Man surrendered tenancy rights for Rs 11 crore flat in redevelopment project;
Income Tax dept issued notice but ITAT Mumbai ruled in his favour. Here's why
Mar 24, 2026
Synopsis
A Mumbai tenant received a Rs 11 crore apartment for giving up tenancy rights during redevelopment. The Income Tax department questioned the deal, calling it a sham. However, the Income Tax Appellate Tribunal Mumbai ruled in the tenant's favour. The tribunal confirmed tenancy rights were valid and the flat was consideration for surrendering these rights. Tax exemption was allowed.
When Mr Singh from Carmichael Road in Mumbai surrendered his tenancy rights for a building to be redeveloped, he received a 1550 sq. feet apartment from the builder worth Rs 11.68 crore. However, the income tax officer dismissed the tenancy agreement, treating it as a colourable device (sham transation) and taxed the flat’s value (Rs 11.68 crore) as income from other sources under Section 56(2)(x)(b).
Additionally , the occupancy certificate (OC) of the redeveloped building was issued in February 2020 after which Singh took possession of the 1550 sq.ft apartment in exchange of surrendering his tenancy rights. Singh claimed capital gains tax exemption under Section 54F for the entire Rs 11.68 crore (the value of the redeveloped apartment). However, the tax officer rejected the Section 54F benefit concerning the acquisition of the newly redeveloped apartment worth Rs 11.68 crore.
What was the tax dispute about?
In his income tax return (ITR), Singh reported a total income of Rs 4.87 lakh and claimed capital gains tax exemption of Rs 11.68 crore. Remember, this is the value of the 1550 sq. ft redeveloped apartment that he received from the builder for surrendering his tenancy rights.
However, the income tax officer discovered that the redeveloped property is actually jointly owned by his family and Singh and his brother were tenants in this property before it was redeveloped. Though an old tenant lived in this property, he was evicted on March 31, 2013 with a payment of Rs 2.75 crore, and since then, the Singh brothers lived there as tenants, paying a monthly rent of Rs 5,000.
Initially, there wasn’t a formal rent agreement, but there were rent receipts and electricity bills for the tenancy. The family didn’t think any formal rent agreement was necessary back in 2013 as they elieved the property would remain within the family.
Later on, when the property was proposed to be redeveloped, the builder required a formal agreement, which led to the tenancy agreement being registered on August 5, 2014.
This triggered the tax dispute since the tax officer dismissed the tenancy agreement, treating it as a colourable device and taxed the value of the flat receipt under Section 56(2)(x)(b) as income from other sources. The tax officer also refused to grant the benefit of Section 54F concerning the purchase of a new flat.
Feeling aggrieved, Singh filed an appeal before CIT(A). The CIT(A) after considering the submissions, deleted the addition. Unhappy with the order, the Income Tax department filed an appeal before ITAT Mumbai. On March 6, 2026, Singh won the case in ITAT Mumbai. He was represented by Mr Dharan Gandhi and Ms. Vinita Nara.
Summary of the judgement
Chartered Accountant Suresh Surana told ET Wealth Online: In this case an individual, claimed tax exemption under Section 54F in respect of a residential flat received pursuant to surrender of tenancy rights in a redevelopment project.
The property in question was jointly owned by family members. After the earlier tenant vacated the premises in March 2013, the assessee and his brother began occupying a portion of the property as tenants from April 1, 2013 by paying monthly rent.
Although the formal tenancy agreement was registered later in August 2014 to facilitate redevelopment, the assessee produced various documentary evidence such as rent receipts, electricity bills in his name, MHADA verification records, and redevelopment agreements to substantiate the existence of tenancy.
Upon redevelopment he received possession of a residential flat in February 2020 in lieu of surrendering such tenancy rights and claimed capital gains exemption under Section 54F. The Assessing Officer, however, treated the tenancy arrangement as a colourable device and taxed the stamp duty value of the flat under Section 56(2)(x) as income from other sources, while also denying the exemption claimed. The CIT(A) deleted the addition, following which the tax department appealed before the Tribunal.
The ITAT Mumbai upheld the CIT(A) order and dismissed the income tax department’s appeal on both factual and legal grounds. The Tribunal observed that the assessee had furnished substantial documentary evidence demonstrating uninterrupted tenancy rights from April 2013 until their surrender during redevelopment.
According to Surana, ITAT Mumbai held that mere delayed registration of the tenancy agreement could not invalidate the tenancy, particularly when corroborated by contemporaneous records such as rent receipts, electricity bills, registered agreements, and independent verification by MHADA.
According to Surana, the Tribunal further clarified that tenancy rights constitute a “capital asset” within the meaning of Section 2(14), and surrender thereof amounts to a “transfer” under Section 2(47). Consequently, the residential flat received by the assessee under the redevelopment scheme represented consideration for transfer of tenancy rights, and the transaction was therefore taxable, if at all, under the head capital gains, not under the residuary provisions of section 56(2)(x).
Since he had invested the money in a residential property, the conditions for claiming exemption under Section 54F were held to be satisfied. The Tribunal also relied on judicial precedents to reiterate that income falling under a specific head cannot be taxed under another head merely on suspicion of tax avoidance.
Surana says: “In the absence of cogent evidence establishing that the tenancy arrangement was a sham or colourable device, the addition made by the Assessing Officer was held to be unsustainable. Accordingly, the taxpayer succeeded and the exemption claim was allowed.”
Mihir Tanna, associate director, S.K Patodia LLP, says that there are five types of heads of income in Income Tax. Head of income is decided on the basis of the nature of income. If a particular type doesn't fall under the head Salary, House Property, Business Income or Capital Gain; it falls under the head Income from other sources. Head of Income is important for deciding the allowed deduction to derive taxable income, and the tax rate for specified income is mentioned.
Tanna says that in this case, the dispute was over whether the receipt was taxable as a Capital Gain or as Income from Other Sources. When a receipt is taxable as a Capital Gain it is taxed at 20% (as per old tax provisions) while income from Other Sources is taxed at the slab rate.
ITAT Mumbai analysis and discussion
ITAT Mumbai gave this judgement on March 6, 2026.
Tenancy agreement was not sham transaction
ITAT Mumbai said that the primary issue involved in the present appeal is whether the tenancy arrangement entered into by the assessee was a sham transaction and whether the value of the flat received by the assessee (Singh) on surrender of tenancy rights was liable to be taxed under Section 56(2)(x), or whether the same constituted consideration for transfer of a capital asset entitling the assessee (Singh) to claim exemption under section 54F of the Act.
ITAT Mumbai says that from the record, it is evident that the assessee (Singh) has placed substantial documentary evidence to establish the existence of tenancy rights, including rent receipts, electricity bills, registered tenancy agreement dated August 5, 2014, MHADA verification records, and the Permanent Alternate Accommodation Agreement executed with the developer.
ITAT Mumbai said: “These documents clearly demonstrate that the assessee had been occupying the premises as a tenant since 01.04.2013 and that the tenancy rights continued until their surrender in the course of redevelopment of the property.”
ITAT Mumbai also said 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.
Tenancy rights is a capital asset
ITAT Mumbai said that tenancy rights constitute a capital asset within the meaning of Section 2(14) and the surrender thereof amounts to a transfer under section 2(47).
ITAT Mumbai said that the allotment of a residential flat by the developer under the redevelopment scheme represents consideration received in exchange for such surrender of tenancy rights.
ITAT Mumbai said: “Therefore, the transaction squarely falls within the ambit of capital gains and cannot be brought to tax under the residuary provisions of Section 56(2)(x).”
ITAT Mumbai cited a relevant case law (Vasant Nagorao Barabde, (2025) 174 taxmann.com 1015 (MUM Trib.) wherein it has been held that once a transaction falls under the specific head of capital gains, it cannot be taxed under the head “Income from Other Sources”.
ITAT Mumbai also said that the Bombay High Court, in the case of the assessee’s brother and cotenant, has observed that allegations of colourable device cannot be sustained in the absence of cogent material and proper show-cause notice specifying the applicable statutory provision.
ITAT Mumbai said: “The observations of the Jurisdictional High Court further lend support to the assessee’s contention that the tenancy arrangement cannot be disregarded merely on the basis of suspicion.”
ITAT Mumbai judgement
ITAT Mumbai said that in light of the above factual and legal position, they find no infirmity in the order of the Ld. CIT(A), who after detailed examination of the documentary evidence rightly concluded that the assessee possessed valid tenancy rights and that the flat received on redevelopment constituted consideration for surrender of such rights.
Order:
Consequently, the addition made by the Assessing Officer under Section 56(2)(x) of the Act was rightly deleted and the assessee’s claim of exemption under Section 54F was correctly allowed. Accordingly, we uphold the order of the Ld. CIT(A) and dismiss the grounds raised by the revenue.
Hence, the appeal filed by the revenue is dismissed.
In the result, the appeal of the revenue bearing ITA No. 8251/Mum/2025 is dismissed. Order is pronounced in the open court on 06.03.2026
[The Economic Times]
