FMV of Ownership Flat Received on Surrender of Tenancy Rights to Be Treated as Cost of Acquisition for Capital Gains: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that where a taxpayer receives an ownership flat in exchange for surrender of tenancy rights, the fair market value (FMV) of the flat on the date of acquisition constitutes the cost of acquisition for computing capital gains on its subsequent sale. The bench of Amit Shukla (Judicial Member) and Arun Khodpia (Accountant Member) has observed that the FMV of the ownership flat on the date it was acquired under the redevelopment agreement represents the cost of acquisition for capital gains purposes. Section 49, which deems cost in cases of inheritance or succession, does not apply once the original tenancy rights are converted into a distinct capital asset, namely an ownership flat. The AO was directed to recompute capital gains by allowing deduction of cost of acquisition based on FMV as on the date of acquisition of the flat, with applicable indexation. The dispute pertained to Assessment Year (AY) 2015–16 and arose from the sale of a residential flat in Mumbai for ₹86 lakh. The taxpayer had not originally filed a return of income for the relevant year, as the declared income after computing capital gains was below the taxable threshold. Based on information regarding the sale of immovable property, the Assessing Officer (AO) reopened the assessment under section 147 of the Income-tax Act, 1961. In response to reassessment proceedings, the taxpayer disclosed long-term capital gains (LTCG) of about ₹2.37 lakh after claiming indexed cost of acquisition of ₹83.62 lakh. The cost was computed by adopting the FMV of the ownership flat as on the date it was received under a redevelopment agreement in lieu of surrender of ancestral tenancy rights. The AO rejected the computation and held that the property was acquired without monetary consideration, as it was received in exchange for surrender of tenancy rights. Treating the tenancy rights as self-generated, the AO invoked sections 49 and 55 and adopted the cost of acquisition as nil, thereby taxing the entire sale consideration of ₹86 lakh as long-term capital gains. The AO also denied exemption claimed under section 54/54F due to lack of supporting documents. The Commissioner of Income Tax (Appeals) upheld the AO’s order, agreeing that no determinable cost of acquisition existed and that the conditions for exemption under section 54/54F were not fulfilled. On further appeal, the ITAT examined the nature of the transaction and the settled judicial position on redevelopment cases involving tenancy rights. The Tribunal noted that the original property was held under the pagdi (tenancy) system by the taxpayer’s father, later devolving upon legal heirs. Under a redevelopment agreement, the tenancy rights were surrendered, and in exchange, an ownership flat was allotted to the taxpayer. What was eventually sold by the taxpayer was not tenancy rights, but an ownership flat received pursuant to the redevelopment. Relying on earlier decisions of the Mumbai ITAT and the Bombay High Court, the Tribunal reiterated that tenancy rights are valuable rights and that when such rights are surrendered in exchange for an ownership flat, the transaction is not cost-free. Had the tenancy rights not been surrendered, the taxpayer would have received monetary compensation or its equivalent. The Tribunal upheld the denial of exemption under section 54/54F, observing that the taxpayer failed to substantiate the claim with requisite documentary evidence. The appeal was partly allowed. The issue relating to cost of acquisition was decided in favour of the taxpayer, while the claim for exemption under section 54/54F was rejected. Case Details Case Title: Murtuza KotharinVersus ITO Case No.: I.T.A. No. 4080/Mum/2025 Date: 06.01.2026 Counsel For Petitioner: Suresh Otwani, AR Counsel For Respondent: Annavaran Kosuri, Sr. DR Click Here To Read Order Read More: Mere Marketing Support Not ‘Fees for Included Services’, but Excessive Claims Need Proof: ITAT Caps Allowable Marketing Expenses at 20%

FMV of Ownership Flat Received on Surrender of Tenancy Rights to Be Treated as Cost of Acquisition for Capital Gains: ITAT

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