ITAT Mumbai Quashes ₹2.88 Crore Addition On Redevelopment Flat

Tribunal Rules Flat From Tenancy Surrender Is Capital Gain, Not Income From Other Sources

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench “F”, has given relief to Vasant Nagorao Barabde, quashing an addition of ₹2.88 crore made under Section 56(2)(x) of the Income-tax Act, 1961.

The order, delivered on May 22, 2025, by Judicial Member Sandeep Singh Karhail and Accountant Member Girish Agrawal, held that the allotment of a flat in a redevelopment project against surrender of tenancy rights constitutes capital gains, not income from other sources.

The Dispute

Barabde, a resident of Ghatkopar, filed his income tax return for AY 2018-19 declaring ₹61.34 lakh. The Assessing Officer noted that he had been allotted a 3BHK flat (No. 1103) in Chembur under a Permanent Alternate Accommodation (PAA) agreement dated 21 September 2017 after surrendering tenancy rights in the old Seeta Sadan building.

The stamp duty authority valued the flat at ₹2.88 crore, and since no purchase consideration was paid, the AO taxed the entire value as income under Section 56(2)(x)(b)(B).

Barabde argued that the tenancy rights belonged to his daughter, Ms. Ashwini Barabde, who had surrendered them, and the flat was compensation under redevelopment, eligible for exemption under Section 54F. He stressed that tenancy rights are capital assets and cannot be taxed under “income from other sources.”

Revenue’s Stand

The tax department contended that since Barabde’s name appeared first in the registered agreement, he was liable. They also argued that his daughter was too young to have valid tenancy rights and no revised return had been filed claiming Section 54F exemption.

Tribunal’s Findings

The ITAT rejected the department’s case and observed:

Surrender of tenancy rights is a transfer of a capital asset, taxable under capital gains provisions.
Since the consideration (₹2.88 crore) was reinvested in the allotted flat, Section 54F exemption applied, reducing taxable gain to nil.
Income already covered under “capital gains” cannot be taxed again under “income from other sources.”
The tribunal relied on the Supreme Court’s ruling in D.P. Sandu Bros. Chembur (P) Ltd. (2005), which held tenancy rights are capital assets.

The ITAT concluded that the addition under Section 56(2)(x) was illegal and deleted it, allowing Barabde’s appeal.

Wider Implications

This ruling clarifies that redevelopment flats received in exchange for tenancy rights fall squarely under capital gains, not under residuary income provisions. It also reinforces that exemptions like Section 54F remain available when gains are reinvested in residential property.