TaxTMI 
TaxTMI 
2026 (6) TMI 463
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....o ownership property and in terms of the Development agreement, he got the new shop against his rights, under the Development agreement executed on 21st September, 2010 that he obtained possession of the property in 2010, that his cost to the shop was the market value of the shop on the day it was handed over by the Developer, that the differential consideration between the above cost and the consideration received was only chargeable to tax for the subject assessment year in appeal. 4. The CITA should have appreciated that the cost in the hands of the appellant was the market value of the property at the date of receiving possession from the Developer." 2. Briefly stated, the facts giving rise to the present appeal are that the assessee, an individual, filed his return of income for the year under consideration on 24.09.2011 declaring total income at Rs.3,30,760/-. The return was processed under Section 143(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") accepting the returned income. Subsequently, the Assessing Officer (for short "the AO") noticed that deposits aggregating to Rs.30,51,000/- had been made in the savings bank account maintained wit....
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.... the tenancy rights surrendered, no capital gains could be computed or charged to tax on transfer of the Permanent Alternate Accommodation received in exchange thereof. The aforesaid explanation, however, did not find favour with the AO. 2.3 The AO observed that three material facts stood admitted by the assessee, namely: firstly, that the assessee was holding tenancy rights in the erstwhile building known as Mani Mansion; secondly, that pursuant to redevelopment, he became owner of the shop allotted in the redeveloped premises, namely Punya Apartment, in lieu of such tenancy rights; and thirdly, that the said shop premises had subsequently been transferred by way of sale. Proceeding on the aforesaid admitted factual position, the AO rejected the contention of the assessee that no capital gains were exigible to tax. According to the AO, the Permanent Alternate Accommodation received by the assessee constituted a capital asset and its transfer squarely attracted the provisions of Section 45 of the Act. The AO further held that the tenancy rights surrendered by the assessee also constituted a "capital asset" within the meaning of Section 2(14) of the Act. It was further observed t....
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....served that the assessee had not incurred any actual cost for acquisition of the property in question and that the market value of the property, as sought to be relied upon by the assessee, could not be equated with "cost of acquisition" for the purposes of computation under the Act. It was further held that the assessee had acquired ownership rights in the redeveloped premises by virtue of surrender of tenancy rights and, therefore, the cost of acquisition of such rights was liable to be taken at "Nil". Consequently, the relinquishment and transfer of such rights gave rise to taxable capital gains. On the aforesaid reasoning, the addition made by the AO under the head "Long-Term Capital Gains" came to be confirmed observing as under: "5.4. I have considered the issue. The appellant's argument is not acceptable as there was no cost of acquisition to the appellant. Even the market value quoted by the appellant is not the cost incurred by the appellant to acquire the property. It is the prevailing value of the land which can be applied when any individual or appellant had actually incurred cost for acquisition of such land. In the instant case the appellant had become th....
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....utory provisions and judicial precedents, accepted the principle that the market value of the rights exchanged on the date of conversion constituted the appropriate cost of acquisition for purposes of Section 48 of the Act. 4.3 The Tribunal in Murtuza Kothari (supra) extensively relied upon the earlier decision of the Mumbai Bench of the Tribunal in Sri Atul G. Puranik vs. ITO (ITA No. 3015/Mum/2010). In the said decision, the Tribunal undertook a detailed analysis of Section 49(1) of the Act and lucidly explained the distinction between the original capital asset acquired through inheritance and the subsequent capital asset obtained in exchange thereof. The Tribunal held that once the original capital asset stood substituted by another independent capital asset, the deeming fiction embodied in Section 49(1) ceased to operate. It was further held that where rights in immovable property are allotted in lieu of acquisition or surrender of an earlier capital asset, the fair market value of such rights at the time of allotment would constitute the cost of acquisition for purposes of computing capital gains upon subsequent transfer. The relevant part of the decision in the case Sri A....
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....du undivided family, by the mode referred to in sub- (2) of section 64 at any time after the 31st day of December, 1969, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. 10.2 A bare perusal of the provision indicates that where the capital asset became the property of the assessee in any of the situations contemplated in clauses (i) to (iv), the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of improvements, etc. The Explanation below subsection (1) defines the expression "previous owner of the property to mean the last previous owner who acquired it by a mode of acquisition other than those referred to in clauses (1) to (iv) of this sub-section. The sum and substance of sec. 49(1) is that where a capital asset becomes the property of the assessee by any of the modes specified in clauses (i) to (iv), such as gift or will, succession, inheritance or devolutio....
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....erted asset. 10.4 Coming back to the facts of the instant case, the view point of the AO that the cost of acquisition in this case on the assigning of rights in the Plot to M/s. Pathik Construction should be considered as the amount of compensation originally awarded on the acquisition of lands from assessee's father, relying on sec. 49(1), does not appear to be sound. This provision cannot have any application at the stage when the assessee transferred the rights in the Plot to a third party in the year in question, because what has been transferred in this year is the right in the Plot, which was not inherited by the assessee from his father. The assessee only received the capital asset in the shape of right to receive compensation from the Government on the death of his father. Cost to the previous owner u/s 49(1) would be relevant at the time of computing the capital gain in the preceding year, when compensation was received in the shape of right in the Plot. Once the first transaction on the allotment of rights in the Plot came to an end, the provisions of sec. 49(1) also ceased to operate. It could not have been applied to the second independent transaction on th....
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.... in the preceding year. Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred. Thus, the full value of consideration should mean the market value of the lease rights in the Plot for sixty years at the time of the first transaction which was completed on 16-08-2004, and the same amount shall become the cost of acquisition when such rights in the Plot became subject matter of transfer in the current year on 25-08-2004. We, therefore, set aside the view taken by the Id. CIT(A) on this issue and hold that the market value of such lease rights for sixty years in the Plot as on 16-08-2004 shall constitute the cost of acquisition for the purpose of computing capital gain when it was assigned for a consideration of Rs. 2.50 cores on 25-08-2005. The AC is directed to determine the cost of acquisition in terms indicated above after allowing a reasonable opportunity of being heard to the assessee." 4.4 Further, the Hon'ble Coordinate Bench of the Tribunal in Murtuza Kothari vs. ITO (supra) referred to the decision in the ca....
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....render of tenancy right and, therefore, the market value of the acquired flat should be taken as on the date of 16th May 1982. For the purpose of ascertaining the cost, the assessee has taken the instance of sale of similar kind of premise in the same month with the builder which was sold for Rs. 3,64,000. It is now quite settled that for the purpose of cost of acquisition under section 48 and 49, the tenancy rights is to be taken into consideration. This is evident from sub-section (2) of section 55. The builder has given the alternate flat to the assessee only by virtue of surrender of tenancy rights by the assessee. Had there been no tenancy right, the builder would have not offered any flat to the assessee, on ownership basis. Thus, it is a valuable right on which cost of acquisition has to be determined. It is not a case that the cost of acquisition cannot be determined in lieu of the surrender of tenancy right at all. Once the cost of acquisition is determinable, the benefit of such acquisition has to be given while computing the tax on capital gain. In the present case, the tenancy right got converted into acquisition of a flat, when the assessee must have got the possession....
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....e to the conclusion that what was transferred, vide sale deed dated May 2, 1992, was not the tenancy rights but the building "Janki Kutir" itself and, therefore, what was to be allowed as deduction for working out the capital gains was not the cost of tenancy but the cost of ownership rights. In view of the said finding, the Tribunal remanded the matter back to the Assessing Officer to work out the market value of "Janki Kutir" as on August 4, 1983, and allow as a deduction the cost of the asset sold to work out the capital gains. This is a pure finding of fact. No interference is called for. Hence, the appeal is dismissed." 4.6 In light of the above decisions, the Tribunal in Murtuza Kothari vs. ITO (supra) held that the market value of exchange of tenancy rights on the date of the surrender would constitute the cost of acquisition for the purpose of computing capital gains. The relevant finding of the Tribunal (supra) is reproduced as under: "11. In backdrop of aforesaid decisions, we find force in the contentions raised by the ld. AR that the ownership property received by virtue of surrender of tenancy rights has whatever valuable right on which cost of acquisition ....
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....ther the same constituted consideration for transfer of a capital asset entitling the assessee to claim exemption under s. 54F of the Act. From the record, it is evident that the assessee has placed substantial documentary evidence to establish the existence of tenancy rights, including rent receipts, electricity bills, registered tenancy agreement dt. 5th Aug., 2014, MHADA verification records, and the Permanent Alternate Accommodation Agreement executed with the developer. These documents clearly demonstrate that the assessee had been occupying the premises as a tenant since 1st April, 2013 and that the tenancy rights continued until their surrender in the course of redevelopment of the property. The fact that the tenancy agreement was formally registered in 2014 does not invalidate the existence of tenancy, particularly when the surrounding documentary evidence corroborates continuous occupation and payment of rent. We further observe that tenancy rights constitute a capital asset within the meaning of sec. 2(14) of the Act and the surrender thereof amounts to a transfer under sec. 2(47) of the Act. The allotment of a residential flat by the developer under the redevelo....
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....r computing the cost of acquisition. The Tribunal further, noted that in the said case, the asset sold was a property which was given free of cost to the assessee upon surrender of tenancy rights. The Tribunal held that the consideration for such asset would be the market value of tenancy rights as on the point of the time when it was surrendered, which is the same as market value of this asset as at the point of time when it was given to the assessee without any payments by the assessee. 4.9 Upon careful consideration of the aforesaid authorities, we find ourselves in respectful agreement with the consistent judicial view taken by the Co-ordinate Benches. In the present case also, there are clearly two distinct and independent transactions. The first transaction occurred when the assessee surrendered his tenancy rights in the original tenanted premises and, in consideration thereof, acquired ownership rights in the form of Permanent Alternate Accommodation under the redevelopment scheme. The second transaction occurred when the assessee subsequently transferred the said Permanent Alternate Accommodation for monetary consideration of Rs. 38,62,000/-. 4.10 The issue before us ....