Tenancy agreement cannot be treated as property sale for capital gains taxation under section 50C

The ITAT Mumbai held that a tenancy agreement cannot be treated as a sale/transfer of property for capital gains taxation. The assessee, one of four co-owners of two flats, entered into a registered tenancy agreement governed by MRC Act, 1999. The AO and CIT(A) erroneously treated this as property transfer and applied section 50C for valuation, calculating long-term capital gains on stamp duty value. The ITAT found no evidence of title transfer or consideration between parties, confirming it was merely a rental agreement. The addition made by AO was deleted and the assessee's appeal was allowed.

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Issues Involved:
1. Confirmation of capital gain under Section 50C of the Income Tax Act, 1961.
2. Nature of the transaction - whether it was a tenancy agreement or a sale/transfer of property.
3. Applicability of Section 50C to tenancy rights.

Summary:

1. Confirmation of Capital Gain under Section 50C:
The main grievance of the assessee was against the action of the Ld. CIT(A) confirming the capital gain of Rs. 71,07,480/- under Section 50C of the Income Tax Act, 1961. The AO treated the transaction as a transfer and computed the Long Term Capital Gain (LTCG) by applying the deeming provision of Section 50C, considering the stamp duty value of Rs. 71,07,480/- as the sale consideration.

2. Nature of the Transaction - Tenancy Agreement or Sale/Transfer:
The assessee contended that the registered documents were tenancy agreements and not sale agreements. The AO, however, viewed the transaction as a surrender of rights in the properties, treating it as a colourable device to avoid taxation. The Ld. CIT(A) upheld the AO's decision, stating that the money paid for regularizing the tenancy agreement was to be treated as income in the nature of tenancy rights and taxed under capital gains.

3. Applicability of Section 50C to Tenancy Rights:
The Tribunal examined whether Section 50C, which applies to land or building, can be extended to tenancy rights. The Tribunal referred to several decisions, including Atul G. Puranik v ITO and Kishori Sharad Gaitonde v ITO, which held that Section 50C does not apply to tenancy rights. The Tribunal found no material evidence to treat the registered tenancy agreement as a sale/transfer of property. The terms of the agreement indicated it was a tenancy agreement governed by the Maharashtra Rent Control Act, 1999, with no consideration passed between the landlord and tenants.

Conclusion:
The Tribunal concluded that the AO and Ld. CIT(A) erred in treating the transaction as a transfer of property and applying Section 50C. The appeal of the assessee was allowed, and the addition made by the AO was deleted.

Order Pronounced:
The appeal of the assessee is allowed, and the order was pronounced in the open court on 12/12/2023.

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