Fair market value of surrendered tenancy rights was treated as acquisition cost for redevelopment-linked capital gains.

Tenancy rights surrendered under a redevelopment scheme were treated as a valuable capital asset, and the permanent alternate accommodation received in exchange could not be assigned a nil cost of acquisition. The fair market value of the surrendered tenancy rights, or the corresponding value of the accommodation received, was the proper basis for computing capital gains on a later transfer of the new premises. The nil-cost approach was rejected, and the Assessing Officer was required to recompute capital gains after considering the period of holding and the nature of the resultant gains.

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Issues: Whether the fair market value of tenancy rights surrendered in a redevelopment scheme could be treated as the cost of acquisition of the permanent alternate accommodation received in exchange, and whether the capital gains on subsequent transfer of such accommodation were liable to be recomputed accordingly.

Analysis: The assessee's tenancy rights were a valuable capital asset. The Permanent Alternate Accommodation received under the redevelopment arrangement was obtained in exchange for surrender of those rights, so the transaction could not be treated as one where the ownership premises had been acquired at no cost. The authorities below erred in adopting a nil cost of acquisition merely because no monetary payment had been made. The correct basis for computation was the fair market value of the tenancy rights on the date of surrender, or the corresponding value of the accommodation received in exchange, with the Assessing Officer also required to determine the nature of the resultant capital gains after considering the period of holding.

Conclusion: The nil-cost approach was rejected. The matter was restored to the Assessing Officer for recomputation of capital gains by adopting the fair market value of the surrendered tenancy rights as the cost of acquisition.

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