He surrendered tenancy rights for redevelopment and got 2 flats worth Rs 1.38 crore; taxman added it as income, why ITAT Mumbai gave him relief
This is the case of a man who surrendered his tenancy rights and got flats from the builder in lieu of that. He was then served an income tax notice for the same. He fought a long battle, and finally won relief from ITAT Mumbai.He was a tenant in Mumbai in a housing society that was slated to undergo redevelopment. He received two flats in the redeveloped building in return for surrendering his tenancy rights.The tribunal ruled that a tax demand under Section 56(2)(x) could not be imposed on the individual merely because he received two flats in exchange for giving up his tenancy rights in the redevelopment project.
What the case is about
The man had been a tenant of four shops in a Mumbai housing society. When the society opted for redevelopment, he entered into a permanent alternative agreement (PAA) with the builder.Under the arrangement, the man agreed to surrender his existing tenancy rights. In return, the builder was to provide him with two flats in the redeveloped building as permanent alternate accommodation.The two flats provided to him under the PAA were valued at Rs 1.38 crore by the stamp duty authorities, according to an ET report.The Income Tax Assessing Officer (AO) from Parel, however, invoked Section 56(2)(x) and treated the entire stamp duty value of Rs 1.38 crore as “income from other sources” in the tenant’s hands. This resulted in the tenant becoming liable to pay income tax on the amount.Section 56(2)(x) applies where a person receives an asset, including property, without consideration or for inadequate consideration exceeding Rs 50,000, with the resulting amount being taxed under the head “Income from other sources”.In this case, the tax notice arose because the Income Tax Department proceeded on the basis that he had received the two flats without consideration. His position, however, was that the flats were provided to him as part of the redevelopment arrangement after he surrendered his existing tenancy rights.The matter subsequently went before the Commissioner of Appeals (CIT(A)), which upheld the addition made by the Assessing Officer. The CIT(A) took the view that, in substance, the tenant had received valuable immovable property in return for extinguishing his tenancy rights.The CIT(Appeals) further held that execution and registration of the redevelopment agreements had resulted in the man acquiring absolute ownership rights in the alternate premises. According to the appellate authority, those rights could not subsequently be changed without his consent.On this basis, the CIT(Appeals) concluded that the property had been received during the relevant assessment year, even though physical possession of the flats had not yet been handed over.The CIT(Appeals) also agreed with the Assessing Officer’s decision to apply Section 56(2)(x). It held that the tenant had obtained valuable immovable property without providing adequate monetary consideration and therefore confirmed the addition of Rs 1.38 crore to his income.The man challenged this decision before the Income Tax Appellate Tribunal (ITAT) Mumbai. On July 16, 2026, the ITAT ruled in his favour.
Why did the tenant win the case in ITAT Mumbai?
Mihir Tanna, associate director, S.K Patodia LLP, told ET that the Mumbai ITAT had considered a similar issue in March 2026 in the case of Varun Jaisingh Asher, although the facts were different.Tanna explained that tenancy rights are treated as a capital asset and surrendering such rights amounts to a transfer that is taxable under the capital gains provisions.He said that when a property is allotted under a redevelopment arrangement, the allotment represents the consideration received in return for giving up those tenancy rights.Tanna says: “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)”The tenant’s contention was that he had not actually received the alternate premises because construction of the redevelopment project was still underway and possession had not been given to him.He also maintained that the allotment of the new units could not be treated as a property received without consideration. The permanent alternate accommodation was being provided by the builder in return for the surrender of his valuable tenancy rights.The central question before the Mumbai ITAT was whether Section 56(2)(x) could be applied simply because the redevelopment agreements had been executed and registered during the relevant assessment year, even though construction remained incomplete and Devshichhadva had neither obtained possession nor acquired the right to enjoy the alternate premises.The ITAT Mumbai examined the requirement under Section 56(2)(x) that the taxpayer must “receive” immovable property during the relevant previous year. The tribunal held that the word “receives” could not be given an artificial or notional meaning that would result in taxation merely because a redevelopment agreement had been registered.Before the deeming provision could be applied, the tribunal said, there had to be an actual receipt of the immovable property during the relevant period.The ITAT Mumbai also rejected the view that the transaction involved receipt of property without consideration.The tribunal also referred to its earlier decisions in the cases of Snehalata Heramb Dhayagude, Anil Dattaram Pitale and Amar Narendra Joshi. In those matters, the tribunal had recognised that receiving alternate premises after surrendering existing tenancy or property rights does not amount to receiving immovable property either without consideration or for inadequate consideration.In this case, therefore, two fundamental requirements for applying Section 56(2)(x) were not satisfied.The first was the absence of actual receipt of the immovable property during the relevant previous year. The redevelopment project was still under construction and possession of the alternate premises had not been handed over.The second was that the transaction was not without consideration. The alternate accommodation was being provided in return for Devshichhadva surrendering his tenancy rights, which had value.The tribunal’s ruling, however, is limited to the question of whether Section 56(2)(x) could be applied in these circumstances. It does not decide whether the surrender or extinguishment of the tenancy rights could have separate capital-gains tax consequences. That remains a distinct issue.
