Flat Received In Lieu Of Surrender Of Tenancy Rights Not Taxable Under Section 56(2)(x)

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The Assessee was allotted property with a stamp duty value of INR 11.69 Crores, under a Permanent Alternate Accommodation (PAA) agreement executed in March 2017.

India Tax

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BACKGROUND

The Assessee¹ is an individual and carrying on the business commission agent related to chemical distribution.
The Assessee was allotted property with a stamp duty value of INR 11.69 Crores, under a Permanent Alternate Accommodation (PAA) agreement executed in March 2017. The flat was received in lieu of the surrender of tenancy rights in the old building which was being redeveloped.
The Assessee filed their return of income for assessment year 2020-21, reporting a total income of INR 4.87 Lacs. The Assesses's case was selected for limited scrutiny under the Act for the verification of the capital gain deduction claimed under Section 54F of the Income-tax Act, 1961 ('the Act').
During Assessment proceedings, the Assessing Officer ('AO') disregarded the tenancy agreement, and treating it as a sham transaction and taxed the value of flat received under section 56(2)(x) of the Act as income from other sources and denied the exemption claimed.
The Commission of Income-tax (Appeals) reversed the AO's order and decisively held in the favour of Assessee.

REVENUE'S CONTENTIONS

Revenue argued that tenancy agreement and the other documents are colourable device for tax avoidance as tenancy agreement is executed between the Assessee and his family members.
It is also argued that the Assessee had no independent or legitimate tenancy rights and the arrangement lacked commercial substance.

ASSESSEE'S ARGUMENTS

It is submitted that stamp duty of INR 35 lacs duly paid on tenancy agreement.
Substantial documentary evidence were submitted to AO to establish the existence of tenancy rights, including rent receipts, electricity bills, registered tenancy agreement, MHADA records, and PAA Agreement executed with developer.
It is also argued that the residential flat was allotted in lieu of the surrender of tenancy rights, which is a transfer of a capital asset, attracting capital gains tax under section 45 of the Act.
Placed reliance on decision of ITAT Mumbai² , wherein it was held that tenancy right is a capital asset, and its transfer is liable to be taxed as capital gains, and exemption under section 54F of the Act is available since, there is an investment by way of PAA agreementresidential flat allotted by the builder.
Also placed reliance on Hon'ble Bombay High Court decision3 , wherein it was held that that allegations of colourable device cannot be sustained in the absence of cogent material and proper show cause notice specifying the applicable statutory provision.

TRIBUNAL OBSERVATIONS

The subsequent registration of the tenancy agreement does not invalidate the tenancy, where contemporaneous documents corroborate continuous occupation and payment of rent.
Tenancy rights constitute as a capital asset under section 2(14) of the Act, and the surrender of it amounts to a transfer under section 2(47) of the Act.
The allotment of a residential flat by the developer under the redevelopment scheme represents consideration received in exchange for such surrender of tenancy rights.
The transaction squarely falls within the ambit of capital gains and cannot be brought to tax under the residuary provisions of section 56(2)(x) of the Act.
Reliance is placed on the decisions of the ITAT Mumbai2 , and the Hon'ble Bombay High Court3 (supra), as cited by the Assessee in his arguments.
The tribunal upheld the order of CIT(A), allowed the claim for exemption under section 54F of the Act. Accordingly, the addition made by the AO under section 56(2)(x) of the Act was deleted and the Assessee's appeal was allowed.
The ruling clarifies the tax treatment of flats received in exchange for tenancy rights during redevelopment treating the allotment as consideration for surrender of tenancy rights, not a gratuitous receipt.
This ruling reaffirms the position that the surrender of tenancy rights is a transfer of capital asset and is taxable under the head 'capital gains'.
The decision reinforces the principle that the residuary head of income (Income from Other Sources) cannot be invoked where the income is specifically taxable under a specific head.

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