Refundable security deposit does not qualify for section 54 relief; transfer of deemed tenancy rights attracts capital gains.

A refundable security deposit paid under a leave and license arrangement does not amount to purchase or construction of a residential house, so relief under section 54 is unavailable. The text also explains that where a licensee in possession becomes a deemed tenant under rent control law, consideration received on transfer of that protected right is treated as capital gains from transfer of tenancy rights. In such cases, the computation machinery under section 55(2) applies and the cost of acquisition may be taken as nil where the statute so provides. The described appeal therefore failed and the tax addition was sustained.

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Issues: (i) Whether a refundable security deposit paid under a leave and license arrangement could be treated as acquisition of a new residential house for relief under section 54 of the Income-tax Act, 1961. (ii) Whether the amount received on transfer of rights in the flat was chargeable as capital gains on transfer of tenancy or occupancy rights, with the cost of acquisition being nil under section 55(2) of the Income-tax Act, 1961.

Issue (i): Whether a refundable security deposit paid under a leave and license arrangement could be treated as acquisition of a new residential house for relief under section 54 of the Income-tax Act, 1961.

Analysis: Section 54 allows exemption only where the assessee purchases or constructs a residential house within the prescribed period. A temporary right to occupy premises under a leave and license agreement, supported by a refundable security deposit, does not amount to purchase or construction of a residential house. The deposit remained security for occupation and was not consideration for acquisition of ownership in a new residential house.

Conclusion: The claim under section 54 was not allowable and was rightly rejected against the assessee.

Issue (ii): Whether the amount received on transfer of rights in the flat was chargeable as capital gains on transfer of tenancy or occupancy rights, with the cost of acquisition being nil under section 55(2) of the Income-tax Act, 1961.

Analysis: The assessee originally entered the premises as a licensee, continued in possession with the landlord's consent, and by operation of the rent control law became a deemed tenant. The right transferred was not an independent occupancy right acquired without cost, but a tenancy-linked right protected by the rent control framework. The consideration received therefore represented transfer of tenancy rights, and the computational machinery under section 55(2) applied. The contention based on nil or unascertainable cost of an alleged occupancy right was rejected.

Conclusion: The receipt was taxable as long-term capital gain, with the cost of acquisition taken as nil under section 55(2), and the assessee's challenge failed.

Final Conclusion: The appeal failed in full, and the addition sustained by the tax authorities was upheld.

Ratio Decidendi: Where a licensee in possession becomes a deemed or statutory tenant under rent control law, consideration received on transfer of that protected right is taxable as capital gains with nil cost of acquisition where the statute so provides, and a refundable security deposit under a leave and license agreement is not equivalent to purchase of a residential house for section 54 relief.

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