Back in 2007, Mr Ghanshyam from Dahisar (East) was told by his landlord that the entire apartment complex would be redeveloped and if he gave up his tenancy rights, he would receive permanent property in the same complex. Ghandhyam accepted this offer and vacated the rented property.
Subsequently when the builder finished the redevelopment work in 2010, the landlord gave him a permanent property in the same society located on V.P Road, Girgaum, Mumbai. In legal terms, this new property is referred to as Permanent Alternate Accommodation (PAA) in exchange for surrendering tenancy rights in a property stated for redevelopment.
However, Ghanshyam sold this (PAA) property for Rs 38.62 lakh and deposited the money in his bank account. The sale agreement was signed by him on September 21, 2010 and the sale deed was registered on September 27, 2010.
On September 24, 2011, Ghanshyam filed his income tax return (ITR) and declared Rs 3.3 lakh income. However, he failed to report the capital gain from the sale of the property which he got from his landlord for surrendering his tenancy rights.
Since the capital gain was not offered for taxation in his ITR, the Income Tax Department issued Ghanshaym a tax notice asking him to explain why the capital gains arising from the sale of immovable property should not be taxed in his hands.
In response to this tax notice, Ghanshyam argued that the property he sold was given to him in exchange for giving up his tenancy rights and he didn’t pay anything for the new shop.
He claimed that since there was no clear cost of acquisition for the tenancy rights he surrendered, there couldn’t be any capital gains calculated or taxed on the transfer of the Permanent Alternate Accommodation he received in return. However, the Income Tax Department Assessing Officer (AO) didn’t accept this explanation.
Feeling dissatisfied, he filed an appeal with CIT (A), but ended up losing there. Still aggrieved, he took his case to ITAT Mumbai.
On May 8, 2026, ITAT Mumbai partly ruled in his favour for statistical purposes. ITAT Mumbai dismissed the AO’s argument, that Ghanshyam had no cost of acquisition for the new property since it was essentially given to him for surrendering his tenancy rights.
ITAT Mumbai said that once the law recognises tenancy rights as a capital asset under Section 2(14), the economic value associated with those rights cannot be disregarded while computing capital gains, even if the assessee did not initially pay a specific amount to acquire those rights.
Therefore, ITAT Mumbai emphasized that the tax computation rules must be interpreted in a manner that reflects both commercial and legal reality, rather than in a way that makes the entire sale amount taxable without allowing deduction of the value of the capital asset surrendered in exchange.
Accordingly, ITAT Mumbai said that they hold that tenancy rights, as on the date of surrender, will be taken as the cost of acquisition of the Permanent Alternate Accommodation/ownership premises received by the assessee under the redevelopment arrangement.
Finally, ITAT Mumbai gave back Ghanshyam’s file and ordered the AO to recompute the capital gains by adopting the aforesaid fair market value as the cost of acquisition and thereafter determine the nature of capital gains, whether short term, taking note of Ghanshyam’s period of holding the Permanent Alternate Accommodation.
Keep reading to know why Ghanshyam got tax relief for selling this property which he got by surrendering his tenancy rights.
Why did Ghanshyam win tax relief in this case?
Chartered Accountant Suresh Surana explains to ET Wealth Online that in this case, the taxpayer was originally a tenant of a shop in an old building that underwent redevelopment. In exchange for surrendering his tenancy rights, he received ownership of a shop in the redeveloped building as a Permanent Alternate Accommodation (PAA).
Subsequently, the taxpayer sold the shop for Rs 38.62 lakh. During reassessment proceedings, the Assessing Officer (AO) treated the cost of acquisition of the shop as ‘Nil’ under Section 55(2)(a) of the Income-tax Act, 1961 and taxed the entire sale consideration as long-term capital gains.
The Commissioner (Appeals) upheld the AO’s view on the ground that the taxpayer had not incurred any actual monetary cost for acquiring the ownership premises.
According to Surana, the ITAT Mumbai ruled in favour of the taxpayer and held that the approach adopted by the tax authorities was legally unsustainable. The Tribunal observed that the ownership premises were not acquired gratuitously; and rather were received for surrendering valuable tenancy rights, which constituted a capital asset under the Income Tax Act.
Accordingly, the fair market value (FMV) of the tenancy rights on the date of surrender, or equivalently the FMV of the alternate accommodation received in exchange, represented the true cost of acquisition for computing capital gains under Section 48.
According to Surana, ITAT Mumbai relied on earlier decisions in Murtuza Kothari, Tauqeer Fatema Rizvi and Atul G. Puranik case, where it was held that when an asset is received in exchange of surrendering tenancy rights, the market value of the rights surrendered provides a valid and ascertainable basis for determining the cost of acquisition.
According to Surana, the taxpayer won because the Mumbai Tribunal recognised that the value embedded in the surrendered tenancy rights could not be ignored merely because no direct cash consideration had originally been paid for acquiring those rights. Taxing the entire sale proceeds without allowing deduction for the value of the rights surrendered would amount to taxing the gross receipt rather than the actual capital gain, contrary to the scheme of Sections 45 to 48 of the Income Tax Act.
Accordingly, the matter was remanded to the AO with directions to recompute the capital gains after adopting the FMV of the tenancy rights/PAA as the cost of acquisition.
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