FMV of Redeveloped Shop Treated as Cost of Acquisition: ITAT Mumbai on Surrender of Tenancy Rights

Background of the Dispute

The case Sarjit Ghanshyam Desai Vs ITO (ITAT Mumbai) concerns the tax treatment of capital gains arising from the sale of a shop received as Permanent Alternate Accommodation (PAA) under a redevelopment project, where the assessee had surrendered tenancy rights in the old building.

The appeal arose from the order dated 13.01.2026 passed by the Commissioner of Income Tax (Appeals) – National Faceless Appeal Centre, Delhi for Assessment Year 2011-12. The central controversy was:

  • How to determine the cost of acquisition of a shop received in ownership as PAA against surrender of tenancy rights and
  • Whether the entire sale consideration on subsequent sale of that shop can be taxed as long-term capital gains by treating cost as “Nil” under Section 55(2)(a).

The assessee, an individual, had filed a return declaring income of ₹3,30,760 on 24.09.2011. The return was processed under Section 143(1) without scrutiny. Later, the Assessing Officer (AO) noticed cash deposits of ₹30,51,000 in a savings bank account with Jan Sahakari Bank Ltd. which were not reflected in the return.

On this basis, the AO reopened the assessment under Section 148 on 21.03.2016. In reassessment, the assessee explained that the deposits came from sale proceeds of a shop at Punya Apartment, Girgaum, Mumbai, sold for ₹38,62,000, which was credited into that account.

Facts: Tenancy, Redevelopment, and Sale of PAA Shop

Original Tenancy and Redevelopment

  • The assessee originally occupied Room No. 6 in “Mani Mansion”, V.P. Road, Girgaum, Mumbai, as a tenant.
  • The building was subsequently taken up for redevelopment.
  • In lieu of the tenancy rights in Mani Mansion, the assessee was allotted Shop No. 2 in Punya Apartment as Permanent Alternate Accommodation (PAA) in ownership.

Transfer of PAA Shop

  • The assessee executed an agreement to sell Shop No. 2 on 21.09.2010.
  • The sale deed was registered on 27.09.2010.
  • Total sale consideration was ₹38,62,000.
  • The assessee did not offer any capital gains in the return of income on this transaction.

Assessee’s Stand Before AO

The assessee argued:

  • The shop in Punya Apartment was allotted purely as compensation for surrender of old tenancy rights.
  • No separate consideration had ever been paid to acquire those tenancy rights.
  • Redeveloped premises were handed over in 2010 (redevelopment initiated in 2007).
  • Since the underlying tenancy rights had no ascertainable cost of acquisition, capital gains computation failed, and therefore no capital gain could be charged on transfer of the PAA shop.

AO’s Findings

The AO recorded that three crucial facts were not in dispute:

  1. The assessee previously held tenancy rights in Mani Mansion.
  2. On redevelopment, the assessee became owner of Shop No. 2 in Punya Apartment as PAA in exchange for those tenancy rights.
  3. The assessee later sold that shop for ₹38,62,000.

On this basis, the AO concluded:

  • Both the original tenancy rights and the PAA ownership shop were “capital assets” under Section 2(14).
  • Transfer of the PAA shop clearly attracted Section 45.
  • Tenancy rights cannot be presumed to have been acquired without any cost in real terms because a tenancy typically arises out of contractual and economic arrangements (rent, deposits, etc.).
  • However, the assessee had not produced evidence of the date of acquisition or actual monetary outlay for the tenancy.

Invoking Section 55(2)(a), the AO treated the cost of acquisition as Nil, on the footing that no cost was established. He therefore:

  • Treated the entire sale consideration of ₹38,62,000 as long-term capital gains, and
  • Initiated penalty proceedings under Section 271(1)(c) for alleged concealment.

CIT(A) Decision: Cost Treated as Nil

On appeal, the CIT(A) endorsed the AO’s approach. Key observations were: