Synopsis: When apartment is received after giving up tenancy rights, its cost of acquisition cannot be nil as It was received in exchange for surrender of tenancy rights. Therefore, cost of acquisition should be based on Fair Market Value. So, tax should be applicable on capital gains and not entire selling amount of property.
Murtuza Kothari is a Mumbai resident, who had lived several years in an old residential building as a tenant. The building later went for redevelopment as was the case with many of the old buildings around the city. The tenants who were there at the time under the redevelopment scheme had to hand over the property and relinquish their right to tenancy so that the developer could rebuild the same. Mr. Kothari, in exchange for giving up (surrendering) his tenancy rights, he received an Ownership flat.
Several years later, he chose to sell this flat at ₹86 lakh. When he calculated tax, he showed only ₹2.37 lakh LTCG, but the tax officer taxed the entire ₹86 lakh. Murtuza argued,
- The flat was not free
- It was received in exchange for surrender of tenancy rights
- Therefore, cost of acquisition should be based on FMV
According to him, FMV of flat as of 22nd August, 2028 was ₹45 lakh plus Indexation applied so LTCG computed is ₹2,37,024. The Income Tax Department however did not agree with this method. On assessment, the tax officer presented that because Mr. Kothari had not made a direct purchase price of the flat, the cost of acquisition should be regarded as zero. It is on this basis that the department sought to tax the whole amount of sale of ₹86 lakh as capital gains, and this matter caused a significant tax contention that was finally heard by the Income Tax Appellate Tribunal (ITAT), Mumbai.
The ITAT after considering the case concluded that the tax department was misinterpreting the issue. The tribunal noted that the rights of tenancy are capital assets of real economic value that are legally recognised. The new apartment could not be treated as a zero-cost asset since it was only received in exchange for giving up those rights in the process of redevelopment. The ITAT thus decided that reasonable cost of acquisition should be allowed when calculating capital gains and ordered the tax department to recalculate the amount of taxes due. Essentially, the tribunal made it clear that all the sale consideration of 86 lakh could not be assessed as capital gains.
Also read: 7 High-Value Transactions You Cannot Hide From Income Tax Department
Rent Control Act 1978 Tenancy (Rental) Rights of a Tenant
- Tenants have the right to be defended by the law against eviction; the tenant cannot be thrown out by the landlord without any solid legal reasons.
- Rent can be regulated and controlled, to avoid excessive and unreasonable rent charged by landlords.
- The tenants are entitled to occupy the property as long as they want on the condition that they abide by conditions of tenancy.
- These are some of the basic services like water, electricity, and basic amenities that the landlord cannot impair in case of a dispute.
- In most instances, tenancy rights may be carried over long durations giving tenants a stable occupation of the premises.
- Because of these protections, the rights of tenancy acquire the economic and legal worth, particularly in cases of redevelopment in which tenants have to receive compensation in terms of giving up occupancy rights.
- In the redevelopment process, tenants usually have a right to receive alternative accommodation or ownership flats since their tenancy rights are appreciated as valuable interests.
Conclusion
This case is an important reminder that tenancy rights are valuable assets and not merely residential arrangements. With redevelopment projects becoming a regular occurrence in urban India, tenants need to know their legal rights, as well as, the tax implications that may arise out of such deals. Awareness, proper valuation, and documentation can help ensure that redevelopment benefits are taxed fairly and prevent avoidable disputes with tax authorities.
Written by Boyapathi Sai Jasmitha
