A Mumbai tenant who surrendered tenancy rights in exchange for a flat in a redeveloped property secured major relief from the Income Tax Appellate Tribunal (ITAT) after facing a tax demand over alleged short-term capital gains (STCG) exceeding Rs 1.1 crore.
The case involved Mr Shah, a tenant from Girgaon, who had filed his income tax return for the assessment year 2019-20, declaring an income of around Rs 19 lakh. However, during scrutiny proceedings, the Assessing Officer (AO) found that Shah had received Flat No. 502 in a redeveloped housing project at Sikka Nagar under a tripartite agreement signed on December 18, 2017, between the tenant, landlord, and developer.
Under the arrangement, Shah agreed to vacate the old premises to facilitate redevelopment in return for permanent alternate accommodation in the new building. The Income Tax Department noted that the Maharashtra government had valued the flat at Rs 1.49 crore for stamp duty purposes and questioned why the amount was not declared as short-term capital gains.
Shah argued that the tenancy rights were not surrendered in 2017 because, under the agreement, the surrender would become effective only after possession of the new flat was handed over. Since possession was received in April 2019, he maintained that any capital gains liability, if applicable, would arise in the assessment year 2020-21 and would qualify as long-term capital gains instead of STCG.
The Assessing Officer rejected the explanation and calculated the taxable STCG of approximately ₹1.10 crore. Shah’s appeal before the Commissioner of Income Tax (Appeals) also failed, following which he approached the Income Tax Appellate Tribunal.
On April 17, 2026, the ITAT Mumbai ruled partly in Shah’s favour and deleted the tax addition. The tribunal observed that the agreement clearly stated that tenancy rights would continue until possession of the alternate accommodation was handed over. Since possession was received only in April 2019, the tribunal held that no taxable “transfer” had occurred during the relevant assessment year.
Chartered accountant Suresh Surana said the ruling reaffirmed that tax authorities cannot ignore explicit contractual clauses or accelerate tax liability before legal transfer conditions are fulfilled.
Source: The Economic Times
