In a significant ruling that could have wide implications for redevelopment transactions in Mumbai and other urban centres, the income-tax appellate tribunal (ITAT) has held that a flat received in exchange for surrender of tenancy rights cannot be taxed as income from other sources under Section 56(2)(x) of the Income Tax (I-T) Act and is instead eligible for capital gains treatment with exemption under Section 54F.
In an order last month, the ITAT bench of Anikesh Banerjee (judicial member) and Girish Agrawal (accountant member) says, "From the record, it is evident that the assessee has placed substantial documentary evidence to establish the existence of tenancy rights, including rent receipts, electricity bills, registered tenancy agreement dated 5 August 2014, MHADA verification records, and the permanent alternate accommodation agreement executed with the developer. These documents clearly demonstrate that the assessee had been occupying the premises as a tenant since 1 April 2013 and that the tenancy rights continued until their surrender in the course of redevelopment of the property. The fact that the tenancy agreement was formally registered in 2014 does not invalidate the existence of tenancy, particularly when the surrounding documentary evidence corroborates continuous occupation and payment of rent."
"We further observe that tenancy rights constitute a capital asset within the meaning of section 2(14) of the Act and the surrender thereof 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. Therefore, 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," the order says.
The Mumbai bench of the tribunal delivered this ruling in the case of I-T officer (ITO) vs Varun Jaisingh Asher for the assessment year (AY)20–21, dismissing the appeal filed by the income-tax department and upholding the relief granted by the commissioner of income-tax (appeals) (CIT-A).
The dispute centred on a flat valued at about ₹11.68 crore that Mr Asher received from a developer as part of a redevelopment project. He had claimed exemption under Section 54F on the grounds that the flat was received in consideration for surrendering tenancy rights, which constitute a capital asset under the I-T Act.
However, the assessing officer (AO) rejected this claim and treated the tenancy arrangement as a sham transaction and a colourable device designed to avoid tax. The officer held that Mr Asher did not possess genuine tenancy rights and that the flat was received without consideration. On this basis, the stamp duty value of about ₹11.68 crore was taxed under Section 56(2)(x) as income from other sources, and the exemption under Section 54F was denied.
Mr Asher challenged this addition before the CIT(A), who deleted the entire addition after examining the documentary evidence. The tax department then escalated the matter to the ITAT.
After reviewing the record, the tribunal found that Mr Asher had produced extensive and credible documentation to establish the existence of tenancy rights over a sustained period. These included rent receipts evidencing regular payments, electricity bills in his name, a registered tenancy agreement executed in August 2014, records of verification by MHADA recognising Mr Asher as a tenant and a permanent alternate accommodation agreement with the developer under the redevelopment scheme.
The tribunal observed that these documents clearly demonstrated that Mr Asher had been occupying the premises as a tenant since April 2013 and continued to do so until the tenancy rights were surrendered in 2020. It rejected the tax department’s contention that the tenancy was invalid merely because the formal agreement was registered at a later stage, noting that the surrounding evidence established continuous and genuine tenancy.
On the legal issue, the tribunal held that tenancy rights fall within the definition of a capital asset under Section 2(14) of the Act, and their surrender amounts to a transfer under Section 2(47). Therefore, any benefit received in exchange, including a redeveloped flat, constitutes consideration for transfer and must be taxed under the head 'capital gains'.
The bench emphasised that once a transaction is clearly covered under a specific head of income, it cannot be brought to tax under the residual head of 'income from other sources'. It held that invoking Section 56(2)(x) in such cases is not permissible.
Rejecting the AO’s reasoning, the tribunal further clarified that the flat received by Mr Asher was not a gratuitous benefit but a direct consideration for the surrender of tenancy rights. As such, it could not be treated as a gift or deemed income under Section 56(2)(x).
The tribunal also upheld Mr Asher’s claim for exemption under Section 54F, observing that the conditions for claiming the benefit are satisfied since the assessee had effectively invested in a residential property through the redevelopment arrangement.
Addressing the allegation that the tenancy arrangement was a colourable device because it involved family members, the tribunal held that such a conclusion could not be drawn merely on suspicion. It noted that transactions between relatives are not barred under tax law, and in this case, the tenancy was backed by documentary evidence as well as independent verification by a statutory authority like MHADA.
The tribunal also referred to observations made by the Bombay High Court in a related matter involving Mr Asher’s brother, where similar allegations by the tax department had been criticised for lack of proper evidence and procedural lapses. The High Court had underscored that allegations of tax avoidance cannot be sustained without a clear factual and legal basis.
In its final ruling, ITAT concluded that Mr Asher had valid tenancy rights, that the flat received in the redevelopment project was consideration for surrender of those rights and that the transaction was rightly assessable under capital gains with eligibility for exemption under Section 54F. Accordingly, it upheld the CIT(A)’s order and dismissed the tax department’s appeal.
The ruling is expected to provide clarity for taxpayers involved in redevelopment projects, particularly in cities like Mumbai, where tenancy arrangements are common. It reinforces the principle that properly documented tenancy rights are legally recognised capital assets and that benefits arising from their surrender cannot be arbitrarily taxed as unexplained or gratuitous income.
(ITA No8251/Mum/2025 AY2020-21 Date: 3 March 2026)
