BHARATI DILIP SHETH,MUMBAI vs. DCIT, CIRCLE - 22(1), MUMBAI

This appeal filed by the assessee for Assessment Year 2018-19 arises out of the order dated 17.03.2026 passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter “Ld. CIT(A)”], under section 250 of the Income-tax Act, 1961 [hereinafter “the Act”], against the assessment order dated 12.01.2021 passed under section 143(3) read with sections 143(3A) and 143(3B) of the Act.

The grounds of appeal raised by the assessee are as under:

Brief facts of the case are that the assessee is an individual deriving income from house property, business and other sources. She filed her return of income on 28.12.2018 declaring total income of Rs.79,600/-. The case was selected for limited scrutiny on the issue of investment in immovable property, the specific reason being that the purchase value of the property was less than the value adopted by the stamp valuation authority. The Assessing Officer noticed from the information available on record that the consideration reflected was Rs.25,00,000/-, whereas the stamp duty value was Rs.1,82,30,000/-.

The assessee explained that she was a tenant of residential premises admeasuring 611.93 sq. ft. carpet area in the building known as “Shree Vanamalai Math” at Girgaum, Mumbai. Under the Agreement for Permanent Alternate Accommodation dated 29.06.2017 with M/s. Shreepati Jewels, the developer agreed to provide Flat No.704 on the seventh floor of “Shreepati Jewels – Pearl Wing – E”, admeasuring 791.04 sq. ft. carpet area, on ownership basis in lieu of the tenanted premises. The assessee also agreed to pay Rs.25,00,000/- towards the cost of construction of the additional area of 179.11 sq. ft., including taxes and stamp duty. The stamp duty valuation was made for the entire flat. Accordingly, the assessee contended that the transaction could not be treated as an ordinary purchase of the entire flat for Rs.25,00,000/-.

The Assessing Officer did not accept the explanation. He observed that the assessee was not the owner of the original premises and that the cost of acquisition of the tenancy rights was nil. He treated the difference of Rs.1,57,30,000/- between the stamp duty value of Rs.1,82,30,000/- and the monetary payment of Rs.25,00,000/- as income from other sources under section 56(2)(x) of the Act. The total income was accordingly assessed at Rs.1,58,09,600/-.

In appeal, the Ld. CIT(A), following the decision of the Tribunal in Vasant Nagorao Barabde v. DCIT in ITA No.5372/Mum/2024 dated 22.05.2025, held that section 56(2)(x) was not applicable to the extent the new flat was received in lieu of surrender of tenancy rights. However, he apportioned the stamp duty value of Rs.1,82,29,800/- in the ratio of the additional area of 179.11 sq. ft. to the total area of 791.04 sq. ft. and determined the value of the additional area at Rs.41,27,654/-. After deducting Rs.25,00,000/-, he sustained an addition of Rs.16,27,654/- under section 56(2)(x). He further held that the balance value of Rs.1,41,02,146/-, attributable to the area of 611.93 sq. ft., was chargeable under the head “Capital Gains”. He did not examine deduction under section 54F on the ground that no such claim had been made in the return, assessment proceedings or appellate proceedings. Aggrieved, the assessee is in appeal before us.

Before us, the Ld. Authorised Representative submitted that the case was selected for limited scrutiny only to examine investment in immovable property and the alleged difference between the purchase consideration and stamp duty value. Taxability of capital gains on surrender of tenancy rights was outside that issue. There was no conversion of the case into complete scrutiny, and the Ld. CIT(A), whose powers were coterminous with those of the Assessing Officer, could not enlarge the scope of the assessment. Reliance was placed on DCIT v. Firefly Market Research India Pvt. Ltd. in ITA No.4184/Mum/2024 dated 09.12.2024. It was further submitted that no proposal to tax capital gains had been communicated to the assessee. In the alternative, the Ld. AR submitted that the entire consideration stood invested in the residential flat and deduction under section 54F ought to be considered. The occasion to make that claim arose when the Ld. CIT(A) sought to bring the transaction to tax as capital gains for the first time.

As regards the addition of Rs.16,27,654/-, the Ld. AR submitted that the entire flat of 791.04 sq. ft. was allotted under the redevelopment arrangement in consideration of surrender of tenancy rights, coupled with payment towards construction of the excess area. Referring to recitals I and K and clause LXXIII of the agreement, as also the stamp duty working referred to in the written submission, he submitted that Rs.25,00,000/- represented construction cost. The Ld. CIT(A) was not justified in treating the additional area as an independent purchase and comparing its proportionate market value with construction cost. The agreement was required to be read as a whole, taking into account the valuable tenancy rights given up by the assessee. The Ld. AR also stated in the written submission that ground Nos.4 and 5 were not pressed.

The Ld. Departmental Representative relied upon the orders of the lower authorities and supported the findings of the Ld. CIT(A).

We have heard the rival submissions and perused the material available on record. We first take up ground Nos.1 and 2 concerning the finding of the Ld. CIT(A) that Rs.1,41,02,146/- was chargeable under the head “Capital Gains”. The assessment order itself records that the case was selected for limited scrutiny to examine the purchase value of the property being lower than the stamp duty value. The enquiry undertaken and the addition made by the Assessing Officer were under section 56(2)(x). No material has been brought on record to show that the scope of scrutiny was expanded by following the prescribed procedure. The question whether capital gains arose on surrender of the assessee’s pre-existing tenancy rights was a separate issue from the alleged receipt of immovable property for inadequate consideration.

In DCIT v. Firefly Market Research India Pvt. Ltd. (supra), the co- ordinate Bench considered the powers of the Ld. CIT(A) in a limited scrutiny assessment. After referring to the decisions in Amit Kumar Dey and Arjun Transport Company Pvt. Ltd., the Tribunal held in paragraph 13 as under:

Applying the above decision to the facts before us, the Ld. CIT(A) could examine the correctness of the addition under section 56(2)(x), including the consideration represented by the tenancy rights. However, that exercise did not authorise him to bring to tax capital gains on surrender of those rights, an issue beyond the specific reason for limited scrutiny. The passing observation of the Assessing Officer about the nil cost of tenancy rights does not establish either an assessment of capital gains or an authorised expansion of the scope of scrutiny. The powers of the first appellate authority cannot be exercised to bypass the restriction governing the assessment from which the appeal arises. Accordingly, the finding and consequential direction in paragraph 5.9 of the impugned order, bringing Rs.1,41,02,146/- to tax under the head “Capital Gains”, are set aside. Ground Nos.1 and 2 are allowed to this extent.

In view of the above finding, it is not necessary to decide separately whether the impugned change also constituted enhancement requiring notice under section 251(2). The alternative claim under section 54F likewise does not survive for determination in this appeal. We have therefore not recorded any finding on satisfaction of the substantive conditions of that section.

We now take up ground No.3 concerning the addition of Rs.16,27,654/- under section 56(2)(x). The nature of the arrangement is evident from the terms recorded in the impugned order. The assessee held tenancy rights over 611.93 sq. ft. and, under one agreement for permanent alternate accommodation, was to receive a single residential flat of 791.04 sq. ft. on ownership basis. In addition to surrendering her existing rights, she was required to contribute Rs.25,00,000/- towards construction of the additional area. Thus, the monetary payment was one component of the composite arrangement. The valuable tenancy rights surrendered by the assessee formed the other component of the consideration.

The fact that the cost of acquisition of tenancy rights may be taken at nil for computation of capital gains does not mean that those rights had no value when exchanged for permanent alternate accommodation. Cost of acquisition of an asset and its value as consideration in an exchange are distinct matters. The developer’s obligation to provide the flat arose from the surrender of the existing tenancy rights and the agreed contribution towards construction. The allotment cannot, therefore, be examined by treating the cash payment alone as the consideration for the rights obtained by the assessee.

The Ld. CIT(A) accepted the redevelopment arrangement for the area corresponding to the old premises, but treated the additional area as though it had been acquired under a separate sale transaction. The description of the construction contribution by reference to the excess area does not, by itself, sever that area from the composite allotment. There was one flat allotted under one agreement in exchange for the existing tenancy rights together with the agreed construction payment. The stamp duty working adopted the market value of the whole flat. Its proportionate allocation to 179.11 sq. ft. does not establish that the consideration for that portion consisted exclusively of Rs.25,00,000/-, without any element of the rights surrendered under the same arrangement. The statutory comparison must take account of the consideration as a whole. The addition sustained by the Ld. CIT(A) rests on a comparison which leaves out that material component.

The decision in Vasant Nagorao Barabde (supra), relied upon by the Ld. CIT(A), also recognises the character of an allotment made against surrender of tenancy rights. The relevant paragraph 8.2, reproduced in the impugned order, reads as under:

In the present case, the additional construction contribution does not alter the essential nature of the allotment under the permanent alternate accommodation agreement. Having regard to the composite consideration and the manner in which the Ld. CIT(A) has worked out the alleged inadequacy, the addition of Rs.16,27,654/- under section 56(2)(x) cannot be sustained. We accordingly direct the Assessing Officer to delete the same. This finding is confined to the redevelopment arrangement and the consideration recorded in the present case. Ground No.3 is allowed.

Ground Nos.4 and 5 are dismissed as not pressed, as expressly stated in the assessee’s written submission. Ground No.6 is general in nature and requires no separate finding.

In the result, the appeal of the assessee is allowed in terms of the above findings.