ET OnlineTenant shifted out for landlord’s property redevelopment, he later got new flat, but tax dept sent him notice for STCG of Rs 1.1 crore; Know how he won case in ITAT Mumbai (AI generated representative image)
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When Mr Shah, a tenant from Sikka Nagar, Girgaon, Mumbai, filed his income tax return (ITR) on September 28, 2019, reporting an income of Rs 19 lakh, he had no clue that he had to face a lengthy legal battle merely for surrendering his tenancy rights in exchange for a new apartment in his landlord’s property.
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After he had filed his ITR, the income tax assessing officer (AO) sent him a tax notice asking him to furnish certain information and documents. Upon verification of these documents and evidence, the AO found out that Shah got flat number 502 at a housing project in Sikka Nagar for surrendering his tenancy rights, through a tripartite agreement dated December 18, 2017. The builder handed over the key to flat number 502 to Shah in April 2019.
This tripartite agreement was signed between Shah, the builder and his landlord as the landlord wanted to redevelop his property and promised to give Shah a new apartment if he surrendered his tenancy rights.
The Income Tax Officer studied the tripartite agreement signed by Shah and found out that for stamp duty purposes, the Maharashtra government determined the value of this property at Rs 1.49 crore.
So, the AO asked Shah to explain why he did not show this Rs 1.49 crore as his short term capital gain and accordingly pay the tax. In response, Shah answered that as per terms of the agreement, surrender of tenancy rights would happen only upon receiving possession of the new premises.
Shah said that he got the tenancy rights in 2015 and the surrender of tenancy rights happens only after getting possession of the flat, which he got in April 2019 and thus the capital gains, if any, should be long term capital gain (LTCG) and not STCG and that too it would be assessable in AY 2020-21.
The Assessing Officer, however, did not agree with Shah’s explanations and proceeded to compute ‘Short Term Capital Gain’ (‘STCG’) at Rs 1.10 crore after allowing deduction on cost of acquisition and stamp duty paid by Shah while acquiring the tenancy rights.
Shah contested the addition and appealed to the Commissioner of Income Tax (Appeals) (CIT A), but was unsuccessful. He then took the case to the Income Tax Appellate Tribunal (ITAT) Mumbai. CA Rajesh Shah represented him in ITAT Mumbai.
On April 17, 2026, Shah partly won the case in ITAT Mumbai as the tribunal deleted the tax notice.
Summary of the judgement
Chartered Accountant Suresh Surana told ET Wealth Online that in the given case, Shah, an individual, had acquired tenancy rights in a residential property in December 2015. Subsequently, the landlord entered into a redevelopment agreement with a developer, following which Shah, as a confirming party, entered into a tripartite agreement dated December 18, 2017.
Under this arrangement, Shah agreed to vacate and hand over possession of the existing premises to facilitate redevelopment, in exchange for a permanent alternate accommodation in the newly constructed building.
The Assessing Officer, relying on the agreement and stamp duty valuation, treated the transaction as a transfer of tenancy rights during the relevant year and brought to tax approximately Rs 1.10 crore as Short-Term Capital Gains (STCG).
On appeal, the ITAT Mumbai undertook a detailed examination of the contractual terms governing the transaction and noted that the agreement expressly provided that although possession of the old premises would be handed over for redevelopment, Shah’s tenancy rights would not be deemed to have been surrendered or extinguished at that stage.
Instead, such rights were contractually stipulated to continue until the assessee was placed in possession of the permanent alternate accommodation in the redeveloped property.
Surana says ITAT Mumbai further observed that the possession of the alternate accommodation was handed over only in April 2019, i.e., in the subsequent financial year.
In light of the above, the Tribunal held that there was no “transfer” or “surrender” of tenancy rights during the relevant assessment year, which is a sine qua non for triggering capital gains taxation.
Surana mentions that the reasoning used by ITAT Mumbai was that the taxable event should be determined based on the actual substance of the contractual arrangement. If the agreement clearly defers the termination of rights to a future date, tax liability can’t be rushed or artificially accelerated.
Surana says: “The Tribunal also emphasised that the tax authorities cannot disregard explicit contractual clauses and impose a tax liability in a year in which the legal conditions for transfer have not been satisfied.”
Surana says that Shah (the tenant) succeeded on the fundamental ground that the surrender of tenancy rights and hence the taxable event had not crystallised in the year under consideration, but would arise only in the year in which possession of the alternate accommodation was actually received.
Consequently, the addition made by the Assessing Officer towards Short-Term Capital Gains was held to be premature and was directed to be deleted.
Mihir Tanna, associate director, S.K Patodia LLP says: “When a property owner, who is an individual or a Hindu Undivided Family (HUF), enters into a Joint Development Agreement (JDA) that allows a developer to construct a building on their land or building in exchange for a share in the new building (with or without monetary consideration), the transaction is considered a ‘transfer’ for capital gains purposes.”
For individuals and HUFs entering into a registered Joint Development Agreement(JDA) till 31st March 2017, capital gains tax arises on the transfer of land or building.
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