MR. BIPINCHANDRA SHANTILAL SHAH,MUMBAI vs. ITO WARD 23 (1) (6), MUMBAI

PER SANDEEP SINGH KARHAIL, J.M.

The present appeal has been filed by the assessee challenging the

impugned order dated 21/07/2023, passed under section 250 of the Income

Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax

(Appeals), National Faceless Appeal Center, Delhi, [“learned CIT(A)”], for

the assessment year 2020–21.

“1. In the facts and in the circumstances, of the case the learned A.O. Erred in considering the present case of conversion as a transfer U/s. 2(47) of the

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

income tax act, 1961 and the learned Commissioner of Income tax (Appeals) erred in confirming the same.

(i) The said section is not at all applicable in the present case;

(ii) The appellant has not received any land, building or cash so as to be able to invoke section 56; and;

(iii) In any case nothing is received in the relevant assessment year so as to be chargeable to tax in the relevant year;

made under section 56(2)(x) of the Act.

the record, are: The assessee is an individual and for the year under

consideration filed its return of income on 18/08/2020 declaring a total

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

income of Rs.12,91,760. The return filed by the assessee was selected for

scrutiny and statutory notices under section 143(2) and section 142(1) were

issued and served on the assessee. During the year under consideration, the

ownership rights of the property, viz. Flat No. 24 Floor No. 5VA, Ram

NamMansion, Block No. 6, Cinema Road, Dhobi Talao, Mumbai-400020, was

transferred to the assessee. Since the stamp duty valuation authority

assessed/adopted the fair market value of the said property at

Rs.1,38,70,000, the assessee was asked to explain the difference in the

purchase consideration. In response, the assessee submitted that he has not

purchased any additional immovable property during the year under

consideration and his landlord has only converted his 25 years old tenancy

in respect of the tenanted residential flat into ownership by executing a

Deed for Conversion of tenancy rights into ownership rights. It was further

submitted that since he was staying in the tenanted premises prior to 1995,

his landlord was desirous to convert the tenancy into ownership for

monetary consideration. The assessee submitted that he has duly shown the

said transaction in his balance sheet and return filed for the year under

consideration. The assessee was asked to show cause as to why the addition

of Rs.1,13,70,000, being the difference in the fair market value adopted by

the stamp duty valuation authority and the consideration paid by the

assessee, be not made under section 56(2)(x)(b)(B) of the Act. In response,

the assessee submitted the valuation report by an independent valuer. As

per the valuation report, the market value of the immovable property was

determined at Rs.2,53,38,057 and in order to drive the value of the cost of

conversion of tenancy into ownership, the valuation was adopted at Rs.

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

25,23,806, i.e. 10% of Rs. 2,53,38,057. The assessee further submitted

that section 56(2)(x)(b)(B) is not applicable in the present case as he has

not received any immovable property, but it is a mere conversion of one

class of rights (tenancy rights) in the property to another class of rights

(ownership rights) in the same property.

under section 143(3) read with section 144B of the Act did not agree with

the submissions of the assessee and also did not accept the valuation report

submitted by the assessee on the basis that in the valuation report, it has

been mentioned that the tenant is eligible to take concession of 10% at the

time of valuation of the immovable property. However, the valuer has

considered the cost of conversion of tenancy rights into ownership rights at

10% of the market value of the property instead of considering 90% of the

same after granting a concession of 10%. The AO further held that the

purchase transaction, i.e. conversion of tenancy rights into ownership rights

are covered under the definition of “transfer” as provided in section 2(47) of

the Act. The AO held that as per the provisions of section 56(2)(x)(b)(B) of

the Act, the difference of the fair market value of the purchased or

transferred immovable property as adopted/assessed by Stamp duty

authority and purchase consideration as mentioned in the purchase deed

should be treated as income chargeable to tax under the head “income from

other sources”. The AO held that the assessee has duly received property

from an earlier owner and therefore the case of the assessee clearly falls

under section 56(2)(x)(b)(B) of the Act, as the assessee has now received

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

absolute rights in the property by way of transfer of the property and has

now become the owner of the property.Accordingly, the AO considered a

sum of Rs.1,13,70,000 (i.e. Rs.1,38,70,000 minus Rs.25,00,000) as income

under the head “income from other sources” as per the provisions of section

56(2)(x)(b)(B) of the Act on account of purchase/conversion of tenancy

rights into ownership rights of the immovable property. Since the report

from theDepartment Valuation Officer (“DVO”) was not received till the

passing of the assessment order, the AO held that as and when the DVO’s

report is received, the value as determined by the DVO shall be considered

and addition under section 56(2)(x)(b)(B) of the Act shall be modified

accordingly.

transaction, i.e. conversion of tenancy rights into ownership rights, is duly

covered under the definition of “transfer” as provided in section 2(47) of the

Act. The learned CIT(A), accordingly, upheld the invocation of provisions

ofsection 56(2)(x)(b)(B) of the Act in the present case. Further, the learned

CIT(A) directed the AO to consider the valuation report of the DVO and

make appropriate adjustments. Being aggrieved, the assessee is in appeal

before us.

material available on record. In the present case, the assessee is an

individual and from the year 1992 was residing atFlat No. 24 Floor No. 5VA,

Ram Nam Mansion, Block No. 6, Cinema Road, Dhobi Talao, Mumbai-400020

as a tenant under what is popularly known as Pagdi system of tenancy. In

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

the said building, apart from the assessee, other tenants were also residing

for a very long time. The landlord of the property, i.e. Tarabhai Bhatia

Family Trust, converted the tenancy rights of various tenants, who were

staying in the tenanted premises prior to the year 1995, into ownership

rights including that of the assessee. As a consideration for the conversion

of tenancy rights into ownership rights, during the relevant assessment

year, the assessee paid Rs.25,00,000 to the landlord. There is no dispute

among the parties regarding the aforementioned basic facts of the present

case.

was noticed that the stamp duty valuation authority had assessed the fair

market value of the said property at Rs.1,38,70,000. Accordingly, the

assessee was asked to show cause as to why the difference between the

consideration paid by the assessee in respect of the aforesaid transaction

and the valuation made by the stamp duty authority be not considered as

income of the assessee under the head “income from other sources” under

section 56(2)(x)(b)(B) of the Act. It is the plea of the assessee that section

56(2)(x)(b)(B) of the Act is not applicable to the present case, since the

consideration of Rs.25,00,000 was paid by the assessee merely for the

conversion of tenancy rights into ownership rights and he has not received

any immovable property during the year under consideration. It is further

the claim of the assessee that he has merely secured the balance rights in

the property, which was always in his possession since the year 1992. Thus,

it is the claim of the assessee that he has not received any immovable

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

property and has only received additional rights in the property. It is further

the plea of the assessee that the term “immovable property” has been

defined to mean land or building or both and the same does not include any

rights in the land or building. Thus, it was submitted that the conversion of

rights is different from the purchase of property. On a without prejudice

basis, the assessee furnished the report from an independent valuer,

whereby the cost of conversion of tenancy rights into ownership rights was

determined at Rs.25,33,806.Since the consideration paid by the assessee

was near to the aforesaid amount, the assessee claimed it to be a justifiable

consideration. However, the AO did not agree with the contention of the

assessee and made the addition under section 56(2)(x)(b)(B) of the Act by

applying the rate determined by the DVO.

section 56(2)(x)(b) of the Act, which is relevant for the adjudication of the

dispute at hand. Section 56(2)(x)(b) of the Act reads as under: -

“(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :—

(i) ……… (ii) …… ………. (x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,— (a) ……. (b) any immovable property,—

(A) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;

(B) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

(i) the amount of fifty thousand rupees; and

(ii) the amount equal to five per cent of the consideration:

………………..

Explanation.—For the purposes of this clause, the expressions "assessable", "fair market value", "jewellery", "property", "relative" and "stamp duty value" shall have the same meanings as respectively assigned to them in the Explanation to clause (vii).”

“property” as provided in the Explanation to section 56(2)(vii) of the Act and

the same reads as follows: -

“Explanation.—For the purposes of this clause,—

(a) …….;

(b) ………;

(c) ………;

(d) "property" means the following capital asset of the assessee, namely:—

(i) immovable property being land or building or both; (ii) shares and securities; (iii) jewellery; (iv) archaeological collections; (v) drawings; (vi) paintings; (vii) sculptures; (viii) any work of art; or (ix) bullion;

receives any immovable property from any person or persons on or after

01/04/2017 for consideration, the stamp duty value of such property as

exceeds such consideration shall be considered as its income from other

sources, if the amount of such excess is more than the higher of the amount

of Rs. 50,000 and the amount equal to 5% of the consideration. Thus, for

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

the applicability of the provisions of section 56(2)(x)(b)(B) of the Act, it is

firstly relevant that the person receives the immovable property on or after

01/04/2017; secondly, the same is received for a consideration which is less

than the stamp duty value of such property; and thirdly, such excess should

be more than the amount as noted above. Here it is also pertinent to note

that while assigning the meaning to the term “property” in the Explanation

to section 56(2)(x) r/w the Explanation to section 56(2)(vii) of the Act, the

term “immovable property” has been defined to mean land or building or

both. In our view, it will not cover the improvement of right which is already

held by the assessee. Therefore, from the bare reading of the aforesaid

provisions of the Act, it is discernible that receipt of immovable property for

the purpose of section 56(2)(x)(b) of the Act only includes within its ambit

receipt of land or building or both. In other words, section 56(2)(x)(b) of the

Act cannot be so exhaustively interpreted to even cover the transaction of

improvement of any right in the immovable property.

56(2)(x)(b) of the Act, in the present case it needs to be examined whether,

pursuant to the Deed for Conversion dated 05/12/2019 entered into

between the landlord, i.e. Tarabhai Bhatia Family Trust, and the assessee as

a tenant, the assessee received an immovable property or merely a right

(i.e. the ownership right) in the immovable property which was in his

possession since 1992 as a protected tenant. The aforesaid examination is

relevant as the Hon’ble Courts have recognised the transfer of ownership

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

rights by a protected tenant and the transfer of ownership by the protected

tenant differently.

who was a tenant sold a building and the dispute arose regarding the cost of

acquisition of the said property. The appellate authority overruled the

decision of the AO and came to the conclusion that the taxpayer was a

tenant, and thus valued the cost of acquisition at a nominal amount of Rs.

2,500. In further appeal, the Tribunal concluded that what was transferred

was not the tenancy rights but the building itself and, therefore, what was to

be allowed as a deduction for working out the capital gains was not the cost

of tenancy but the cost of ownership rights. The Hon’ble Jurisdictional High

Court dismissed the appeal filed by the Revenue and held that this is a pure

finding of fact, which requires no interference.

(Bom.), the facts before the Hon’ble Jurisdictional High Court were as

follows: -

“2. This reference pertains to the assessment year 1977-78. The assessee jointly with his mother held a flat in Shanti Kutir, Bombay, admeasuring about 1,800 sq. ft. The said flat was originally taken on lease in the year 1962-63 by the father of the assessee for residential purposes on a monthly rent of Rs. 175. Since then it was in occupation of the assessee’s father as a tenant and after his death on 26-3-1974, in the occupation of the assessee and his mother. In May 1974, the existing tenants of the building Shanti Kutir formed a society and entered into an agreement with the landlord for the purchase of the building. The ownership of the building was transferred to the society in January 1976. The assessee and his mother, like all other tenants, jointly paid Rs. 46,287 towards the purchase price of the flat in their occupation and thereby became the owner thereof. After about four months of the purchase of the said flat, in May 1976, the assessee and his mother sold the said flat to Mr. & Mrs. V.V. Dalal for Rs. 1,80,000 and handed over vacant possession thereof to the said purchasers. In the assessment of the assessee under the Act for the assessment year Page | 10

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

1977-78, the ITO computed capital gains from the sale of the said flat at Rs. 1,31,213 by deducting Rs. 46,287, being the purchase price and Rs. 2,500 being legal expenses incurred in connection therewith from the sale consideration of Rs. 1,80,000 and assessed the same as short-term capital gain from the sale of the flat because the flat had been sold within 4 to 5 months of the purchase. The assessee was aggrieved by the above order of the ITO. According to the assessee, the sale of the flat by the assessee comprised of two capital assets, viz., occupancy right and the remaining rights of owner including title. It was contended by the assessee that the tenancy right was acquired by the father of the assessee in year 1962-63 and the ownership right was acquired by the assessee and his mother in January 1976. …..” (Emphasis supplied)

High Court observed as follows: -

“4. We have carefully considered the submissions of Mr. Desai, the learned counsel for the revenue. We find force in the same. The Tribunal, in our view, was wrong in holding that even after the purchase of the flat by the lessee, the leasehold right subsisted in the lessee. Because, once the lessee purchases the leased property from the owner, the lease is extinguished as the same person cannot at the same time be both landlord and tenant. The doctrine of merger applies resulting in ‘drowning’ and ‘sinking’ of inferior right into superior right. There is a complete union of the interest of the lessor in the lessee in such a case and the tenancy comes to an end. This principle has been statutorily recognised in section 111(d) of the Transfer of Property Act, 1882, which specifically provides for determi- nation of lease in case the interests of the lessee and the lessor in the whole of the property become vested at the same time in one person in the same right.

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

Commissioner of Income-tax (Appeals), XXV, [2012] 21 taxmann.com 324

(Mum.), after considering the aforesaid decisions, held that where the

taxpayer hadan office premise in a property on tenancy basis for last 30

years and she had purchased said office from the owner through open

bidding and not through ownership right, cost of acquisition of office

premises would be cost, which was incurred for acquiring it. The relevant

findings of the coordinate bench, in the aforesaid decision, are reproduced

as follows: –

“8.2 After holding that the sale of office amounted to Long Term Capital Gain, the second issue which comes for our consideration is to what would be the cost of acquisition of the said property. The appellant's claim is that, since she was a tenant for the last 30 years, therefore, she had a tenancy right which was exchanged for the ownership right vide agreement dated 10.06.1999 and therefore, the cost of the premises has to be taken by including the tenancy right in the cost of acquisition. Accordingly, the appellant took the market value as on 10.06.1999 as the cost of acquisition, which has been estimated by the approved valuer at Rs. 10,04,475/-. In support of this, heavy reliance has been placed on the judgment of Hon'ble Jurisdictional High Court in the case of Abrar Alvi (supra). First of all, the said judgment cannot be held to be applicable as that was a case where the ownership right was itself bought instead of the property and in the case of the appellant, the property itself was purchased through open bidding and not through ownership right. To this extent, the finding of the CIT (Appeals) are correct. As already stated above, the appellant had purchased the said property for a sum of Rs. 4,75,000/- which included the proportionate cost of new building. In such a situation, the cost of tenancy right cannot be taken into consideration, firstly, there was no surrender of tenancy rights and secondly, as per the sub section 2 of section 55, the cost of acquisition of tenancy right has to be taken at Nil. Even from the plain reading of the agreement dated 10.06.1999, it is evident that the appellant had bought the property and not the ownership right and once this is a factual position, then it cannot be held that the some cost should be assigned on the tenancy right also. The judgment of Hon'ble Jurisdictional High Court in the case of Dr. D.A. Irani (supra) also gets squarely applicable, wherein it has been held that even if the assessee was tenant before its purchase, it becomes wholly irrelevant because at the time of purchase, tenancy gets extinguished and hence the value has to be assessed from the date of acquisition of the property. Therefore, the cost of acquisition for the purpose of indexation has to be taken at Rs. 4,75,000/- and not Rs. 10,04,475/- as has been contented by the appellant. Page | 12

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

Thus, the finding of the CIT (Appeals) on this issue is upheld. We accordingly hold that the cost of acquisition should be taken at Rs. 4,75,000/-.” (Emphasis supplied)

clearly evident that the transfer of ownership rights is distinguished by the

Hon’ble Courts from the transfer of ownership by the protected tenant. Dr.

D.A. Irani (supra) and Mrs. Nila V. Shah (supra) are the cases where the

taxpayer purchased the tenant premises from the owner and thus there was

a transfer of ownership by the erstwhile tenant. However, in the present

case, vide Deed for Conversion dated 05/12/2019 the assessee did not

purchase the ownership of the Flat No. 24 Floor No. 5VA, Ram Nam

Mansion, Block No. 6, Cinema Road, Dhobi Talao, Mumbai-400020 and

merely his tenancy rights were converted to ownership rights, for which the

assessee paid Rs. 25,00,000 to the landlord. This fact is further evident from

clauses 6 and 7 of the Deed for Conversion, forming part of the paper book

from pages 86 to 134, wherein it has been provided that the assessee shall

have the ownership rights only in respect of the Flat in his occupation and

possession and is not entitled to any separate rights in the Land or the

Building in any manner whatsoever. Thus, we agree with the submissions of

the assessee that if the assessee had purchased an immovable property,

then he would have entered into a Deed of Conveyance, however, in the

instant case the parties entered into a Deed for Conversion. Further, the fact

that while computing the fair market value of the subject property, the DVO

considered 30% of the gross value as the fair market value of the subject

property also supports the case of the assessee as in the case of purchase of

ownership entire 100% would have been considered as fair market value. Page | 13

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

Having considered the peculiar facts of the present case in light of the

various judicial pronouncements as noted above and also in light of the

detailed analysis of the provisions of section 56(2)(x)(b) of the Act, we are

of the considered view that since the assessee, being a protected tenant

since 1992, has merely acquired an ownership right of the Flat earlier

occupied by him as a protected tenant and not any immovable property vide

Deed for Conversion dated 05/12/2019, therefore section 56(2)(x)(b) of the

Act is not applicable to the present case. Further, reliance on the definition

of the term “transfer” as provided in section 2(47) of the Act is immaterial in

the instant case as no addition on account of capital gains was made either

in the hands of the assessee or the landlord. Accordingly, the impugned

addition made by the AO and upheld by the learned CIT(A) under section

56(2)(x)(b) of the Act is directed to be deleted. As a result, the grounds

raised by the assessee are allowed.

Order pronounced in the open Court on 22/10.2024

S Sd/-d/- S Sd/-d/- B.R. BASKARAN SANDEEP SINGH KARHAIL ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 22/10/2024

Shri Bipinchandra Shantilal Shah ITA no.2933/Mum./2023

Copy of the order forwarded to:

(1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. True Copy By Order

Assistant Registrar ITAT, Mumbai