Capital gains treatment for surrendered tenancy rights: allotment of a flat is consideration for transfer, not residuary taxable income.

Surrender of registered tenancy rights was held to constitute a transfer of a capital asset under the statutory definition, and the allotment of a flat in exchange is treated as consideration for that transfer rather than taxable income under the residuary receipt provision. The taxpayer produced contemporaneous tenancy documentation and possession/allotment records; coordinate precedents and High Court observations on identical issues supported capital gains treatment and entitlement to exemption for reinvestment in residential property. Revenue allegations of a colourable device lacked cogent evidence and notice defects were noted in related proceedings. The impugned addition under the residuary receipt head was deleted and exemption was allowed.

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Issues: Whether the registered tenancy arrangement was a genuine tenancy and whether the flat allotted on surrender of tenancy rights is taxable under section 56(2)(x) of the Income-tax Act, 1961 or constitutes consideration for transfer of a capital asset entitling the assessee to exemption under section 54F of the Income-tax Act, 1961.

Analysis: Tenancy rights are within the scope of capital asset as defined by section 2(14) and their surrender amounts to a transfer under section 2(47) of the Income-tax Act, 1961. Where a transaction squarely falls within the specific head of capital gains, it cannot be taxed under the residuary provision of section 56(2)(x). The assessee produced registered tenancy agreement dated 05.08.2014, contemporaneous rent receipts and electricity bills evidencing continuous occupation from 01.04.2013, MHADA verification listing the assessee as tenant, a Permanent Alternate Accommodation Agreement with the developer, and allotment/possession documents showing receipt of a flat in lieu of surrender of tenancy rights. Co-ordinate Tribunal precedent and jurisdictional High Court observations addressing identical factual and legal issues support treating such allotment as consideration for transfer of tenancy rights and permitting exemption for investment in residential property. The revenue's contention of a colourable device was not supported by cogent material and, in related proceedings, the High Court noted defects in the show cause notice procedure where applicable.

Conclusion: The assessee possessed valid tenancy rights; the allotment of the flat was consideration for surrender of those tenancy rights and falls within capital gains treatment, not section 56(2)(x). The addition under section 56(2)(x) is deleted and exemption under section 54F is allowable in favour of the assessee.

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