Tenancy Rights Transfer Taxable, Mumbai ITAT Remands FMV Determination to AO

Before the Assessing Officer, the assessee contended that the tenancy rights were inherited from his father, were of very old origin and that the cost of acquisition in the hands of the previous owner was not ascertainable. He argued that the capital-gains computation mechanism therefore failed and, alternatively, sought adoption of nil cost or FMV as on 01.04.2001 with indexation. He also sought exemption under section 54, alternatively section 54F, and requested a reference to the Departmental Valuation Officer under section 55A.

The Assessing Officer held that the agreement transferred tenancy rights and not ownership of a residential house. Relying on section 49(1)(ii), the AO held that the cost to the previous owner was required to be adopted; in the absence of evidence, the cost was taken at nil. The AO rejected the section 54 claim and did not accept the alternative section 54F claim in full. The entire Rs. 7,00,00,000/- was treated as long-term capital gains and total income was determined at Rs. 4,98,20,343/-. The CIT(A) substantially upheld the assessment, including the finding that only tenancy rights had been transferred and that the previous-owner cost had to be considered. On section 54F, however, the CIT(A) accepted that the assessee had made the investment in the new residential property and directed grant of deduction to the extent of 100% of the investment made by him, while sustaining exclusion of expenditure relating to lift installation and layout charges.