Redevelopment agreement and tenancy rights: capital gain not taxable until possession of alternate premises is handed over

A limited scrutiny objection failed because the capital-gain issue arose from the same immovable property transactions that formed the basis of the scrutiny for investment in immovable property. However, the addition as short-term capital gain on alleged surrender of tenancy rights was unsustainable where the redevelopment agreement postponed surrender until possession of the permanent alternate accommodation was handed over. Mere execution of the agreement or delivery of the old premises did not extinguish tenancy rights, and any taxable transfer would arise only on receipt of the alternate premises in the later financial year. The addition for the year under appeal was therefore deleted.

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Issues: (i) Whether the assessment was invalid for allegedly travelling beyond the scope of limited scrutiny; (ii) Whether the addition made as short-term capital gain on alleged surrender of tenancy rights in the relevant assessment year was sustainable.

Issue (i): Whether the assessment was invalid for allegedly travelling beyond the scope of limited scrutiny.

Analysis: The scrutiny was initiated to verify investment in immovable property. The transactions examined in the assessment related to immovable property, including acquisition of property and redevelopment-linked tenancy rights. The issue of capital gain arose from the same set of property-related transactions and was held to fall within the wider ambit of the scrutiny mandate for investment in immovable property. The scope was therefore not treated as improperly expanded.

Conclusion: The assessment was not invalid on the ground of breach of limited scrutiny, and the objection was rejected.

Issue (ii): Whether the addition made as short-term capital gain on alleged surrender of tenancy rights in the relevant assessment year was sustainable.

Analysis: The tripartite redevelopment agreement provided that the tenancy rights would continue until possession of the permanent alternate accommodation in the new building was handed over. The clauses governing surrender and possession showed that mere execution of the agreement or handing over of the old premises did not itself extinguish the tenancy rights. The taxable event, if any, would arise only when possession of the alternate accommodation was actually received. Since such possession was handed over in April 2019, the transfer or surrender, if at all, fell in the subsequent financial year and not in the year under appeal.

Conclusion: The addition as short-term capital gain in the impugned assessment year was unsustainable and was directed to be deleted.

Final Conclusion: The challenge to limited scrutiny failed, but the addition on account of alleged surrender of tenancy rights was deleted, resulting in a partial success for the assessee.

Ratio Decidendi: Where a redevelopment agreement expressly postpones surrender of tenancy rights until possession of the alternate premises is handed over, no capital gain can be brought to tax in the earlier year merely on execution of the agreement or delivery of the old premises.

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