Tenancy Rights Exchanged for Flats: ITAT Mumbai Says FMV Becomes Cost of Acquisition, Not Nil
In an important ruling affecting redevelopment projects across India, the Mumbai Bench of the Income Tax Appellate Tribunal has clarified how capital gains should be computed where a tenant surrenders tenancy rights in exchange for ownership flats from a developer.
In I.T.A. No. 4080/Mum/2025, the Tribunal rejected the Assessing Officer’s approach of treating the cost of acquisition of such flats as nil and held that the fair market value of the property received on the date of surrender must be taken as the cost.
The decision offers major relief to tenants participating in redevelopment arrangements, particularly in metropolitan cities where such transactions are common.
Facts of the Case
The taxpayer had surrendered tenancy rights to a developer under a redevelopment arrangement. Instead of receiving cash compensation, the assessee received ownership flats in the redeveloped property.
Later, when the flats were sold, the Assessing Officer computed capital gains by treating the cost of acquisition as nil or nominal on the ground that the flats were received without monetary consideration.
This resulted in addition of around ₹83.62 lakh by effectively taxing almost the entire sale value.
The assessee challenged the computation, arguing that surrender of tenancy rights itself constituted consideration and therefore the flats could not be treated as acquired without cost.
Key Issue Before the Tribunal
The core question before the Tribunal was:
When tenancy rights are surrendered in exchange for flats, what should be treated as the cost of acquisition of those flats for capital gains computation?
The Tribunal ruled in favour of the taxpayer.
Tribunal’s Reasoning
The ITAT held that surrender of tenancy rights is not a free transaction. It represents transfer of a valuable capital asset.
The Bench explained the principle in simple commercial terms:
If the tenant had surrendered tenancy rights for cash, the developer would have paid an amount equal to the market value of those rights. Therefore, when the tenant receives flats instead of cash, the value of what is received represents the consideration for surrender.
Accordingly, the Tribunal directed that:
• The fair market value of the flats on the date of surrender must be adopted
• That FMV becomes the cost of acquisition of the flats
• Capital gains should be computed only on the real profit arising at the time of sale
The assessment was therefore set aside with directions to recompute the gains on this basis.
Important Principle Established
This ruling reinforces a crucial concept in capital gains law:
Exchange transactions also have cost, even if no cash changes hands.
Where a capital asset is surrendered in return for another asset:
• The value of what is received represents the consideration
• That value becomes the cost of the new asset
• Tax must apply only to actual profit, not the entire sale proceeds
This aligns with settled judicial principles that taxation should follow commercial reality.
Why This Ruling Matters in Practice
Redevelopment arrangements involving tenants are extremely common, especially in cities like Mumbai, Pune, Ahmedabad, and Delhi.
Often, tenants receive:
• Ownership flats
• Additional area
• Monetary compensation
• Temporary rent payments
Disputes frequently arise when such flats are later sold and the department attempts to treat the cost as nil.
This ruling strengthens the position that such flats are not received free of cost and their FMV must be recognised.
Practical Takeaways for Property Owners and Professionals
The decision highlights some key compliance points:
First, valuation of flats on the date of surrender should be documented.
Second, redevelopment agreements should clearly record exchange consideration.
Third, stamp duty value or independent valuation reports can support cost claims.
Fourth, professionals should examine original tenancy rights documentation when computing capital gains.
Proper documentation at the time of redevelopment can prevent large tax disputes later.
Conclusion
The Mumbai ITAT ruling provides welcome clarity that surrender of tenancy rights in exchange for flats is not a zero-cost transaction.
By holding that the fair market value of the flats on the date of surrender becomes the cost of acquisition, the Tribunal has ensured that capital gains tax is levied only on real income and not on artificial computations.
For tenants entering redevelopment deals, the decision confirms that what is received in exchange carries a measurable cost — and tax must respect that commercial reality
The copy of the order is as under:.
