy/sub-tenancy rights and, in consideration thereof, the developer undertook to provide alternate premises. Consequently, absence of monetary payment could not by itself establish that the PAA was received without consideration.
Following the principle laid down by the Supreme Court in D.P. Sandu Bros. Chembur (P.) Ltd. and the coordinate Mumbai Tribunal decisions in Varun Jaisingh Asher and Vasant Nagorao Barabde, the Tribunal held that tenancy rights constitute a capital asset, their surrender constitutes a transfer and the alternate accommodation represents consideration connected with that transfer. It also considered the additional factual circumstance that the PAA had not been received or put into possession of the assessee during the relevant year.
The Tribunal therefore concluded that the proposed PAA, being contractually linked with relinquishment of the assessee’s pre-existing sub-tenancy/occupancy rights, could not be treated as a gratuitous receipt merely because the consideration was non-monetary or its precise monetary value was not separately quantified. The addition of Rs.33,41,818/- under Section 56(2)(vii)(b) was accordingly held unsustainable. The impugned order of the CIT(A) was set aside and the Assessing Officer was directed to delete the addition. The assessee’s appeal was allowed.
Cases Discussed
- CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. reported in [2005] 273 ITR 1 (SC)/142 Taxman 713 (SC)
- Snehalata Heramb Dhayagude vs JAO, ITA No. 258/Mum/2026
- ITO v. Varun Jaisingh Asher
- Vasant Nagorao Barabde v. DCIT
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT MUMBAI
The instant appeal of the assessee filed against the order of the NFAC, Delhi [for brevity “Ld. CIT(A)”], order passed under Section 250 of the Income Tax Act, 1961 (for brevity ‘the Act’), for Assessment Year 2017-18, date of order 17.03.2026. The impugned order emanated from the order of the Assessment Unit Income Tax Department (for brevity ‘Ld. AO’), order passed under Section 147 r.w.s. 144B of the Act, date of order 23.05.2023.
2. The brief facts of the case are that the assessee is an individual engaged in the retail business of stationery. For the year under consideration, the assessee had not originally filed the return of income as his income was below the taxable threshold. Subsequently, proceedings under Section 147 of the Act were initiated on the basis of information that the assessee had entered into a transaction relating to immovable property during F.Y. 2016-17 wherein the consideration reflected was lower than the stamp duty value. In response to notice under Section 148 dated 31.07.2022, the assessee filed the return declaring total income of Rs.74,030/-. The assessee was a sub-tenant/occupant along with his father in respect of the existing premises at Goregaon East, Mumbai. The tenancy/sub-tenancy rights originated from the family arrangement and the property was subsequently taken up for redevelopment by M/s Kabra & Associates. Under the Agreement for Providing Permanent Alternate Accommodation (“PAA”) dated 06.06.2016, the assessee and his father were entitled to receive PAA admeasuring 550 sq. ft. on ownership basis in consideration of relinquishment of their existing tenancy/sub-tenancy rights. Out of the said area, the assessee’s entitlement was 200 sq. ft. Significantly, the PAA was not received or put in possession of the assessee during the year under consideration. The stamp valuation authority valued the entire PAA of 550 sq. ft. at Rs.91,90,000/-. The Ld. AO proportionately determined the value attributable to the assessee’s 200 sq. ft. share at Rs.33,41,818/-. According to the Ld. AO, since the assessee had not paid any monetary consideration for acquiring the PAA, the said amount represented receipt of immovable property without consideration within the meaning of Section 56(2)(vii)(b) of the Act. Accordingly, an addition of Rs.33,41,818/- was made. Being aggrieved, the assessee carried the matter before the Ld. CIT(A). The Ld. CIT(A) upheld the addition mainly on the reasoning that no documentary evidence or valuation report was produced to establish the market value of the tenancy rights surrendered and that the registered agreement conferred enforceable rights upon the assessee notwithstanding that possession of the proposed property was to be delivered subsequently. The Ld. CIT(A), accordingly, sustained the addition of Rs.33,41,818/-.
3. The Ld. AR submitted that the authorities below fundamentally misconstrued the nature of the transaction. The assessee had not acquired the PAA gratuitously. The assessee possessed valuable sub-tenancy/occupancy rights, and the PAA was agreed to be provided by the developer precisely in exchange for relinquishment and surrender of those rights. Thus, the transaction involved reciprocal contractual obligations and valuable consideration flowing from the assessee to the developer. There was, therefore, no receipt of immovable property “without consideration” so as to attract Section 56(2)(vii)(b) of the Act.
4. The Ld. AR further submitted that the assessee’s status as a sub-tenant does not alter the character of the right surrendered. The existing sub-tenancy/occupancy right was itself the source and consideration for the assessee’s entitlement to 200 sq. ft. in the redeveloped premises. The registered PAA agreement dated 06.06.2016 recognised such entitlement. Therefore, merely because no monetary consideration was paid by the assessee, the consideration flowing in kind by way of surrender/relinquishment of the pre-existing sub-tenancy rights could not be ignored.
5. The Ld. AR further contended that the PAA itself had not been received during the relevant previous year. The agreement contemplated construction and subsequent delivery of possession. Therefore, even independently, the essential requirement of receipt of immovable property during the year for invoking Section 56(2)(vii)(b) was absent. The assessee relied upon the decision of the Coordinate Bench of ITAT-Mumbai in Snehalata Heramb Dhayagude vs JAO, ITA No. 258/Mum/2026 date of pronouncement 21/04/2026 wherein, according to the material placed before us, the addition was deleted on the finding that there was no receipt of immovable property during the relevant previous year.
6. The Ld. AR further relied upon the decision of the Coordinate Bench of ITAT, Mumbai in ITO v. Varun Jaisingh Asher reported in [2026] 184 taxmann.com 174 (Mumbai-Trib.), wherein the Tribunal held that tenancy rights constitute a capital asset within Section 2(14); surrender thereof constitutes transfer under Section 2(47); and allotment of a residential flat by the developer in exchange for surrender of tenancy rights represents consideration for such transfer. Consequently, such transaction falls within the ambit of capital gains and cannot be brought to tax under the residuary provisions of Section 56.
7. The Ld. AR also relied upon the judgment of the Hon’ble Supreme Court in CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. reported in [2005] 273 ITR 1 (SC)/142 Taxman 713 (SC). The Hon’ble Supreme Court has held that a tenancy right is a capital asset, surrender of such right constitutes transfer and the consideration received there for is a capital receipt. It was further held that where the receipt properly falls under a specific head, it cannot be brought to tax under the residuary provisions of Section 56.
8. Per contra, the Ld. DR relied upon the orders of the revenue authorities. The Ld. DR submitted that the registered agreement dated 06.06.2016 conferred valuable and enforceable rights upon the assessee in the proposed immovable property. The stamp valuation authority had determined the value of the entire property at Rs.91,90,000/-, whereas no monetary consideration had been paid by the assessee. The Ld. AO had already restricted the addition to the assessee’s proportionate entitlement of 200 sq. ft., amounting to Rs.33,41,818/-.
9. The Ld. DR further supported the finding of the Ld. CIT(A) that the assessee had not furnished any valuation report or other cogent material quantifying the value of the tenancy/sub-tenancy rights claimed to have been surrendered. It was accordingly submitted that the addition made under Section 56(2)(vii)(b) was justified and the impugned order should be upheld.
10. We have heard the rival submissions and perused the material available on record, including the judicial precedents relied upon by the assessee. The controversy before us essentially revolves around the character of the transaction arising from the redevelopment arrangement and whether the assessee’s entitlement to PAA can be regarded as receipt of immovable property without consideration for the purpose of Section 56(2)(vii)(b) of the Act.
11. At the outset, we find that the transaction cannot be examined by isolating the proposed PAA from the pre-existing sub-tenancy/occupancy rights surrendered by the assessee. The record indicates that the assessee was a sub-tenant/occupant in the existing premises along with his father and, upon redevelopment, the developer agreed to provide alternate accommodation against relinquishment of those existing rights. The assessee’s entitlement was specifically identified as 200 sq. ft. out of the total PAA of 550 sq. ft.
12. Therefore, the absence of payment of monetary consideration cannot, by itself, lead to the conclusion that the proposed PAA was received without consideration. The surrender or relinquishment of a valuable pre-existing tenancy/sub-tenancy right is itself the consideration flowing from the occupant to the developer. The arrangement is reciprocal: the assessee gives up the existing occupancy/sub-tenancy rights and, in consideration thereof, the developer undertakes to provide alternate premises. The transaction, therefore, cannot be characterised as a gratuitous receipt merely because the consideration is not expressed in money.
13. In this regard, the principle laid down by the Hon’ble Supreme Court in D.P. Sandu Bros. Chembur (P.) Ltd. (supra) assumes significance. The Hon’ble Supreme Court has categorically recognised that a tenancy right is a capital asset and its surrender constitutes a transfer; consideration received on such surrender bears the character of a capital receipt. The Hon’ble Supreme Court further explained that Section 56 operates residually and where a receipt falls under a specific head of income, the same cannot be shifted to the residuary head merely because of an issue concerning its chargeability or computation under that specific head.
14. We further find that the Coordinate Bench of ITAT, Mumbai in Varun Jaisingh Asher (supra), while dealing with redevelopment against surrender of tenancy rights, has applied the same principle. The Coordinate Bench held that tenancy rights constitute a capital asset under Section 2(14), surrender thereof amounts to transfer within Section 2(47), and the residential premises allotted by the developer represent consideration received in exchange for surrender of those rights. It was consequently held that such consideration cannot be subjected to tax under the residuary provisions of Section 56.
15. The same decision also refers to Vasant Nagorao Barabde v. Dy. CIT reported in [2025] 174 taxmann.com 1015 (Mumbai-Trib.), wherein the Coordinate Bench considered surrender of tenancy rights against allotment of a PAA flat and held that once the source falls under the specific head of capital gains, applicability of Section 56 stands ruled out, following the ratio of the Hon’ble Supreme Court in D.P. Sandu Bros. Chembur (P.) Ltd. (supra).
16. In the present case, there is an additional factual aspect. The proposed alternate accommodation had not been received or put in possession of the assessee during the year under consideration. The assessee’s material specifically records that his share was 200 sq. ft. in the proposed PAA and that the said PAA was not received during the relevant year. The assessee has also relied upon the Coordinate Bench decision in Snehalata Heramb Dhayagude (supra), wherein the absence of receipt of immovable property during the relevant previous year was considered while deleting the addition under Section 56(2)(vii)(b).
17. In our considered view, the approach adopted by the Ld. CIT(A) in requiring the assessee to establish the precise market value of the surrendered tenancy/sub-tenancy rights overlooks the more fundamental character of the transaction. The material question for the applicability of Section 56(2)(vii)(b) is whether the proposed PAA was received without consideration. Once the PAA emanates from and is contractually linked with relinquishment of the assessee’s pre-existing sub-tenancy/occupancy rights, the transaction cannot be treated as one without consideration merely because the consideration was non-monetary or because the precise monetary value of the surrendered right was not separately quantified in the agreement.
18. Respectfully following the ratio laid down by the Hon’ble Supreme Court in D.P. Sandu Bros. Chembur (P.) Ltd. (supra) and the decisions of the Coordinate Benches in Varun Jaisingh Asher (supra) and Vasant Nagorao Barabde (supra), and considering the peculiar facts that the assessee’s entitlement to the PAA arose directly against relinquishment of his sub-tenancy/occupancy rights and that possession of the PAA was not received during the year under consideration, the addition of Rs.33,41,818/- made under Section 56(2)(vii)(b) of the Act cannot be sustained. Accordingly, the impugned order of the Ld. CIT(A) on this issue is set aside and the Ld. AO is directed to delete the addition of Rs.33,41,818/-. The grounds raised by the assessee on this issue are allowed.
19. In the result, the appeal of the assessee bearing ITA No. 6107/Mum/2026 is allowed.
Order pronounced in the open court on 20th day of August 2026
